Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM
10-Q
(Mark One)
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021March 31, 2022
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from
     to
to
Commission File Number
001-40590
001-36773
F45 Training Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
38-3978689
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
801 Barton Spring Road, 9th Floor
Austin, Texas 98704
(Address of principal executive offices and zip code)
(737)
787-1955
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Delaware
(State or other jurisdiction of incorporation or organization)
84-2529722
(I.R.S. Employer Identification Number)
3601 South Congress Avenue, Building E
Austin, Texas 78704
(Address of principal executive offices and zip code)
(737) 787-1955
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol
Name of each exchange
on which registered
Common stock, par value $0.00005
Trading Symbol
FXLV
FXLVName of each exchange on which registered
New York Stock Exchange

Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrantregistrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer☐Accelerated filer☐
Non-accelerated
filer		ý☒Smaller reporting company☒ý
Emerging growth company☒ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act: Yes No
Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act): Yes ☐ No ☒
As of November 
15
, 2021,of May 13, 2022, there were approximately 90,554,57195,675,094 shares of the registrant’sregistrant's common stock outstanding.
1

F45 Training Holdings Inc.
Form 10-Q
Table of Contents
Part I.Financial InformationPage
Item 1.
1
2
3
4
5
7
Item 2.
40
Item 3.
60
Item 4.
61
Part II.Other Information
Item 1.
62
Item 1A.
62
Item 2.
62
Item 3.
62
Item 4.
63
Item 5.
63
Item 6.

2
FORWARD-LOOKING STATEMENTS


Forward-Looking Statements

This Quarterly Report on Form
10-Q
contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words, variations of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:
•our dependence on the operational and financial results of, and our relationships with, our         franchisees and the success of their new and existing studios;
•our ability to protect our brand and reputation;
•our ability to identify, recruit and contract with a sufficient number of qualified franchisees;
•our ability to execute our growth strategy, including through development of new studios by new and existing franchisees;
•our ability to manage our growth and the associated strain on our resources;
•our ability to identify, source and procure components of our inventories on a timely basis and at attractive economics terms;
•our ability to successfully integrate any acquisitions, or realize their anticipated benefits;
•the high level of competition in the health and fitness industry;
•economic, political and other risks associated with our international operations;
operations, including due to the Russia-Ukraine conflict;
•changes to the industry in which we operate;
•our reliance on information systems and our and our franchisees’ ability to properly maintain the confidentiality and integrity of our data;
•the occurrence of cyber incidents or a deficiency in our cybersecurity protocols;
•our and our franchisees’ ability to attract and retain members;
•our and our franchisees’ ability to identify and secure suitable sites for new franchise studios;
•risks related to franchisees generally;
•our ability to obtain third-party licenses for the use of music to supplement our workouts;
•certain health and safety risks to members that arise while at our studios;
•our ability to adequately protect our intellectual property;
•risks associated with the use of social media platforms in our marketing;
•our ability to obtain and retain high-profile strategic partnership arrangements;
•our ability to comply with existing or future franchise laws and regulations;
•our ability to anticipate and satisfy consumer preferences and shifting views of health and fitness;
•our business model being susceptible to litigation;
and
the increased expenses associated with being a public company; and
•additional factors discussed in our SEC filings, withincluding those identified under the Securities and Exchange Commission, or the SEC.
header “Risk Factors” beginning on Page 62 of this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on
Form 10-Q
on ourhistorical performance, management’s current expectations and projections about future events and trends that we believemanagement believes may affect our business, results of operations, financial condition and prospects.
prospects in light of information currently available to us.

The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in our Final Prospectus dated July 14, 2021.this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward- looking statements contained in this Quarterly Report on
Form 10-Q.
We cannot assure you that the results, events, and circumstances reflected in the forward-looking
3

statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

Table of Contents
The forward-looking statements made in this Quarterly Report on Form
10-Q
relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form
10-Q
to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form
10-Q,
and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements (Unaudited)
1
Table of Contents



F45 Training Holdings Inc.
Form
10-Q
Table of Contents
Page
Part I.
FINANCIAL INFORMATION
Item 1.
Condensed consolidated financial statements (unaudited)1
Condensed Consolidated Balance Sheets1
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income2
Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)3
Condensed Consolidated Statements of Cash Flows5
Notes to the Condensed Consolidated Financial Statements6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations34
Item 3.
Quantitative and Qualitative Disclosures about Market Risk57
Item 4.
Controls and Procedures57
Part II.
OTHER INFORMATION
Item 1.
Legal Proceedings59
Item 1A.
Risk Factors59
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds59
Item 3.
Defaults Upon Senior Securities60
Item 4.
Mine Safety Disclosures60
Item 5.
Other Information60
Item 6.
Exhibits60
Table of Contents
Part I—FINANCIAL INFORMATION
Item 1. Financial Statements
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts and share data)
(unaudited)
March 31, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$13,992 $42,004 
Accounts receivable, net45,200 27,788 
Due from related parties2,739 2,442 
Inventories16,622 12,300 
Deferred costs2,021 1,887 
Prepaid expenses32,724 12,706 
Other current assets18,442 9,515 
Total current assets131,740 108,642 
Property and equipment, net8,870 5,645 
Deferred tax assets, net22,755 22,716 
Goodwill4,614 4,614 
Intangible assets, net28,921 28,446 
Deferred costs, net of current12,476 11,871 
Other long-term assets27,246 21,960 
Total assets$236,622 $203,894 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses$38,519 $36,594 
Deferred revenue10,452 7,137 
Interest payable174 276 
Income taxes payable12,144 9,624 
Total current liabilities61,289 53,631 
Deferred revenue, net of current3,865 7,385 
Long-term debt, net of current31,600 — 
Other long-term liabilities13,717 12,605 
Total liabilities110,471 73,621 
Commitments and contingencies (Note 13)00
Stockholders’ equity
Common stock, $0.00005 par value; 95,682,833 and 95,806,063 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively6 5 
Additional paid-in capital655,405 662,946 
Accumulated other comprehensive income1,509 603 
Accumulated deficit(356,049)(358,561)
Less: Treasury stock(174,720)(174,720)
Total stockholders' equity126,151 130,273 
Total liabilities and stockholders' equity$236,622 $203,894 
   
September 30, 2021
  
December 31, 2020
 
   
(unaudited)
  
(audited)
 
Assets
   
Current assets:   
Cash and cash equivalents  $52,618  $28,967 
Accounts receivable, net   15,326   9,582 
Due from related parties   2,150   2,406 
Inventories   17,252   4,485 
Deferred costs   1,851   1,616 
Prepaid expenses   10,653   2,891 
Other current assets   5,209   2,452 
          
Total current assets   105,059   52,399 
Property and equipment, net   2,014   884 
Deferred tax assets, net   6,703   7,096 
Intangible assets, net   25,598   1,758 
Deferred costs, net of current   13,081   11,215 
Other long-term assets   14,166   5,165 
          
Total assets  $166,621  $78,517 
          
Liabilities, convertible preferred stock and stockholders’ equity (deficit)         
Current liabilities:         
Accounts payable and accrued expenses  $34,461  $18,657 
Deferred revenue   8,787   3,783 
Interest payable   143   250 
Current portion of long-term debt   —     5,847 
Income taxes payable   1,792   3,499 
          
Total current liabilities   45,183   32,036 
Deferred revenue, net of current   5,908   10,312 
Long-term derivative liability   —     36,640 
Long-term debt, net of current   —     236,186 
Other long-term liabilities   4,615   4,890 
          
Total liabilities   55,706   320,064 
Commitments and contingencies (Note 12)   0    0  
Convertible preferred stock, $0.0001 par value; 0 and 9,854,432 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively (Note 13)   —     98,544 
Stockholders’ equity (deficit)         
Common stock, $0.00005 par value; 90,554,571 and 29,281,514 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively   4   1 
Additional
paid-in
capital
   659,977   11,456 
Accumulated other comprehensive loss   (938)   (982) 
Accumulated deficit   (373,408)   (175,846) 
Less: Treasury stock   (174,720)   (174,720) 
          
Total stockholders’ equity (deficit)   110,915   (340,091) 
          
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)  $166,621  $78,517 
          


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
1
Table of Contents

F45 Training Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INCOME
(in thousands, except share amounts and share data)
(unaudited)

Three Months Ended
March 31,
20222021
Revenues:
Franchise (Related party: $2,616 and $45 for the three months ended March 31, 2022 and 2021, respectively)$19,860 $13,156 
Equipment and merchandise (Related party: $7 and $0 for the three months ended March 31, 2022 and 2021, respectively)30,148 5,035 
Total revenues50,008 18,191 
Costs and operating expenses:
Cost of franchise revenue1,231 1,214 
Cost of equipment and merchandise (Related party: $3,286 and $941 for the three months ended March 31, 2022 and 2021, respectively)10,943 3,181 
Selling, general and administrative expenses32,090 16,828 
Total costs and operating expenses44,264 21,223 
Income (loss) from operations5,744 (3,032)
Loss on derivative liabilities, net— 25,505 
Interest expense, net126 8,415 
Other expense, net570 291 
Income (loss) before income taxes5,048 (37,243)
Provision (benefit) for income taxes2,536 (398)
Net income (loss)$2,512 $(36,845)
Other comprehensive income (loss)
Unrealized gain on interest rate swap, net of tax— 71 
Foreign currency translation adjustment, net of tax906 (32)
Comprehensive income (loss)$3,418 $(36,806)
Earnings (loss) per share
Basic$0.03 $(1.26)
Diluted$0.03 $(1.26)
Shares used in computing earnings per share
Basic95,709,671 29,281,514 
Diluted96,687,283 29,281,514 
                 
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2021
  
2020
  
2021
  
2020
 
              
Revenues:                 
Franchise (Related party: $2,724 and $52 for the three months ended September 30, 2021 and 2020, respectively, and $3,329 and $277 for the nine months ended September 30, 2021 and 2020, respectively)  $18,513  $14,067  $52,250  $39,766 
Equipment and merchandise (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $328 for the nine months ended September 30, 2021 and 2020, respectively)   8,664   7,896   19,950   24,497 
                  
Total revenues   27,177   21,963   72,200   64,263 
Costs and operating expenses:                 
Cost of franchise revenue (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $12 for the nine months ended September 30, 2021 and 2020, respectively)   1,486   1,997   4,162   6,591 
Cost of equipment and merchandise (Related party: $1,561 and $355 for the three months ended September 30, 2021 and 2020, respectively, and $3,678 and $1,098 for the nine months ended September 30, 2021 and 2020, respectively)   5,752   5,247   12,672   14,410 
Selling, general and administrative expenses   110,492   10,100   145,882   31,724 
                  
Total costs and operating expenses   117,730   17,344   162,716   52,725 
                  
(Loss) income from operations   (90,553)   4,619   (90,516)   11,538 
Loss on derivative liabilities   —     —     48,603   —   
Interest expense, net   41,897   534   59,165   1,333 
Other income, net   (2,035)   (238)   (1,415)   (815) 
                  
(Loss) income before income taxes   (130,415)   4,323   (196,869)   11,020 
(Benefit) provision for income taxes   (222)   1,974   693   3,536 
                  
Net (loss) income  $(130,193)  $2,349  $(197,562)  $7,484 
                  
Other comprehensive (loss) income                 
Unrealized (loss) gain on interest rate swap, net of tax   (7)   88   196   (639) 
Reclassification to interest expense from interest rate swaps   464   —     464   —   
Foreign currency translation adjustment, net of tax   (509)   138   (616)   (426) 
                  
Comprehensive (loss) income  $(130,245)  $2,575  $(197,518)  $6,419 
                  
Per share data:                 
Net (loss) income per common share                 
Basic and diluted   (1.52)   0.03   (4.10)   0.09 
Weighted average common shares outstanding                 
Basic and diluted   85,463,755   58,000,000   48,214,724   58,000,000 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2
3
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)
Convertible Preferred StockCommon StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders'
Equity
SharesAmountSharesAmount
Balances as of December 31, 2021— $— 95,806,063 $5 $662,946 $(174,720)$603 $(358,561)$130,273 
Stock-based compensation— — — — 487 — — — 487 
Vested restricted stock awards— — 7,739 — — — — — — 
Vested restricted stock units to be issued in association with promotional agreement— — 914,692 1 2,963 — — — 2,964 
Shares withheld related to net share settlement of equity awards— — (1,045,661)— (10,991)— — — (10,991)
Net income— — — — — — — 2,512 2,512 
Cumulative translation adjustment, net of tax— — — — — — 906 — 906 
Balances as of March 31, 2022— $— 95,682,833 $6 $655,405 $(174,720)$1,509 $(356,049)$126,151 

                                     
   
Convertible Preferred
Stock
  
Common Stock
   
Additional
Paid-In

Capital
   
Treasury Stock
  
Accumulated
other
comprehensive
loss
  
Accumulated
deficit
  
Total
Stockholders’

Equity
(Deficit)
 
  
Shares
  
Amount
  
Shares
   
Amount
 
                                
Balance at June 30, 2021   9,854,432  $98,544   29,281,514   $1   $11,456   $(174,720)  $(886)  $(243,215)  $(407,364) 
Conversion of convertible preferred stock into common stock upon initial public offering   (9,854,432)   (98,544)   27,368,102    1    98,543    —     —     —     98,544 
Conversion of convertible notes into common stock upon initial public offering   —     —     14,847,066    1    191,517    —     —     —     191,518 
Stock-based compensation   —     —     —      —      80,707    —     —     —     80,707 
Issuance of common stock pursuant to initial public offering, net of underwriting commissions and discounts and offering costs of $5.8 million   —     —     19,057,889    1    277,754    —     —     —     277,755 
Net loss   —     —     —      —      —      —     —     (130,193)   (130,193) 
Unrealized loss on interest rate swap, net of tax   —     —     —      —      —      —     (7)   —     (7) 
Reclassification to interest expense from interest rate swap   —     —     —      —      —      —     464   —     464 
Cumulative translation adjustment, net of tax   —     —     —      —      —      —     (509)   —     (509) 
                                         
Balances at September 30, 2021   0    $0—     90,554,571   $4   $659,977   $(174,720)  $(938)  $(373,408)  $110,915 
                                         
Convertible Preferred StockCommon StockAdditional Paid- In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders' Deficit
SharesAmountSharesAmount
Balances as of December 31, 20209,854,432 $98,544 29,281,514 $1 $11,456 $(174,720)$(982)$(175,846)$(340,091)
Net loss— — — — — — — (36,845)(36,845)
Unrealized loss on interest rate swap, net of tax— — — — — — 71 — 71 
Cumulative translation adjustment, net of tax— — — — — — (32)— (32)
Balances as of March 31, 20219,854,432 $98,544 29,281,514 $1 $11,456 $(174,720)$(943)$(212,691)$(376,897)
                                     
   
Convertible Preferred

Stock
   
Common Stock
   
Additional
Paid- In
Capital
   
Treasury Stock
   
Accumulated
other
comprehensive
loss
  
Accumulated
deficit
  
Total
Stockholders’

Equity
(Deficit)
 
  
Shares
   
Amount
   
Shares
   
Amount
 
                                   
Balance at June 30, 2020   11,000,000   $110,000    58,000,000   $3   $—     $—     $(1,832)  $(145,422)  $(147,251) 
Net income   —      —      —      —      —      —      —     2,349   2,349 
Unrealized gain on interest rate swap, net of tax   —      —      —      —      —      —      88   —     88 
Cumulative translation adjustment, net of tax   —      —      —      —      —      —      138   —     138 
                                            
Balances at September 30, 2020   11,000,000   $110,000    58,000,000   $3   $—     $—     $(1,606)  $(143,073)  $(144,676) 
                                            



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
3
Table of Contents

F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
20222021
Cash flows from operating activities
Net income (loss)$2,512 $(36,845)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation286 71 
Amortization of intangible assets888 133 
Amortization of deferred costs626 448 
Accretion and write-off of debt discount— 1,376 
Bad debt expense1,464 1,666 
Stock-based compensation2,073 — 
Deferred income taxes— 361 
In-kind marketing57 — 
Loss on derivative liabilities, net— 25,505 
Provision for inventories(52)— 
Paid-in-kind interest accrual— 6,300 
Unrealized foreign currency transaction gains381 151 
Changes in operating assets and liabilities:
Due from related parties(294)1,084 
Accounts receivable, net(16,413)(5,306)
Inventories(4,160)(3,495)
Prepaid expenses(20,085)292 
Other current assets(12,498)(1,021)
Deferred costs(1,194)(668)
Other long-term assets(8,068)(1,594)
Accounts payable and accrued expenses1,963 6,891 
Deferred revenue3,527 3,654 
Interest payable(104)(39)
Income taxes payable3,149 (432)
Other long-term liabilities952 1,267 
Net cash used in operating activities(44,990)(201)
Cash flows from investing activities
Purchases of property and equipment(2,117)(67)
Purchases of intangible assets(1,296)(112)
Net cash used in investing activities(3,413)(179)
Cash flows from financing activities
Borrowings under revolving facility31,600 — 
Repayments under term facility— (1,313)
Taxes paid related to net share settlement of equity awards(10,991)— 
Net cash provided by (used in) financing activities$20,609 $(1,313)
Effect of exchange rate changes on cash and cash equivalents(218)(384)
Net decrease in cash and cash equivalents(28,012)(2,077)
Cash and cash equivalents at beginning of period42,004 28,967 
Cash and cash equivalents at end of period$13,992 $26,890 
                                     
   
Convertible Preferred
Stock
  
Common Stock
   
Additional
Paid-In

Capital
   
Treasury Stock
  
Accumulated
other
comprehensive
loss
  
Accumulated
deficit
  
Total
Stockholders’

Equity
(Deficit)
 
  
Shares
  
Amount
  
Shares
   
Amount
 
                                
Balances at December 31, 2020   9,854,432  $98,544   29,281,514   $1   $11,456   $(174,720)  $(982)  $(175,846)  $(340,091) 
Conversion of convertible preferred stock into common stock upon initial public offering   (9,854,432)   (98,544)   27,368,102    1    98,543    —     —     —     98,544 
Conversion of convertible notes into common stock upon initial public offering   —     —     14,847,066    1    191,517    —     —     —     191,518 
Stock-based compensation   —     —     —      —      80,707    —     —     —     80,707 
Issuance of common stock pursuant to initial public offering, net of underwriting commissions and discounts and offering costs of $5.8 million   —     —     19,057,889    1    277,754    —     —     —     277,755 
Net loss   —     —     —      —      —      —     —     (197,562)   (197,562) 
Unrealized gain on interest rate swap, net of tax   —     —     —      —      —      —     196   —     196 
Reclassification to interest expense from interest rate swap   —     —     —      —      —      —     464   —     464 
Cumulative translation adjustment, net of tax   —     —     —      —      —      —     (616)   —     (616) 
                                         
Balances at September 30, 2021   —    $—     90,554,571   $4   $659,977   $(174,720)  $(938)  $(373,408)  $110,915 
                                         
5
                                     
   
Convertible Preferred
Stock
   
Common Stock
   
Additional
Paid- In
Capital
   
Treasury Stock
   
Accumulated
other
comprehensive
loss
  
Accumulated
deficit
  
Total
Stockholders’

Equity
(Deficit)
 
  
Shares
   
Amount
   
Shares
   
Amount
 
                                   
Balances at December 31, 2019   11,000,000   $110,000    58,000,000   $3   $—     $—     $(541)  $(150,557)  $(151,095) 
Net income   —      —      —      —      —      —      —     7,484   7,484 
Unrealized loss on interest rate swap, net of tax   —      —      —      —      —      —      (639)   —     (639) 
Cumulative translation adjustment, net of tax   —      —      —      —      —      —      (426)   —     (426) 
                                            
Balances at September 30, 2020   11,000,000   $110,000    58,000,000   $3   $—     $—     $(1,606)  $(143,073)  $(144,676) 
                                            

Three Months Ended March 31,
20222021
Supplemental disclosures of cash flow information:
Income taxes paid$222 $— 
Interest paid68 601 
Supplemental disclosure of noncash financing and investing activities:
Property and equipment included in accounts payable and accrued expenses$1,008 $— 
Intangible assets included in accounts payable and accrued expenses184 — 
Deferred offering costs included in accounts payable and accrued expenses— 194 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
         
   
Nine Months Ended September 30,
 
   
2021
  
2020
 
Cash flows from operating activities
         
Net (loss) income  $(197,562)  $7,484 
Adjustments to reconcile net (loss) income to net cash used in operating activities:         
Depreciation   195   279 
Amortization of intangible assets   1,968   499 
Amortization of deferred costs   1,330   975 
Accretion and
write-off
of debt discount
   31,585   —   
Bad debt expense   5,417   3,400 
Stock
-based compensation
   85,745   —   
(Gain) loss on disposal of property, plant and equipment   (6)   —   
Prepayment penalty included in interest expense   13,034   —   
PPP loan forgiveness   (2,063)   —   
Loss on derivative liability   48,603   —   
Provision for inventory   147   90 
Paid in kind interest accrual   12,851   —   
Unrealized foreign currency transaction gains (losses)   333   (659) 
Changes in operating assets and liabilities:         
Due from related parties   178   —   
Accounts receivable, net   (11,361)   (80) 
Inventories   (7,120)   (2,315) 
Prepaid expenses   (7,863)   1,673 
Other current assets   (2,742)   (2,344) 
Deferred costs   (2,534)   (3,616) 
Other long-term assets   (9,274)   (4,675) 
Accounts payable
 and accrued expenses
   5,432   2,891 
Deferred revenue   989   (13,507) 
Interest payable   (107)   188 
Income
taxes
payable
   (1,766)   1,391 
Other long-term liabilities   (167)  (971) 
          
Net cash used in operating activities
   (34,758)   (9,297) 
   
 
 
  
 
 
 
Cash flows from investing activities
         
Purchases of property and equipment   (1,465)   (307) 
Disposal of property and equipment   —     3 
Acquisition of Flywheel   (25,033)   —   
Purchases of intangible assets   (872)   (601) 
          
Net cash used in investing activities
   (27,370)   (905) 
          
Cash flows from financing activities
         
Borrowings under revolving facility   —     8,145 
Proceeds from issuance of Common
stock
, net of offering costs
   277,753   —   
Repayment of 1st Lien Loan   (33,688)   (2,250) 
Repayment of 2nd Lien Loan   (137,443)   —   
Prepayment of premium on 2nd Lien Loan   (13,034)   —   
Deferred financing costs   (1,012)   —   
Repayment of revolving facility   (7,000)   —   
Proceeds from Paycheck Protection Program loan   —��    2,062 
          
Net cash provided by financing activities
   85,576   7,957 
          
Effect of exchange rate changes on cash and cash equivalents
   203   (171) 
          
Net decrease in cash and cash equivalents
   23,651   (2,416) 
   
 
 
  
 
 
 
        
Cash and cash equivalents at beginning of period
   28,967   8,267 
   
 
 
  
 
 
 
Cash and cash equivalents at end of period
  $52,618  $5,851 
   
 
 
  
 
 
 
Supplemental disclosures of cash flow information
         
Interest paid
   14,143   803 
Income taxes paid
  $1,771  $—   
Supplemental disclosure of noncash financing and investing activities:
         
Conversion of convertible debt and derivative liability into common stock
  $191,519  $—   
Deferred offering costs included in accounts payable and accrued expenses
   —     1,030 
Conversion of convertible preferred stock into common stock
   98,544   — 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
F45 Training Holdings Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1—Nature of the business and basis of presentation

Organization

F45 Training Holdings Inc. (“F45 Training Holdings”,Holdings,” the “Company,” or “F45”) was incorporated in the State of Delaware on March 12, 2019 as a
C-Corp.
The Company and its subsidiaries are engaged in franchising and licensing the F45 Training brand to fitness facilities in multiple countries across the globe.

Initial public offering
The Company’s registration statement on
Form
S-1
(“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on July 14, 2021, and the Company’s common stock began trading on the New York Stock Exchange on July 15, 2021. On July 15, 2021, the Company completed its IPO of 20,312,500 shares of the Company common stock, $0.00005 par value per share at an offering price of $16.00 per share. The Company sold 18,750,000 shares and an existing stockholder sold an aggregate of 1,562,500 shares. The Company received aggregate net proceeds of approximately $277.8 million after deducting underwriting discounts, commissions and other offering costs. Immediately prior to the closing of the IPO, the Company amended and restated its article of incorporation and its bylaws authorizing an increase of capital stock to 215,000,000 shares with a par value of $0.00005 per share.
On August 13, 2021, the underwriters in the Company’s IPO exercised in part their overallotment option to purchase an additional 307,889 shares of the Company’s common stock from the Company and an additional 1,231,555 shares of the Company’s common stock from the selling stockholder at a public offering price of $16.00 per share. The overallotment sale was consummated on August 17, 2021 and the Company received $4.6 million in net proceeds from the purchase of the additional 307,889 shares after deducting underwriting discounts and commissions and will utilize the net proceeds for continuing operations and to pay expenses related to the offering.
Upon completion of the IPO, 9,854,432 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $98.5 million were automatically converted into an aggregate of 27,368,102 shares of the Company’s common stock and the Company’s outstanding convertible notes were converted into an aggregate of 14,847,066 shares of common stock. Following the completion of the IPO, the Company only has outstanding common stock.
2020 Stock repurchase agreements
On October 6, 2020, the Company entered into stock repurchase agreements (“Repurchase Agreements”) with 2M Properties Pty Ltd and Robert Deutsch, in which the Company purchased a total of 31,900,000 shares of common stock for $174.7 million. In addition, the Company paid a $2.5 million bonus to Mr. Deutsch. As a result of the Repurchase Agreements, these two parties no longer own any common stock in the Company.
Transaction with MWIG LLC (“MWIG”)

On March 15, 2019, MWIG, a special purpose private investment fund vehicle led by FOD Capital LLC, a family office investment fund, and Mark Wahlberg, made a minority preferred investment in the Company. On March 15, 2019, F45 Training Holdings, MWIG and Flyhalf Acquisition Company Pty Ltd, a newly incorporated wholly-owned, indirect subsidiary of F45 Training Holdings, entered into a Share Purchase Agreement (“SPA”) with F45 Aus Hold Co Pty Ltd (“F45 Aus Hold Co”) and its existing stockholders pursuant to which F45 Training Holdings became the ultimate parent of F45 Aus Hold Co and its subsidiaries. Upon the consummation of the transaction with MWIG, the existing stockholders and MWIG held 72.5% and 27.5% ownership interests, respectively, in the Company and, its wholly-owned subsidiaries. On December 30, 2020, MWIG converted 1,145,568 shares of preferred stock of the Company into 3,181,514 shares of common stock of the Company and sold those shares of common stock to affiliates of L1 Capital Fund, an Australian based global fund manager. See
Note 13—14—Convertible preferred stock and stockholders’ equity (deficit)
for further discussion.

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Table of Contents
Pursuant to the SPA and in return for acquiring 100% of the shares in F45 Aus Hold Co, F45 Training Holdings issued 29,000,000 shares of common stock to the existing stockholders of F45 Aus Hold Co proportionate to their relative ownership of the common stock of F45 Aus Hold Co and its wholly-owned subsidiaries. As a result of this transaction, there was no change in control. All references to shares in the condensed consolidated financial statements and the notes to the condensed consolidated financial statements presented herein, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the effects of the transaction retrospectively as of the earliest period presented in the interim unaudited condensed consolidated financial statements.

Initial public offering

The Company’s registration statement on Form S-1 (“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on July 14, 2021, and the Company’s common stock began trading on the New York Stock Exchange on July 15, 2021. On July 15, 2021, the Company completed its IPO of 20,312,500 shares of the Company’s common stock, $0.00005 par value per share at an offering price of $16.00 per share. The Company sold 18,750,000 shares and 1 of the Company’s existing stockholders sold an aggregate of 1,562,500 shares. The Company received aggregate net proceeds of approximately $277.8 million after deducting underwriting discounts, commissions and other offering costs. Immediately prior to the closing of the IPO, the Company amended and restated its articles of incorporation and its bylaws authorizing an increase of capital stock to 215,000,000 shares with a par value of $0.00005 per share.

Upon completion of the IPO, 9,854,432 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $98.5 million were automatically converted into an aggregate of 27,368,102 shares of the Company’s common stock and the Company’s outstanding convertible notes were converted into an aggregate of 14,847,066 shares of common stock. Following the completion of the IPO, the Company only has outstanding common stock.

On August 13, 2021, the underwriters in the Company’s IPO exercised in part their over allotment option to purchase an additional 307,889 shares of the Company’s common stock from the Company and to purchase an additional 1,231,555 shares of the Company’s common stock from the selling stockholder at a public offering price of $16.00 per share. The over-allotment sale was consummated on August 17,
7

2021 and the Company received $4.6 million in net proceeds from the purchase of the additional 307,889 shares after deducting underwriting discounts and commissions and utilized the net proceeds for continuing operations and to pay expenses related to the offering.

Basis of presentation

The accompanying unauditedinterim condensed consolidated financial statements and relatedaccompanying notes to the unaudited condensed consolidated financial statements have been prepared in accordanceconformity with U.S. generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules andapplicable regulations of the Securities and Exchange Commission (the “SEC”(“the SEC”). In accordance with such rules regarding interim financial reporting, and regulations, certaininclude the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Certain information and accompanying note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted althoughpursuant to the Company believes theapplicable required disclosures included herein are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments which are considered necessary for the fair presentationand regulations of the financial position of the Company at September 30, 2021 and the results of operations for the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. All intercompany balances and transactions have been eliminated in consolidation.
These interimSEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto ofincluded in the Company as of andCompany’s Annual Report on Form 10-K for the yearsfiscal year ended December 31, 2020 and 2019 disclosed in the final prospectus filed with the SEC on July 16, 2021.

Note 2—Summary of significant accounting policies

There were no changes to the significant accounting policies or recent accounting pronouncements that were disclosed in
Note 2—Summary of significant accounting policies
to the audited consolidated financial statements of the Company as of and for the years ended December 31, 20202021 and 2019,2020, other than as discussed below.

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Table of Contents
Stock split

In July 2021, the Company effected a
2-for-1
forward stock split of its common stock. In connection with the forward stock split, each issued and outstanding share of common stock, automatically and without action on the part of the holders, became two2 shares of common stock. The par value per share of common stock was adjusted from $0.0001 to $0.00005. All share, per share and related information presented in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the stock split.

Use of estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Key estimates and judgments relied upon in preparing these interim condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, depreciation of long-lived assets, internally developed software, amortization of intangible assets, valuation of inventory, fair value of derivative instruments, fair value of stock-based awards, and accounting for income taxes. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable. Actual results could differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents consist of bank deposits. The Company holds cash and cash equivalents at major financial institutions, which often exceed insured limits. Historically, the Company has not experienced any losses due to such bank depository concentration.

8

Accounts receivable and allowance for doubtful accounts

Accounts receivable is primarily comprised of amounts owed to the Company resulting from fees due from franchisees. The Company evaluates its accounts receivable on an ongoing basis and establishes an allowance for doubtful accounts based on historical collections and specific review of outstanding accounts receivable. Accounts receivable are written off as uncollectible when it is determined that further collection efforts will be unsuccessful.

The change in allowance for doubtful accounts is as follows (in thousands):
For the Three Months Ended March 31,
20222021
Balance at beginning of period$8,132 $5,746 
Provisions for bad debts, included in selling, general and administrative1,464 1,666 
Uncollectible receivables written off(4,230)(2,659)
Balance at end of period$5,366 $4,753 
                 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
Balance at beginning of period  $5,256   $2,195   $5,746   $1,069 
Provisions for bad debts, included in selling, general and administrative   1,903    1,483    5,417    3,400 
Uncollectible receivables written off   (114)    (892)    (4,118)    (1,683) 
                     
Balance at end of period  $7,045   $2,786   $7,045   $2,786 
                     
None
One of the Company’s related partiescustomers accounted for more than 10%approximately 19% of the Company’s accounts receivable as of September 30, 2021 and DecemberMarch 31, 2020.2022. None of the Company’s customers accounted for more than 10% of the Company’s accounts receivable as of September 30, 2021 and December 31, 2020. None2021. Two of the Company’s customers accounted for more thanapproximately 39% of the Company’s revenues for the three months ended March 31, 2022. No customers accounted for over 10% of the Company’s revenuerevenues for the three and nine months ended September 30, 2021March 31, 2021.

Inventories

Inventory is carried at the lower of cost or net realizable value. Inventory primarily consists of finished goods such as merchandise and 2020.
Deferred IPO costs
Deferred IPO costs, which consistequipment. The first-in, first-out method is used to determine the cost of direct incremental legal and accounting fees relatinginventories held for sale to franchisees. If the IPO,Company determines that the estimated net realizable value of its inventory is less than the carrying value of such inventory, it records a charge to reflect the lower of cost or net realizable value. If actual market conditions are capitalized. As of September 30,less favorable than those projected by the Company, further charges may be required. The Company wrote off $0.1 million in inventories during the three months ended March 31, 2022 related to obsolete inventory. During the three months endedMarch 31, 2021, the deferred IPOCompany had 0 write-offs in inventories related to obsolete inventory.

Property and equipment

Property and equipment is recorded at cost and depreciated using the straight-line method over its related estimated useful life. Refer to Note 3—Property and equipment, net for useful lives of property and equipment. Leasehold improvements depreciate over the shorter of the lease term or the estimated useful life of the related asset. Maintenance and repair costs are expensed in the period incurred. Expenditures for purchases and improvements that extend the useful lives of $5.8 million were recordedproperty and equipment are capitalized and depreciated over the term of the lease or useful life of the equipment. Upon sale or retirement, the asset cost and related accumulated depreciation are removed from the respective accounts, and any related gain or loss is reflected in additional
paid-in
capitalselling, general and administrative expenses in the condensed consolidated balance sheetsstatements of operations and comprehensive income (loss).

Construction in progress

Construction in progress (“CIP”) consists of costs associated with the leasehold improvement activities of the Company’s new headquarters in Austin, Texas. Capitalization of these costs ceases and CIP is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is recognized until the assets are completed and ready for their intended use. During the three months ended March 31, 2022, the Company moved into the headquarters and placed the assets into service.
9


Business combination

The Company includes the results of operations of the businesses that the Company acquires as of the acquisition date. The Company allocates the consideration transferred of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions, including projections of future events and operating performance. The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Goodwill and intangible assets

Goodwill and intangible assets that arise from acquisitions are recorded in accordance with Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other. In accordance with this guidance, specifically identified intangible assets must be recorded as a reductionseparate asset from goodwill if either of the following two criteria is met: (1) the intangible asset acquired arises from contractual or other legal rights; or (2) the intangible asset is separable. Intangibles are typically trade and brand names, customer relationships, and reacquired franchise rights. Transactions are evaluated to determine whether any gain or loss on reacquired franchise rights, based on their fair value, should be recognized separately from identified intangibles. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The Company allocates goodwill to reporting units based on the expected benefit from the proceedsbusiness combination. The Company evaluates the reporting units periodically, as well as when changes in the operating segments occur.

The Company capitalizes costs associated with software developed or obtained for internal use when the preliminary project stage is completed. These capitalized costs are included in intangible assets and include third-party cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Software development costs are amortized to selling, general and administrative expenses using the straight-line method over an estimated useful life of three years commencing when the software development project is ready for its intended use. Amounts related to software development that are not capitalized are charged immediately to selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

The recoverability of software development costs capitalized under ASC 350-40 is evaluated in accordance with the methodology noted within the “Impairment of long-lived assets, goodwill, and intangible assets” section below. When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, the Company expenses these capitalized costs to selling, general and administrative expenses in the period such a determination is made.

Goodwill, trade names and trademarks have an indefinite life and are not amortized, but are tested annually for impairment or more frequently if impairment indicators arise, as described below.

Impairment of long-lived assets, goodwill, and intangible assets

The Company assesses potential impairment of its long-lived assets, which include property and equipment 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 IPO.carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset group exceeds its estimated
10

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.

Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired. Generally, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If factors indicate that this is the case, the Company then estimates the fair value of the related reporting unit. If the fair value is less than the carrying value, the goodwill of the reporting unit is determined to be impaired and the Company will record an impairment equal to the excess of the carrying value over its fair value.

The indefinite-lived intangible asset impairment test consists of a comparison of the fair value of each asset with its carrying value, with any excess of carrying value over fair value being recognized as an impairment loss. The Company is also permitted to make a qualitative assessment of whether it is more likely than not an indefinite-lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If based on the Company’s qualitative assessment it is more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment may be required. The Company also tests for impairment whenever events or circumstances indicate that the fair value of such indefinite-lived intangible asset has been impaired.

If impairment indicators arise with respect to finite-lived intangible assets, the Company evaluates impairment by comparing the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, then the Company estimates the fair value of the asset and compare the estimated fair value to the intangible asset’s carrying value. The Company recognizes any shortfall from carrying value as an impairment loss in the current period.

The Company completes the required annual impairment test of goodwill and indefinite-lived intangible assets annually on October 1. There were no deferred IPO costsimpairment charges recorded on the Company’s long-lived assets, goodwill and indefinite-lived and finite-lived intangible assets during the three months ended March 31, 2022 and 2021.

Revenue from contracts with customers

The Company’s contracts with customers are typically comprised of multiple performance obligations, including exclusive franchise rights to access the Company’s intellectual property to operate an F45 Training-branded fitness facility in a specific territory (franchise agreements), a material right related to discounted renewals of the franchise agreements (both reflected in franchise revenue in the condensed consolidated statements of operations and comprehensive income (loss) and equipment and merchandise. Taxes collected from customers and remitted to government authorities are recorded on a net basis.

Franchise revenue

The Company’s primary performance obligation under the franchise agreement is granting certain exclusive rights to access the Company’s intellectual property to operate an F45 Training-branded fitness facility in a defined territory. This performance obligation is a right to access the Company’s intellectual property, which is satisfied ratably over the term of the franchise agreement. Renewal fees are generally recognized over the renewal term for the respective agreement from the start of the renewal period. Transfer fees are recognized over the remaining term of the franchise agreement beginning at the time of transfer.

Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement. Earlier franchise agreements had an initial term of three years while more recent agreements have an initial term of five years. With the Company’s approval, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is paid. The Company’s arrangements have no financing elements as of December 31, 2020.
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Table of Contentsthere is no difference
Revenue recognition—Change in estimate11

Duringbetween the height ofpromised consideration and the
COVID-19
pandemic in 2020, cash selling price. Additionally, the Company entered into franchise agreementshas assessed that included a discount onsignificant amount of the costs incurred under the contract to perform are incurred up-front.

Franchise revenue consists primarily of upfront establishment fees, monthly franchise fees and modified other contract terms as partfranchise-related fees. The upfront establishment fee is payable by the franchisee upon signing a new franchise agreement and monthly franchise and related fees are payable throughout the term of the franchise license. Historically, franchisees have paid a fixed monthly franchise fee. For new franchisees the franchise fee is based on the greater of a limited-time promotional offer made exclusivelyfixed monthly franchise fee or a percentage of gross monthly studio revenue.

Discounted franchise agreement renewal fees

The Company’s franchise agreements may include discounted renewal options allowing franchisees to existing franchises (“limited-time promotional deals”). renew at no cost or at a reduction of the initial upfront establishment fee. The resulting discount in fees at renewal provides a material right to franchisees. The Company’s obligation to provide future discounted renewals to franchisees are accounted for as separate performance obligations. The value of these material rights related to the future discount was determined by reference to the estimated franchise agreement term, which has been estimated to be 10 years, and related estimated transaction price. The estimated transaction price allocated to the franchise agreements, including the upfront establishment fee, is recognized as revenue over the estimated contract term of 10 years, which gives recognition to the renewal option containing a material right. At the end of the initial contract term, any unrecognized transaction price would be recognized during the renewal term, if exercised, or when the renewal option expires, if unexercised.

Equipment and merchandise revenue

The Company deemed thatrequires its franchisees to purchase fitness and technology equipment directly from the limited-time promotional deals did not meetCompany and payment is required to be made prior to the criteria of a contract at the inceptionplacement of the agreement under Accounting Standards Codification (ASC)franchisees’ orders. Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the franchisee, which is when the franchisee obtains physical possession of the goods, legal title has transferred, and the franchisee has all risks and rewards of ownership. The franchisees are charged for all freight costs incurred for the delivery of equipment. Freight revenue is recorded within equipment and merchandise revenue and freight costs are recorded within cost of equipment and merchandise revenue.

The Company is the principal in a majority of its equipment revenue transactions as the Company controls its proprietary equipment prior to delivery to the franchisee, has pricing discretion over the goods, and has primary responsibility to fulfill the franchisee order through its direct third-party vendor.
606-10-25-1
The Company is the agent in a limited number of equipment and merchandise revenue transactions where the franchisee interacts directly with third-party vendors for which the Company receives a rebate on sales directly from the vendor.

Allocation of transaction price

The Company’s contracts include multiple performance obligations—typically the franchise license, equipment and material rights for discounted renewal fees. Judgment is required to determine the standalone selling price for these performance obligations. The Company does not sell the franchise license or World Pack equipment on a stand-alone basis (the Company’s contracts with customers almost always include both performance obligations), as such the standalone selling price of the performance obligations are not directly observable on a stand-alone basis. Accordingly, the Company estimates the standalone selling prices using available information including the prices charged for each performance obligation within its contracts with customers in the relevant geographies and market conditions. Individual standalone selling prices are estimated for each geographic location, primarily the United States, Australia and ROW, due to the Company’s inability to determine that collectability under the agreements was probable, and as such, did not begin immediately recognizing revenue upon the inceptionunique market conditions of these franchise agreements. During the second quarter of 2021, the Company assessed the limited-time promotional deals and determined the criteria of a contract under ASC
606-10-25-1
had been met and, as a result, recorded a cumulative
catch-up
those performance obligations in revenue of $2.2 million. The Company noted the assessment of collectability was primarily driven by a review of post-COVID payment and collection history for franchisees who owned multiple studios within the Company’s network, system-wide sales per region, and increases in post
re-opening
weekly visit volume and store-level gross sales volumes compared to specified periods in which the contracts were initially signed.each region.
The Company’s United States subsidiary, F45 Training, Inc., operates in various states within the United States which require the Company to defer collection of certain fees (“Deferred States”), including the initial establishment fees, until certain criteria are met as specified by state and local requirements. In Deferred States, the Company concluded that the deferred establishment fees represent variable consideration as receipt was subject to uncertainty due to a lack of experience with contracts requiring deferral of establishment fees and uncertainty on the length of
time
between inception of an agreement and the opening of a studio. As a result, establishment fees were excluded from the transaction price upon signing of the franchise agreements within the Deferred States. The Company
re-evaluates
the transaction price on its Deferred States franchise agreements if there is a significant change in facts and circumstances at the end of each reporting period. During the second quarter of 2021, the Company increased the transaction price of the Deferred States contracts by $1.7 million because of an enhanced history of franchise agreements and collections history on Deferred States franchise agreements, as well as a review of post-COVID payment and collection history for similar franchisees, resulting in the recognition of an additional $1.3 million in revenue during the nine months ended September 30, 2021.
12



Contract assets

Contract assets primarily consist of unbilled revenue where the Company is utilizing the costs incurred as the measure of progress of satisfying the performance obligation. When the contract price is invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. The unbilled receivable represents the amount expected to be billed and collected for services performed through
period-end
period end in accordance with contract terms. The unbilled contract assets are principally the result of a number of multi-unit franchise agreements executed during 2021. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company recorded $3.7had contract assets of $15.0 million and $1.2$4.3 million, respectively, in other current assets, and $22.6 million and $18.4 million, respectively, in other long-term assets. These contract assets are subject to impairment assessment. During the three months ended March 31, 2022, the Company recognized $0.1 million of impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). During the three months ended March 31, 2021, the Company recognized no impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

Deferred costs

Deferred costs consist of incremental costs to obtain (e.g., commissions) and fulfill (e.g., payroll costs) a contract with a franchisee. Both the incremental costs to obtain and fulfill a contract with a franchisee are capitalized and amortized on a straight-line basis over the expected period if the Company expects to recover those costs. The Company reviews existing franchisee contract terminations and where terminations are identified associated contract and fulfillment costs are fully impaired. As of March 31, 2022 and December 31, 2021, the Company had $14.5 million and $13.8 million, respectively, of short-term unbilled receivable, whichdeferred costs to obtain and fulfill contracts with franchisees. During the three months ended March 31, 2022 and March 31, 2021, the Company recognized $0.6 million and $0.4 million amortization of these deferred costs. The amortization of these costs is included in selling, general and administrative expenses for costs to obtain a contract and cost of franchise revenue for costs to fulfill a contract in the condensed consolidated statements of operations and comprehensive income (loss). During the three months ended March 31, 2022 and March 31, 2021, the Company recognized no impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

Consideration from a vendor

Consideration from a vendor includes rebates that the Company can apply against the purchase price of the equipment acquired from the Company’s suppliers. Such consideration is accounted for by the Company as a reduction to the cost of sales of the related acquired equipment upon delivery to the franchisee. For the three months ended March 31, 2022, the Company recognized$3.2 million of consideration from its suppliers as a reduction to the cost of sales of equipment and merchandise in the condensed consolidated statements of operations and comprehensive income (loss). Additionally, $2.8 million of consideration from its suppliers is included as a reduction to inventory in the condensed consolidated balance sheets as of March 31, 2022. For the three months ended March 31, 2021, the Company recognized no consideration from its suppliers as a reduction to the cost of sales of equipment and merchandise in the condensed consolidated statements of operations and comprehensive income (loss).

Leases

The Company recognizes rent expense related to leased office and operating space on a straight-line basis over the term of the lease. During the three months ended March 31, 2022 and March 31, 2021, the rent expense was $1.3 million and $0.2 million, respectively, and recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

13


Advertising

Advertising and marketing costs are expensed as incurred. For the three months ended March 31, 2022 and March 31, 2021, advertising expenses included in selling, general and administrative expenses totaled $6.5 million and $3.5 million, respectively.

Income taxes

The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax (benefit) expense is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The factors used to assess the Company’s ability to realize its deferred tax assets are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented. Under ASC 740, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized due to the inability to generate sufficient future taxable income of the correct character. Failure to achieve previous forecasted taxable income could affect the ultimate realization of deferred tax assets and could negatively impact the Company’s effective tax rate on future earnings.

Tax benefits from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits, which to date have not been material, are recognized within the provision (benefit) for income taxes.

Foreign currency

The functional currency for the Company is the United States dollar. The Company has determined all other currentinternational subsidiaries’ functional currencies are the local currency. The assets and liabilities of the international subsidiaries are translated at exchange rates in effect at the balance sheet date while income and expense amounts are translated at average exchange rates during the period. The resulting foreign currency translation adjustments are disclosed as a separate component of other comprehensive income (loss). Transaction gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other income, net in the condensed consolidated statements of operations and comprehensive income (loss).

Stock-based compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award. The Company estimates the fair value of stock-based payment awards subject to both performance and market conditions on the date of grant using a Monte Carlo simulation model. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation cost for awards whose vesting is subject to the occurrence of both a performance condition and market condition is recognized immediately at the time the performance condition is achieved. Liability-classified awards are accounted at fair value at the grant date and remeasured at each reporting period until the awards are settled, with all changes in fair value recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

Basic and diluted loss per share

14

The Company computes loss per share using the two-class method required for participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s convertible preferred stock are participating securities, as preferred stockholders have rights to participate in dividends with the common stockholders on a pro-rata, as converted basis. These participating securities do not contractually require the holders of such shares to participate in the Company’s losses.

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of outstanding shares of common stock and, when dilutive, potential shares of common stock outstanding during the period.

Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are based on a fair value hierarchy, based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

•Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted market prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amount of cash and cash equivalents, accounts receivable, inventory, and accounts payable and accrued expenses, as reflected on the condensed consolidated balance sheets. Assheets, approximate fair value because of September 30,the short-term maturity of these instruments. These estimated fair values may not be representative of actual values of the financial instruments that could have been realized or that will be realized in the future.

The valuation techniques used to measure the fair value of the Company’s debt instruments and stock-based compensation are based on level 2 or 3 inputs.

Derivative instruments

Interest rate swap

The Company was subject to interest rate volatility on its floating-rate debt. The Company entered into an interest rate swap agreement to manage its exposure to interest rate fluctuations, which terminated in July 2021 and December 31, 2020,in connection with the IPO. The principal objective of these agreements was to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company recorded $11.6 million and $4.9 million, respectively, of long-term unbilled receivable, which is includedelected to apply the hedge accounting rules in other long-term assetsaccordance with authoritative guidance for the agreement. The agreement was carried at fair value as a liability on the condensed consolidated balance sheets.
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Changes in the fair value of the agreement designated as a cash flow hedge was recorded as a component of accumulated and was amortized to interest expense over the term of the related debt.

Embedded derivatives

When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative liabilities. The estimated fair value of the derivative feature is recorded as a liability in the consolidated balance sheets, separate from the carrying value of the host contract. Subsequent changes in the estimated fair value of the embedded derivatives are recorded as a gain or loss in within loss on derivative liabilities in the Company’s condensed consolidated statements of operations and comprehensive income (loss).

The Company fair values the embedded derivatives using the Bond plus Black-Scholes option pricing model. Valuations derived from this model are subject to ongoing internal and external verification review. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

The embedded derivatives were extinguished in connection with the repayment of the debt upon the IPO.

Recently issued accounting pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company (“EGC”). The Company has elected to take advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In February 2016, the Financial Accounting Standards Board (FASB)(“FASB”) established Topic 842, Leases (“Topic 842”), by issuing Accounting Standards Update
(“
ASU
” (“ASU”)
No. 2016-02,
Leases (“ASU
2016-02”).
Topic 842 was subsequently amended by ASU
No. 2018-01,
Land Easement Practical Expedient for Transition, to Topic 842; ASU
No. 2018-10,
Codification Improvements to Topic 842, Leases;Leases, ASU
No. 2018-11,
Targeted Improvements;Improvements, ASU
No. 2018-20,
Narrow-Scope Improvements for Lessors;Lessors, ASU
No. 2019-01,
Codification Improvements;Improvements, ASU
No. 2019-10,
Effective Dates, and ASU
No. 2020-20,
2020-02, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update
No.ASU 2016-02.
This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance requires lessees to recognize the assets and liabilities on the balance sheet for the rights and obligations created by leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Leases will be classified as finance or operating, with the classification affecting the pattern and classification of expense recognition within the income statement. Topic 842 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. While the Company is currently evaluating the impact of adopting Topic 842, the Company expects to recognize
right-of-use
assets and lease liabilities on its consolidated balance sheets upon adoption. The standard is not expected to have a material impact to the condensed consolidated statements of operations and comprehensive income (loss) income and statements of cash flows.

16

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-CreditInstruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Topic 326 was subsequently amended by ASU No. 2018-19, Codification Improvements;Improvements, ASU No. 2019-04, Codification Improvements; ASU No. 2019-11, Codification Improvements, that clarify the scope of the standard in the amendments in ASU 2016-13; ASU No. 2019-05, Targeted Transition Relief; ASU No. 2019-10, Effective Dates; andDates, ASU no.No. 2019-11, Codification Improvements, ASU No. 2020-02, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC section on Effective Date Related to Accounting Standards Update No. 2016-02.ASU 2016-02, and ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. The guidance changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current ‘incurred loss’ model with an ‘expected loss’ approach. The guidance will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact that the guidance will have on the consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which amends ASC 740. This ASU simplifies the accounting for income taxes by modifying the treatment of intraperiod tax allocation in certain circumstances, eliminating an exception to recognizing deferred tax liabilities for outside basis differences for foreign equity method investments and foreign subsidiaries when ownership or control changes, and modifying interim period tax calculations when a loss is forecast. In addition, this ASU also requires that enacted changes in tax laws or rates be included in the annual effective rate determination in the period that includes the enactment date and clarifies the tax accounting of a step up in tax basis of goodwill. ASU 2019-12 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact that the guidance will have on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (“ASU 2020-04”), which provides companies with optional guidance, including expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). ASU 2020-04 is effective for the Company upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 on its consolidated financial statements; however, the Company does not believe that adoption of ASU 2020-04 will materially impact its consolidated financial statements.

In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation-StockCompensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’sEntity's Own Entity (Subtopic 815-40), to clarify the accounting for modifications or exchanges of equity-classified warrants.warrants (“ASU 2021-04”). In accordance with the ASU, if there is a modification and the option is still determined to be classified as equity, the modification should be accounted for as an exchange of the original option for a new option. This guidance will be effective for the Company beginning with the year ending December 31, 2022, with early adoption permitted. The Company is currently evaluating the impact of this update and will monitor for modifications or exchanges of the issued freestanding stock options, but at this time does not anticipate the adoption of ASU 2021-04 to have a material impact on the consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. This guidance will be effective for the Company beginning with the year ended December 31, 2023, with early adoption permitted. The Company is currently evaluating the impact that the guidance will have on the consolidated financial statements.
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Note 3—Property and equipment, net

Property and equipment, net, consists of the following as of September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
Estimated Useful LifeMarch 31, 2022December 31, 2021
(years)
Vehicles5$263 $177 
Furniture and fixtures71,067 542 
Office and other equipment51,181 945 
Leasehold improvementsLesser of lease term or useful life7,387 2,825 
Construction in progressn/a57 2,241 
9,955 6,730 
Less: accumulated depreciation(1,085)(1,085)
Total property and equipment, net$8,870 $5,645 
           
   
Estimated Useful Life
  
September 30, 2021
   
December 31, 2020
 
   (years)          
Vehicles  5  $175   $43 
Furniture and fixtures  7   223    179 
Office and other equipment  5   754    720 
Leasehold improvements  Lesser of lease term or
useful life		   1,763    675 
              
       2,915    1,617 
Less accumulated depreciation      (901)    (733) 
              
Total property and equipment, net     $2,014   $884 
              

Depreciation expense related to property and equipment was $0.1approximately $0.3 million and $0.1 million for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively. Depreciation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income..

Note 4—IntangibleAcquisitions

Acquisition of Surf & Turf Holdings Pty Ltd (“Vive Active” or “Vive”)

On October 29, 2021, Company entered into a share purchase agreement to acquire 100% of the outstanding stock of Vive Active. Vive Active, located in Australia, provides Pilates classes through its online platform and its studios. The consideration exchanged for the acquisition amounts to $7.5 million (50% cash up front and 50% deferred cash paid no later than 6 months after completion and which is not subject to any other conditions). The stock acquisition was a strategic transaction to leverage Vive’s intellectual property, content, and expertise to supplement the Company’s brands, to expand the Company’s corporate footprint across Australia and key global markets, and to leverage Vive management team’s experience in developing corporate-owned studios,

As of December 31, 2021 and March 31, 2022, the estimated fair values of the acquired assets and assumed liabilities were provisional estimates, based on the Company’s best estimates of fair value. The Company has not been able to obtain all of the necessary information to complete the valuation of each of the assets acquired and liabilities assumed since the acquisition closed late in the year. Consequently, more time is needed to obtain market data information, and adequately review and evaluate the information. These provisional estimates are subject to change as the Company completes all remaining steps in finalizing the purchase price allocation, but the Company does not expect material changes to the preliminary estimates below.

The following table summarizes the useful lives and carrying valuesfair value of intangiblethe consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets including
internal-use
softwareacquired (in thousands):

                             
       
As of September 30, 2021
   
As of December 31, 2020
 
   
Useful Life
   
Gross Value
   
Accumulated
Amortization
   
Net Value
   
Gross Value
   
Accumulated
Amortization
   
Net Value
 
   
(in years)
                         
Internal-use
software
   3   $3,403   $1,823   $1,580   $2,767   $1,352   $1,415 
Trade names & trademarks
   n/a    1,651    —      1,651    343    —      343 
Flywheel CRM software   9    22,873    506    22,367    —      —      —   
                                    
Total intangible assets, net       $27,927   $2,329   $25,598   $3,110   $1,352   $1,758 
                                    
18

Fair value of consideration transferred:
Cash paid to shareholders$7,521 
Less: cash acquired(19)
Fair value of consideration transferred, net of cash acquired:$7,502 
Less: net assets acquired:
Assets acquired:
Accounts receivable$7 
Inventory53 
Prepaid expenses31 
Other assets30 
Property and equipment, net1,292 
Intangible assets2,141 
$3,554 
Liabilities assumed:
Accounts payable and accrued expenses$(161)
Deferred tax liability(497)
Short-term debt(170)
$(828)
Net assets acquired2,726 
Goodwill$4,776 

The amortization expensecreation of goodwill in this transaction was the result of the expected growth in future cash flows and cost savings to be derived from economies of scale of combining Vive’s assets and workforce to the Company’s business operations. None of the goodwill is expected to be deductible for income tax purposes.

The acquired intangible assets consist of the following:

Useful Life (in years)Fair Value as of October 29, 2021
Brand nameIndefinite$418 
Software6485 
Customer contracts71,238 
Total$2,141 

The fair values of the customer contracts and brand name were based on multi-period excess earnings and relief from royalty methods, respectively. The fair value of the software was $0.7 millionbased on replacement cost method. Such methods are widely-accepted valuation techniques, which inherently use critical assumptions such as future revenue growth rates, royalty rates, and $
0.3discount rates.

m
illion forVive was consolidated into the condensed consolidated financial statements starting on the acquisition date of October 29, 2021. For the three months ended September 30, 2021 and 2020, respectively, and $2.0March 31, 2022, $0.7 million and $
0.5
less than $0.1 million forof the nine months ended September 30, 2021Company’s consolidated revenue and 2020,consolidated net loss, respectively, and was recorded in selling, general and administrative expenses inattributable to Vive.

The Company has not disclosed pro forma information of the condensedcombined business as the transaction is not material to the Company’s consolidated statementsrevenue or consolidated net loss.

Acquisition of operations and comprehensive (loss) income. The weighted average remaining life ofFlywheel Sports, Inc. (“Flywheel”)
internal-use
software was 2.2 years and 1.7 years as of September 30, 2021 and December 31, 2020, respectively.
In April 2021, the Company entered into an intellectual property license agreement with FW SPV II LLC (“FW SPV”), a Delaware limited liability company, regarding certain intellectual property previously owned by Flywheel Sports, Inc. (“Flywheel IP”). The license agreement is for a period of five years at a rate of $5.0 million per year. The Company initially recorded $20.8 million of intangible assets when the
19

license agreement became effective in April 2021 based on the present value of the annual payments throughout the term of the license agreement.

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On July 19, 2021, after the consummation of the IPO, the Company acquired certain assets of the Flywheel indoor cycling studio business for $25.0 million in cash consideration, effectively transferring control of the assets to the Company and terminating the license agreement entered into in April 2021. The acquisition was accounted as an asset acquisition. On the acquisition date, the Company reversed the net carrying amount of $19.8 million of intangible assets, net of accumulated amortization of $0.8 million, and $20.6 million of the related liability that was initially recorded under the license agreement, resulting in a decrease to the cash consideration transferred by $0.8 million. The net purchase consideration of net $24.2 million was allocated to the assets acquired on a relative fair value basis, which primarily consisted of the client relationship management (“CRM”) software and trade names.The CRM software is amortized on a straight-line basis over 9 years, while the trade names have
an
indefinite life.

Note 5—Goodwill and intangible assets

The following table summarizes the useful lives and carrying values of intangible assets, including internal-use software (in thousands):

As of March 31, 2022As of December 31, 2021
Useful LifeGross ValueAccumulated AmortizationNet ValueGross ValueAccumulated AmortizationNet Value
(in years)
Goodwilln/a$4,614 $— $4,614 $4,614 $— $4,614 
Internal-use software3$4,627 $2,352 $2,275 $3,862 $2,077 $1,785 
Trade names & trademarksn/a4,058 — 4,058 3,329 — 3,329 
Customer contracts71,194 75 1,119 1,194 30 1,164 
Acquired software6 - 923,324 1,855 21,469 23,324 1,156 22,168 
Total intangible assets, net$33,203 $4,282 $28,921 $31,709 $3,263 $28,446 

The amortization expense of the CRM softwareintangible assets was $0.5approximately $0.9 million and $0.1 million for the three and nine months ended September 30, 2021.March 31, 2022 and 2021, respectively, and was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). The weighted average remaining life of internal-use software was 1.8 years and 1.6 years as of March 31, 2022 and December 31, 2021, respectively. The weighted average remaining life of acquired software was 4.6 years and 4.8 years as of March 31, 2022 and December 31, 2021, respectively.

As of September 30, 2021,March 31, 2022, the expected amortization of intangible assets for future periods, excluding those assets not yet placed in service as of September 30, 2021,March 31, 2022, is as follows (in thousands):

  
  
Future Amortization
 Future Amortization
Remainder of 2021  $856 
2022   3,324 
Remainder of 2022Remainder of 2022$2,895 
2023   2,991 20233,537 
2024   2,663 20243,180 
2025   2,541 20252,812 
202620262,787 
Thereafter   11,572 Thereafter9,652 
    
Total  $23,947 Total$24,863 
    


20

Note 5—6—Accounts payable and accrued expenses

Accounts payable and accrued expenses were comprised of the following (in thousands):
         
   
September 30, 2021
   
December 31, 2020
 
Accounts payable  $8,066   $7,670 
Accrued sales tax   5,998    3,423 
Accrued payroll and benefits   1,493    1,399 
Stock-based compensation liability
  
4,446
   
—  
 
Accrued inventory purchases   14,376    5,999 
Other payables   82    166 
           
   $34,461   $18,657 
           

12
March 31, 2022December 31, 2021
Accounts payable$10,256 $4,777 
Accrued sales tax6,519 5,944 
Accrued payroll and benefits1,707 1,677 
Stock-based compensation liability2,678 4,221 
Accrued inventory purchases15,981 19,862 
Other payables1,378 113 
Total$38,519 $36,594 

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Note 6—7—Deferred revenue

Deferred revenue results from establishment fees paid by franchisees at the outset of the contract term and the value of material rights related to discounted renewal options as well as equipment fees paid by franchisees prior to the transfer of the equipment. The following table reflects the change in deferred revenue during the three and nine months ended September 30,March 31, 2022 and 2021 and 2020 (in thousands):

Deferred Revenue
Balance at December 31, 2021$14,522 
Revenue recognized(12,008)
Increase11,803 
Balance at March 31, 2022$14,317 
     
   
Deferred Revenue
 
Balance at December 31, 2020
  $14,095 
Revenue Recognized   (11,523) 
Increase   15,393 
      
Balance at June 30, 2021
  $17,965 
   
 
 
 
Revenue Recognized
   (9,143) 
Increase
   5,873 
      
Balance at September 30, 2021
  $14,695 
   
 
 

Deferred Revenue
Balance at December 31, 2020$14,095 
Revenue recognized(7,016)
Increase10,571 
Balance at March 31, 2021$17,650 
   
Deferred Revenue
 
Balance at December 31, 2019
  $23,941 
Revenue Recognized   (20,114) 
Increase   13,313 
      
Balance at June 30, 2020
  $17,140 
   
 
 
 
Revenue Recognized
   (6,439)
Increase
   2,311
   
 
 
 
Balance at September 30, 2020
  $13,012 
   
 
 
 

Deferred revenue expected to be recognized within one year from the balance sheet date is classified as current, and the remaining balance is classified as noncurrent.non-current. Transaction price allocated to remaining performance obligations represents contracted franchise and equipment revenue that has not yet been recognized, which includes deferred revenue recognized as revenue in future periods. Total contract revenues from franchisees yet to be recognized as revenue was $209.7$198.1 million as of September 30, 2021,March 31, 2022, of which the Company expects to recognize approximately 23% of the revenue over the next 12 months and the remainder thereafter.


Note 7—8—Debt

Subordinated Convertible Debt AgreemenAgreement
t

On October 6, 2020, the Company entered into a subordinated convertible debt agreement (the “Convertible Notes”), whereby the Company issued $100 million of Convertible Notes to certain holders maturing on September 30, 2025. The Convertible Notes have an annual interest rate of 8.28%, which accrues as
paid-in-kind
through the duration of the contract. Repayment of principal and accrued interest (“PIK Interest”) may be made in cash or shares of the Company upon the occurrence of certain qualifying events or at the end of the contract term (“PIK Interest”).term. Interest is accrued over the term of the debt and is payable upon repayment at maturity or earlier upon the occurrence of certain events. The outstanding balance of the Convertible Notes, including PIK Interest, as of December 31, 2020 was $102.0 million.
21


As a part of the subordinated convertible debt agreement, the Company identified embedded derivatives that require bifurcation under ASC 815,
Derivatives and Hedging
,relating to the contingent conversion option, payment of liquidation, default payment and prepayment options. See
Note 8—9—Derivative instruments
for further discussion on the Company’s accounting for these embedded derivatives.

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Table of Contents
In conjunction with the IPO on July 15, 2021, the outstanding Convertible Notes of $106.3 million of principal and interest were converted into 14,847,066 shares of common stock at a conversion price of $16.00. The unamortized debt discount of $23.7 million remaining as of the conversion date was recognized as interest expense on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended
September 30, 2021. As of September 30, 2021, there were no Convertible Notes and PIK interest outstanding.

Subordinated Second Lien Term Loan

On October 6, 2020, the Company enteredentered into a Subordinated Second Lien Term Loan (“Subordinated Credit AgreementAgreement”) with certain lenders which committed the lenders to provide $125 million of financing to the Company in exchange for a note payable. This agreement matures over a five-year period that carries a
Paid-In
Kind (“PIK”) InterestInterest rate of 13.00%. PIK Interest is accrued over the term of the Subordinated Credit Agreement. The Subordinated Credit Agreement hashad a maturity date of October 5, 2025. The outstanding balance of the note, including PIK Interest, payable as of December 31, 2020 was $124.2 million, net of unamortized debt issuance costs of $4.7 million.
In connection with issuing the note, the Company paid the lenders approximately $3.8 million in
fees. Similarly, the Company paid third parties fees of approximately $1.0 million associated with issuing the note. The Company determined that all fees paid to the lenders and third parties would result in a reduction of the initial carrying amount of the note. The Company is amortizingamortized the debt discount and debt issuance costs into interest expense utilizing the effective interest method.
Beginning with the first fiscal quarter ending after the first anniversary of the agreement effective date and as of the last day of each fiscal quarter thereafter, the Company must not permit the Total Leverage Ratio, for any period of four consecutive fiscal quarters ending on the last day of such fiscal quarter, to exceed 8.00 to 1.00; provided, that for purposes of determining the Total Leverage Ratio with respect to any fiscal quarter in which studios that have been closed by government mandate due to
COVID-19,
EBITDA shall be adjusted by a percentage equal to (1) the excess (if any) of (x) the number of studios that were closed by government mandate due to
COVID-19
during such fiscal quarter over (y) the number of studios that were closed by government mandate due to
COVID-19
as of the Effective Date, divided by (2) the total number of studios during such fiscal quarter.
On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Subordinated Credit Agreement. The Company used proceeds from its IPO to repay $150.5 million under the terms of the Subordinated Credit Agreement, inclusive of a prepayment penalty of $3.8 million and penalty of six months of advanced interest for $9.3 million as a result of the repayment of indebtedness or termination of the Subordinated Credit Agreement. The unamortized debt discount of $4.5 million remaining as of the repayment date was recognized as interest expense on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021.

14
Table of Contents
First Lien Loan

The Company entered into a senior Secured Credit Agreement, dated as of September 18, 2019 (the “Secured Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Australian Security Trustee, Lender, Swingline Lender and Issuing Bank, consisting of a $20.0 million revolving credit facility (the “Revolving Facility”) and a $30.0 million term loan facility (the “Term Facility”). Initial borrowings of $30.0 million from the Term Facility and $11.9 million of the availability under the Revolving Facility were used to repay, in full, amounts due to common stockholders as a result of the MWIG transaction.
See
Note 13—14—Convertible preferred stock and stockholders’ equity (deficit
)(deficit) for further discussion.
The remaining availability under the Revolving Facility may be drawn and used for general corporate purposes. The obligations under the Secured Credit Agreement are guaranteed by certain operating subsidiaries of the Company and secured by a majority of the Company’s assets. The Revolving Facility may be prepaid and terminated by the Company at any time without premium or penalty (subject to customary LIBOR breakage fees). The Term Facility bearsbore interest at floating rate of LIBOR plus 1.5 percent. The Term Facility principal and interest payments are due quarterly in accordance with an amortization schedule with a maturity date of September 18, 2022.

On June 23, 2020, the Company amended the Secured Credit Agreement to allow it to enter into a definitive agreement with a special purpose acquisition corporation. On October 6, 2020, the Company amended the agreement a second time. Through the second amendment, the Company agreed to convert $8,000,000 of the amount outstanding on the Revolving Facility to be part of the Term Facility. In addition to converting a portion of the Revolving Facility to the Term Facility, the Company agreed to repay $5,000,000 of the principal amount of the Revolving Facility outstanding. The interest rate of both
22

the Term Facility and the Revolving facilityRevolving Facility were amended to 4.00% and 3.00% for Eurodollar loans and letters of credit, and ABR Loans, respectively.

On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Term Facility. The Company used proceeds from its IPO to repay the Term Facility and Revolving Facility in the amount of $31.1 million and $7.0 million, respectively.

On August 13, 2021, the Company entered into an amended and restated credit agreement (“Credit Agreement”) which
amended
amends and
restated
restates the Secured Credit Agreement dated September 18, 2019. The Credit Agreement provides for a $90.0$90 million five-year senior secured revolving facility (“Facility”). The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $35.0$35 million. The proceeds from the Facility will be used for general corporate purposes. Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s election, the LIBOR rate plus a margin of 2.50% to 3.50% per annum, or base rate plus a margin of 1.50% to 2.50%, in each case depending on the Company’s total leverage ratio.

As a result
of
the amendment, the Company modified the existing
covenants
covenant under the Secured Credit Agreement. The total leverage ratio was modified such that the Company is required to maintain a total leverage ratio for any four4 quarters, of less than 3.00 to 1.00. Prior to the third amendment to the Secured Credit Agreement, the Company was required to maintain a total leverage ratio, for any period of four consecutive quarters, of less than 7.00 to 1.00, respectively.

In connection with the Credit Agreement, the Company paid the lenders approximately $0.9 million in fees. Similarly, the Company paid third partiesthird-party fees of approximately $0.1 million associated with the amendment. The Company concluded that the amendment resulted in a modification of debt rather than a debt extinguishment. As such, the Company determined that all fees incurred in connection towith the Credit Agreement would be deferred and amortized over the term of the new arrangement. Similarly, unamortized debt issuance costs from the original revolving facility will continue to be deferred. The unamortized debt discount of $0.2 million relating to the Term Facility that remained as of the termination date was recognized as interest expense on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021.

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Table of Contents
The outstanding balance of the Term Facility as of September 30, 2021March 31, 2022 and December 31, 20202021 was $31.6 million and $0, and $33.3 million, respectively, net ofrespectively. The unamortized debt issuance costs of $0 and $0.4 million, respectively. The outstanding balance ofcost in connection to the Revolving Facility as of September 30, 2021March 31, 2022 and December 31, 20202021 was $0 $0.9 million and $7.0$1.0 million, respectively. The availability on the revolving lineFacility as of credit as of September 30,March 31, 2022 and December 31, 2021 was $88.5 million.was $56.9 million and $88.5 million, respectively.

The weighted-average interest rate on the Company’s outstanding debt as of March 31, 2022 was 2.94%. There was no outstanding debt as of December 31, 2020 was 5.15%.2021.

As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company was in compliance with its covenants on the Credit Agreement and the Secured Credit Agreement, respectively.Agreement.

PPP Loan

On April 10, 2020, the Company received loan proceeds of approximately $2.1 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides
for loans to qualifying businesses to help sustain
their
its employee payroll costs, rent, and utilities due to the impact of the recent
COVID-19
pandemic. Loans obtained through the PPP are eligible to be forgiven as long as the proceeds are used for qualifying purposes, which include the payment of payroll costs, interest on covered mortgage obligations, rent obligations and utility payments. The receipt of these funds, and the forgiveness of the loan is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its adherence to the forgiveness criteria. In June 2020, Congress passed the Payroll Protection Program Flexibility Act that made several significant changes to PPP loan provisions, including providing greater flexibility for loan forgiveness.

The Company is usingused the proceeds from the PPP loan to fund payroll costs in accordance with the relevant terms and conditions of the CARES Act. The Company is followingfollowed the government guidelines and tracking costs to ensure full forgiveness of the loan. To the extent it iswas not forgiven, the Company would behave been required to repay that portion at an interest rate of 1% over a period of 1.5 years, beginning November 2020 with a final installment in April 2025. Any amounts forgiven when the
Company is legally released as the primary obligor under the loan will be recognized as a gain from the extinguishment of the loan in the condensed consolidated statements of operations and comprehensive (loss) income.
23


During the third quarter of 2021, the outstanding balance on the PPP loan including interest was forgiven by the U.S. Small Business Administration (SBA)(“SBA”). The Company recognized a gain of
$2.1 
million from the extinguishment of the PPP loan, which is included in “other income net” on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021. The Company is subject to examination by the SBA as the total loan forgiveness exceeds
$2.0 $2 million threshold.

Interest expense

Interest expense recorded on the debt facilities was $42.1$0.3 million and $0.5$8.4 million for the three months ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, respectively, and $59.2 million and $1.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The following table reflects the write off of debt discounts and penalties incurred during the
three and
nine months ended September 30, 2021 that are included in interest expense (in thousands):
             
   
Debt Discount
   
Penalty
   
Total
 
             
Subordinated Convertible Debt  $23,740   $—     $23,740 
Subordinated Second Lien Term Loan   4,463    13,034    17,497 
First Lien Loan   241    —      241 
                
   $28,444   $13,034   $41,478 
                
16

Table of Contents
Note 8–9—Derivative instrumentsInstruments
Interest rate swap
Rate Swap
The Company is subject to interest rate volatility with regard to existing debt. From time to time, the Company enters into swap agreements to manage exposure to interest rate fluctuations.

On October 25, 2019, the Company entered into an interest rate swap contract (the “Swap Agreement”) with JP Morgan Chase Bank N.A. to fix the interest rate on the Term Facility over the life of the loan. The notional amount of the swap covers the entire $30.0 million borrowings outstanding under the Term Facility. Under the terms of the Swap Agreement, the Term Facility, which formerly accrued interest at a rate of LIBOR plus
1.50
% 1.50%, started effectively accruing interest on the effective date (October 30, 2019) at a fixed rate of
1.74
% 1.74% on an annualized basis.

To hedge the variability in cash flows due to changes in benchmark interest rates, the Company entered into an interest rate swap agreement related to debt issuances. The swap agreement is designated as a cash flow hedge. The derivative’sderivative's gain or loss is recorded in OCIother comprehensive income (loss) and is subsequently reclassified to interest expense over the life of the related debt.

The Company recognized an unrealized gain of $0.1 million on this instrument during the three months ended March 31, 2021, respectively. The unrealized gain has been presented within other comprehensive income (loss) in the condensed consolidated statements of operations and comprehensive income (loss). On July 21, 2021, in connection with the repayment in full of all outstanding obligations under the Subordinated Credit Agreement, the Company terminated the interest rate swap agreement. The Company paid $0.5 million to terminate the interest rate swap. As a result of the termination, the accumulated fair value of the interest rate swap was reclassified from accumulated other comprehensive loss to interest expense of $0.5 million and $0.5 
million during the three and nine months ended September 30, 2021, respectively, on the condensed consolidated statements of operations and comprehensive (loss). As of December 31, 2020, the interest rate swap liability of $0.7 million was included in long-term derivative liability on the accompanying condensed consolidated balance sheets.
Swap Agreement.

The Company recognized an unrealized gain of $0.1 million on this instrument in the three months ended September 30, 2020,
and an unrealized loss of $0.6 million on this instrument in the nine months ended September 30, 2020. The unrealized gains and losses have been presented within other comprehensive income (loss) in the condensed consolidated statements of operations and comprehensive (loss) income.
Convertible notes

As discussed in
Note 7—Debt
, inIn October 2020, the Company entered into a subordinated convertible debt agreement (the “Convertible Notes”) as discussed in Note 8—Debt, whereby the Company issued $100.0$100 million of Convertible Notes
convertible notes to certain holders maturing on September 30, 2025. These notes can be converted
into common shares of the Company at the holders’ option. The Company has analyzed the
conversion and redemption features of the agreement and determined that certain of the embedded
features should be bifurcated and classified as derivatives. The Company has bifurcated the following
embedded derivatives: (i) Liquidity Event Conversion Option; (ii) Liquidity Event Redemption Option;
and (iii) Qualified Public Offering (“QPO”) Redemption Option.

17
Table of Contents
The $27.8 million initial fair value of the embeddedembedded derivatives for the Convertible Notes was
recorded as a debt discount along with a corresponding liability onin the Company’s consolidated balance sheets. The initial debt discount is not subsequently
re-valued
and is being amortized using the effective interest method over the life of the Convertible Notes. ThePrior to the Company’s IPO, the derivative liabilities arewere classified in the condensed consolidated balance sheets as
non-current
as the Company iswas not required to net cash settle within 12 months of the balance sheet date and are
were marked-to-market
at each reporting period with changes in fair value recorded within “Loss on derivative liabilities” in the condensed consolidated statements of operations and comprehensive (loss) income.period.
The Company fair values the embedded derivatives using the Bond plus Black-Scholes option pricing model because it believes that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving compound embedded derivatives.
The following table sets forth the inputs to the Bond plus Black-Scholes option pricing model that
24
were used to value the embedded conversion and redemption features derivatives:

                 
   
As of December 31, 2020
 
   
Risk-free rate
   
Volatility
  
Term (years)
   
Dividend yield
 
                
Liquidity event
   0.10%-0.34%    37.4%   3.00    0   
QPO event
   0.10%-0.34%    34.8%   0.75    0   
As discussed in
Note 7—8—Debt
, in connection with the IPO, outstanding Convertible Notes of $106.3 million, including principal and interest, were converted into 14,847,066 shares of common stock.

Note 10—Fair Value

The following table summarizes the derivative liability included in the condensed consolidated balance sheets at September 30, 2021 and December 31, 2020
(in 
thousands):
Fair Value of Embedded Derivative Liability (Level 3 Inputs):
Balance at January 1, 2020$0—  
Initial measurement on October 6, 2020(27,822) 
Change in fair value(8,818) 
Balance at December 31, 2020
(36,640) 
Change in fair value(25,505) 
Balance at March 31, 2021
(62,145) 
Change in fair value(23,098) 
Balance at June 30, 2021
(85,243) 
Conversion on July 1
5
, 2021 (IPO)
85,243
Balance at September 30, 2021
$—  
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Table of Contents
Note 9 – Fair value
OurCompany’s carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid expenses, accounts payable and other accrued liabilities approximate their fair value due to their short-term nature of settlement. NoneAs of March 31, 2022 and December 31, 2021, NaN of the Company’s assets andor liabilities are accounted for at fair value on a recurring basis as of September 30, 2021.
None of the Company’s assets are currently accounted for at fair value on a recurring basis as of December 31, 2020. The following table presents the Company’s liabilities accounted for at fair value on a recurring basis as of December 31, 2020 (in thousands).basis.
                 
   
As of December 31, 2020
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                 
Liabilities
                    
Interest rate swap  $0—     $(660)   $0—     $(660) 
Derivative liability   0     0—      (36,640)    (36,640) 
                     
Total Liabilities
  $0—     $(660)   $(36,640)   $(37,300) 
                     
The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces.
Credit risk relates to the risk of loss resulting from the
non-performance
or
non-payment
by the Company’s counterparties in connection with contractual obligation. Risk around counterparty performance and credit could ultimately impact the amount and timing of cash flows. The Company believes it has appropriately addressed any credit risk due to the financial standing of the counterparties with which it trades. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.
The inputs for determining fair value of the embedded conversion and redemption features of the Company’s convertible notes are classified as Level 3 inputs, refer to
Note 8—Derivative instruments
for further discussion related to the accounting for these instruments.
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Table of Contents
Note 10—11—Income taxes

For interim reporting periods, the Company’s provision for income taxes is calculated using its annualized estimated effective tax rate for the year. This rate is based on its estimated full-year income and the related income tax expense for each jurisdiction in which the Company operates. Changes in the geographical mix, permanent differences or the estimated level of annual
pre-tax
income can affect the effective tax rate. This rate is adjusted for the effects of discrete items occurring in the period.

Provision (benefit) for income taxes

(Benefit)The provision for income taxes
was $2.5 million for the three months ended March 31, 2022. The benefit for income taxes was $0.2$0.4 million for the three months ended September 30, 2021, compared with the provision for income taxes of $2.0 million for the three months ended September 30, 2020. The
provision
for income taxes was $0.7 million for the nine months ended September 30, 2021, compared with the provision for income taxes of $3.5 million for the nine months ended September 30, 2020.March 31, 2021. The effective tax rate for the ninethree months ended September 30, 2021March 31, 2022 of
(
0.35%
)
50.24% differed from the expected U.S. statutory tax rate of 21% primarily due to state taxes, the foreign tax rate differential and by current period losses incurred by F45
Training 
Holdings Inc. not benefited due to its full valuation allowance.
The effective tax rate for the ninethree months ended September 30, 2020March 31, 2021 of 32.09%1.10% differed from the U.S. statutory tax rate of 21% primarily due to state taxes, the foreign jurisdiction earnings taxes at different rates,tax rate differential and interest and penalties for uncertain tax positions.

Note 11—12—Related party transactions

As discussed in
Note 1—DescriptionNature of the business and basis of presentation
, due to the repurchase of the Company’s shares from two2 primary directors that occurred
on
in October 6, 2020, the Company no longer considers these two2 directors as related parties from October 6, 2020 onward.

Group Training, a related party, is owned by certain existing stockholders that are executive officers and directors of the Company, through which they operate two2 F45 studios in the United States. As of September 30, 2021 and DecemberDuring the three months ended March 31, 2020, 2022, the Company had receivables related to fees under this management service agreement of
$0.7 million and $0.4 million, respectively. These amounts are included in due from related parties on the condensed consolidated balance sheets. The Company recognized less than $0.1 million of franchise revenue related to fees under thisthe management service agreement during the three and nine months ended September 30, 2021 and 2020.
agreement. During the three months ended September 30, March 31, 2021, and 2020, the Company recognized 0no franchise revenue respectively, from studios owned by Group Training. During the nine months ended September 30, 2021 and 2020, the Company recognized
0 franchise revenue
and $0.1 million franchise revenue, respectively, from studios owned by Group Training. With
respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income.. As of March 31, 2022 and December 31, 2021, the Company had receivables related to fees under this management service agreement of $0.8 million and $0.7 million, respectively. These amounts are included in due from related parties on the condensed consolidated balance sheets.

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Table of Contents
During the three months ended September 30,March 31, 2022 and 2021, and 2020, the Company recognized less than $0.1 million and $0.1 million, respectively, of franchise revenue and of equipment and merchandise revenue from studios owned by Messrs. Wahlberg and Raymond. During the nine months ended September 30, 2021 and 2020, the Company recognized less than $0.1 million and $0.3 million, respectively, of franchise revenue and of equipment and merchandise revenue from studios owned by Messrs. Wahlberg and
25

Raymond. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had less than $0.1 million and 0 outstanding receivables, respectively.receivables. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and equipment and merchandise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income..

During the three months ended September 30,March 31, 2022 and 2021, and 2020, the Company recognized less than $0.1 million franchise revenue, respectively, from studios owned by an entity in which an existing stockholder that is an executive officer and director of the Company holds a 10% ownership interest. During the nine months ended September 30, 2021 and 2020, the Company recognized less than $0.1 million and
$
0.1
million, respectively, from these studios. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had less than
$0.1 $0.1 million and 0 outstanding receivables from these studios, respectively. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and equipment and merchandise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income..
The
During the three months ended March 31, 2022 and 2021, the Company incurred expenses totaling approximately $1.6$3.3 million and $0.4$0.9 million, respectively, during the three months ended September 30, 2021 and 2020, and $3.7 million and $1.1 million, respectively, during the nine months ended September 30, 2021 and 2020, in connection with certain shipping and logistic services from a third-party vendor that is owned by an immediate family member of an executive officer of the Company. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had approximately $0.4$1.5 million and $0.3$1.3 million, respectively, of outstanding payables to the third-party vendor. The Company has presented the expenses incurred during these periods in cost of equipment and merchandise revenue in the condensed consolidated statements of operations and comprehensive income (loss) income..

During the three and nine months ended September 30,March 31, 2022, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $0.1 million from 3 studios owned by employees. During the three months ended March 31, 2021, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $0.1 million from 2
studios owned by employees. During the three and nine months ended September 30, 2020, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $
0.1
million and $
0.1
million, respectively, from 6 studios owned by employees. As of September 30, 2021 and DecemberMarch 31, 2020,2022, the Company
had 0no receivables outstanding related to this revenue.revenue, As of December 31, 2021, the Company had receivables outstanding related to this revenue of less than $0.1 million.

Transaction with LIIT LLC

On June 23, 2020, the Company entered into an Asset Transfer and Licensing Agreement with
LIIT LLC (“LIIT”) an entity wholly-owned by Adam Gilchrist (F45’s
Co-Founder
and Chief Executive Officer). Pursuant to this agreement, F45 will sellsold to LIIT certain
at-home
exercise equipment packages (including the intellectual property rights thereto) for $1.0 million payable on or before December 31, 2020. LIIT assumesassumed all outstanding rights and obligations related to these exercise equipment packages from F45. In addition, pursuant to this agreement, LIIT will receive access to F45’s library of programming related to existing and future fitness content for the duration of the license period of 10 years. In exchange for this license, LIIT will pay F45 an annual license fee equal to the greater of (a) $1.0 million and (b) 6% of the annual gross revenue of LIIT, less any payments made by LIIT to third parties in connection with the sale of
such
exercise equipment packages payable annually
on July 30
.
30. This agreement will expire on July 1, 2030, unless otherwise terminated upon mutual agreement of F45 and LIIT. Upon termination or expiration of this agreement, LIIT must: (i) immediately cease all use and application of the licensed intellectual property; (ii) promptly return to F45, or otherwise dispose of as F45 may instruct, all documents, databases, lists and materials (whether hard copy or electronic form) including any advertising and promotion material, labels, tags, packaging material, advertising and promotional matter and all other material relating to the licensed intellectual property in the possession or control of LIIT; and (iii) immediately cease to hold itself out as having any rights in relation to the licensed intellectual property from the date of termination.

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Table of Contents
The Company recognized $0.3 million and $0.8 millionno revenue, respectively, and 0no cost of sales in conjunction with the transaction with LIIT LLC during the three and nine months ended September 30March 31, 2022 and 2021.
, 2021.
The Company recognized no revenue and cost of sales in conjunction with the transaction with LIIT LLC during the three and nine months ended September 30, 2020. 
26

The outstanding receivable balance as of September 30, 2021
March 31, 2022 and December 
3
1, 2020
31, 2021 was $1.3$1.8 million
and $1.5 million, respectively
.
respectively.

Transaction with Club Franchise Group LLC

On June 15, 2021, the Company entered into a long-term multi-unit studio agreement, with Club Franchise Group LLC or (“Club Franchise,Franchise”), an affiliate of KLIM. Pursuant to the term multi-unit studio agreement, the Company have granted to Club Franchise the right to, and Club Franchise has agreed to, open at least 300 studios in certain territories in the U.S. over 36 months, with the first 150 studios to be openedopen at least within 18 months of the date of themulti-unit studio agreement, or December 15, 2022.
Club Franchise had 0 studios opened as of March 31, 2022 under the multi-unit studio agreement.

Club Franchise is obligated to pay to the Company the same general fees as other franchisees in the U.S., and to enter into a franchise agreement in respect of each studio upon approval by the Company of the studio site.site. Consistent with othersome of the franchise agreements in the United States entered into since July 2019, Club Franchise areis required to pay the Company a monthly franchise fee based
on the greater of a fixed monthly franchise fee of
$2,500 $2,500 per month or 7% of gross monthly studio revenue, regardless of whether such studios are open. Club Franchise has also agreed to pay
the Company
an upfront establishment feefees of $7,500,000 as follows: (i) $1,875,000 upon execution of the multi-unit studio agreement (which amount has been paid)paid as of December 31, 2021); (ii) $1,875,000 by June 2022; (iii) $1,875,000 by December 2022;
and (iv) $1,875,000 by December 2023. Club Franchise
is required to pay monthly franchise fees to usthe Company in respect of additionaladditional studios with monthly franchise fees for 150 studios being payable by December 2022. With respect to the remaining 150 studios,
the Company
and Club Franchise have agreed to negotiate a payment schedule that provides for the monthly franchise fees in respect of such studios to commence no later than 12 months after the opening date of the relevant studio. Like other franchisees, Club Franchise is also obligated to pay
the Company
other fees, including fees related to marketing and equipment and merchandise, some of which
the Company
haveCompany has agreed to provide at a discounted rate.

The Company recognized $2.4$2.3 million revenue and 0cost of salesfranchise revenue in conjunction with the transaction with Club Franchise Group LLC during the three months and nine ended September 30, 2021.March 31, 2022. There was a less than $0.1 million and no outstanding receivable balance owed by the Club Franchise as of September 30, 2021.March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company recognized less than $0.1 million and no unbilled receivable in other short-term assets on the condensed consolidated balance sheets, respectively. The Company recognized $6.7 million and $4.4 million of unbilled receivable in other long-term assets on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

Related party franchise arrangements were transacted at arm’s length pricing with standard contractual terms.
22

Table of Contents
Note 12—13—Commitments and contingencies
Litigation
Where appropriate, the Company establishes accruals in accordance with FASB guidance over loss contingencies in accordance with ASC 450,
Contingencies
(ASC 450). As of September 30, 2021,March 31, 2022, the Company had established a litigation accrual of $4.1$4.0 million in accounts
payable and accrued expenses for claims brought against the Company in the ordinary course of business. The Company’sOur accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. The Company discloses the amount accrued if the Company believes it is material or if the Company believes such disclosure is necessary for the Company’sour financial statements to not be misleading. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount previously accrued, the Company assesses whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and the Company adjusts the accruals and disclosures accordingly. The Company does not presently believe that the ultimate resolution of the foregoing matters will have a material adverse effect on the Company’s results of
27

operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened could have a material adverse effect on
the Company’s
our liquidity, consolidated financial position, and/or results of operations.

Lease commitments

The Company leases 812 office buildings in the United States and other international locations. Future minimum lease payments, which include
non-cancelable
operating leases at September 30, 2021,March 31, 2022, are as follows (in thousands):

  
  
Operating Leases
 Operating Leases
Remainder of 2021  $416 
2022   2,231 
Remainder of 2022Remainder of 2022$2,208 
2023   2,241 20233,557 
2024   2,103 20242,852 
2025   1,991 20252,749 
202520252,531 
Thereafter   7,289 Thereafter10,228 
    
Total minimum lease payments
  $16,271 
    
Total Minimum Lease PaymentsTotal Minimum Lease Payments$24,125 

Rent expense
under
for all operating leases was approximately $0.5$1.3 million and $0.2 million for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $1.1 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively. The Company has presented rent expense during these periods in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income..
As of September 30, 2021, the Company had an outstanding guarantee of $2.8 million in aggregate total for lease payments over 10 years for a franchisee’s studio lease in the state of California.
OnIn December 21, 2020, the Company entered into a lease agreement with CIM Urban REIT Properties IX, L.P.(“Lease”) to lease an44,171 square feet of office buildingspace in Austin, Texas. The Lease has an initial term of eight years and 1 five-year tenant renewal option, with the initial term beginning after completion of leasehold improvements or 180 days after the space was delivered to the Company to begin leasehold improvements. The Company is obligated to make rent payments totaling approximately $13.9 million over the initial term, with $1.6 million of rent during the first year subject to rent escalations on an annual basis throughout the initial term. In connection with the Lease, the Company is entitled to receive a tenant improvement allowance of $3.8 million funded by the landlord. The Company was given the right to control physical access to the leased space to begin leasehold improvements on March 1, 2021, which is considered the lease term expires oncommencement date used in calculating the last daystraight-line rent expense as the Company is deemed the accounting owner of the 96th lease month from the Rent Commencement Date, as defined in the lease agreement. In the event that the Company does not achieve earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $20.0 million for the period from January 1, 2021 through June 30, 2021, the Company shall post an additional conditional deposit of $1.0 million on or before September 30, 2021 (“First Conditional Deposit”) as additional security for the Company’s obligations under the lease.leasehold improvement assets. The Company did not achieve the required EBITDA for the period from January 1, 2021 through June 30, 2021. In the event that the Company does not achieve EBITDArecorded $3.8 million of $53.0 million for the period from January 1, 2021 throughtenant improvement allowance as deferred rent as of December 31, 2021 and amortized $0.1 million as reductions to rent expense over the lease term of approximately 9.4 years for the three months ended March 31, 2022.

As of March 31, 2022, the Company shall deposithad an additional depositoutstanding guarantee of $1.0$2.6 million on or before April 30, 2022 (“Second Conditional Deposit”). The Company is not obligatedin aggregate total for lease payments related to deposit the Second Conditional Deposit, regardless of the Company’s EBITDA for the year ended December 31, 2021,4 franchisee studio leases in the event that the Company deposits the First Conditional Deposit. Asstate of September 30, 2021, CIM Urban REIT Properties IX, L.P. waived the EBITDA requirement for the First Conditional Deposit of $1 million.California with non-cancelable lease periods ranging from 4 to 10 years.

23
Promotional Agreements
Table of Contents

2020 Promotional agreements
Liability-classified awards

On October 15, 2020, the Company entered into a promotional agreement with ABG-Shark, LLC (“ABG-Shark”). Pursuant to this agreement, Greg Norman will provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, ABG-Shark is entitled to receive additional performance-based cash compensation based on the Company’s enterprise value.
On the same date, Malibu Crew, Inc., a
28

subsidiary of the Company, also entered into a promotional agreement with Greg Norman, whereby, he will provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 15% of the fair market value of Malibu Crew. As of September 30, 2021, no definitive partnership agreement has been reached with Crew, Inc. (“Malibu Crew.Crew”). Both of these promotional agreements expire on October 14, 2025. As of March 31, 2022, the Malibu Crew concept is still in the incubation phase.

On November 24, 2020, the Company entered into a promotional agreement with DB Ventures Limited (“DB Ventures”). Pursuant to this agreement, DB Ventures will provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, DB Ventures is entitled to receive the greater of 1% of the Company’s issued and outstanding common stock or $5.0$5 million on the
six-
and 12-month anniversaries of the Company becoming publicly traded.
This agreement will expire on December 5, 2025. The Company will recognize expenses related to promotional activities and image rights under this agreement ratably over the
five-year
contractual term. As part of the agreement, the Company is obligated to create two2 F45 studios for DB Ventures who will then have the option to take ownership of the studios upon termination of the agreement for no additional service or consideration. AsIn December 2021, the Company invested in a joint venture with 75% ownership in the newly incorporated CLF High Street Limited that operates the DB studios and provided $0.5 million of September 30,cash for equipment and other studio opening costs. For the three months ended March 31, 2022 and 2021, these studiothe Company recorded $1.4 million and $0.5 million in expense related lease agreements had yet to commence.this agreement, respectively. During the three months ended March 31, 2022, 914,692 of common shares vested under this agreement as a result of meeting the six-month anniversary of the Company becoming publicly traded.
2021 Promotional agreements
On April 12, 2021, the Company entered into a promotional agreement with Magic Johnson
Entertainment (“MJE”). Purs
u
antPursuant to this agreement, MJE will provide certain promotional services to the Company in exchange for compensation. In connection with the Company becoming publicly traded on July 15, 2021, MJE agreed to a cash payment of $
4.0 
$4.0 million in lieu of equity compensation that MJE was entitled to receive as a result of the IPO. The prepayment of $4.0 million was recorded as prepaid expenses on the condensed consolidated balance sheets and the amount is amortized ratably over the service period. Additionally, in connection with the Company becoming publicly traded on July 15, 2021, the Company is obligated to grant MJE a number of shares of common stock equal to the result of
$5.0 
$5.0 million divided by the Average Trading Price upon each occurrence of a Vesting Event, which isvesting event based on increases in the Company’s market capitalization as defined in the agreement. The agreement between the Company and MJE terminates on January 23, 2026.

On June 25, 2021, the Company entered into a promotional agreement with Craw Daddy Productions (“CDP”). Pursuant to this agreement, effective July 1, 2021, Cindy Crawford will provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, the Company is obligated to grant Craw Daddy ProductionsCDP a number of shares of common stock equal to the result of $5.0 million divided by the Average Trading Price upon each occurrence of a Vesting Event which is based on increases in the Company’s market capitalization as defined in the agreement. On the same date, Avalon House, a subsidiary of the Company, also entered into a promotional agreement with Cindy Crawford, whereby, she will provide certain promotional and marketing services to the Company in exchange for equity compensation equal to
10%
of the fair market value of Avalon House. Both of these promotional agreements expire on June 30, 2026.
As of March 31, 2022, the Avalon House concept is still in the incubation phase.

On September 24, 2021, the Company entered into a promotional agreement with Big Sky, IncInc. (“Big Sky”). Pursuant to this agreement, Joe Montana will provide certain promotional services to the Company in exchange for an annual compensation. On the same date, Malibu Crew a subsidiary of the Company, also entered into a promotional agreement with Big Sky, Inc. whereby Joe Montana will provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 1% of the fair market value of Malibu Crew. As part of the agreement, the Company is obligated to provide franchise rights to five5 Malibu Crew studios and cover costs associated with start-up of the studios, subject to the Company’s ability to recoup these start-up costs over a negotiated period of time to be defined in the
29

underlying franchise agreements. As of September 30, 2021,March 31, 2022, these studios and associated start-up costs had yet to commence.

24
Table of Contents
In connection with the consummation of the IPO on July 15, 2021, the Company recognized total stock-based compensation expense of $5.0 million in connection to these promotional agreements entered with ABG-Shark, DB Ventures, MJE and Cindy Crawford for the three and nine months ended September 30, 2021, respectively. The Company determined that the common stock to be issued upon settlement of the promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP are liability classifiedliability-classified awards. As of September 30, 2021,March 31, 2022, the Company recorded $4.4$2.7 million of stock-based compensation liability in accounts payable and accrued expenses and $0.6$0.4 million of stock-based compensation liability in other long-term liabilities onin the condensed consolidated balance sheets.

The Company estimates the fair value of the stock-based compensationits liability-classified awards using a Monte-Carlo simulation model.model at each reporting period until settlement. The other significant assumptions used in the analysis as of March 31, 2022 were as follows:

As of March 31, 2022
Risk-free interest rate
0.07
 – 
0.92%
0.61% - 2.40%
Expected dividend yield0  —
Expected term in years0.29
 – 
4.75		 - 4.25
Expected volatility20.70
 – 
28.10%		27.20% - 30.50%

Equity-classified awards

On December 17, 2021, the Company entered into a promotional agreement with Timothy Kennedy (“TK”). Pursuant to this agreement, effective December 30, 2021, Timothy Kennedy will provide certain promotional services to the Company in exchange for annual compensation and $0.1 million of the Company’s Restricted Stock Awards (“RSAs”) for each 12-month period of service. RSAs will vest 100% upon each of the first 4 one-year anniversaries of the services being provided. The agreement between the Company and TK terminates on December 16, 2026. The Company determined that the RSAs granted to TK are equity-classified awards. The stock-based compensation expense related to the RSAs is recognized ratably over the requisite service period in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

See
Note 14
15—
Stock-based compensation
for discussion on the stock option activities and total stock-based compensation expense for the three and nine months ended September 3
0
,March 31, 2022 and March 31, 2021, respectively.

Note 13—14—Convertible preferred stockPreferred Stock and stockholders’ equity (deficit)Stockholders’ Equity (Deficit)
Issuance of convertible preferred stock and common stock

In connection with the transaction with MWIG described in
Note 1—Nature of the business and basis of presentation
, on July 14, 2021, the Company amended its articles of incorporation and authorized 108,000,000 shares of common stock with a par value of $0.00005 and 11,000,000 shares of preferred stock all with a par valuesvalue of $0.0001. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had 90,554,57195,682,833 and 29,281,51495,806,063 shares of common stock, respectively. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had 0 and
9,854,432
no shares of convertible preferred stock issued and outstanding, respectively.outstanding.

As part of the transaction with MWIG and in return for Flyhalf Acquisition Company Pty Ltd acquiring 100% of the shares in F45 Aus Hold Co, the Company issued 58,000,000 shares of its common stock to F45 Aus Hold Co’s existing stockholders. In addition, Flyhalf Acquisition Company Pty Ltd made a payment to F45 Aus Hold Co’s existing stockholders of $100 million.

The payment of $100 million was funded by MWIG, subscribing for 10,000,000 shares of preferred stock at $10.00 per share in the Company. This amount was ultimately paid to F45 Aus Hold
30

Co’s existing stockholders pro rata in proportion to their interests in F45 Aus Hold Co. Further, Flyhalf Acquisition Company Pty Ltd issued $50.0 million secured promissory notes to F45 Aus Hold Co’s existing stockholders pro rata in proportion to their interests in F45 Aus Hold Co (the “Sellers Notes”). The $100.0 million payment, $50.0 million Sellers Notes and related interest thereon have been recorded as a dividend in the condensed consolidated statements of changes in convertible preferred stock and stockholders’ equity (deficit)deficit during the year ended December 31, 2019. In addition to the initial issue of 10,000,000 shares of Preferred Stock, MWIG was granted an option to acquire an additional 1,000,000 shares of Preferred Stock for $10.00 per share under the SPA.Share Purchase Agreement. The $10.0 million in funds raised by the issue of the additional Preferred Stock were used in full to partially settle the outstanding Sellers Notes.

25
Table of Contents
On December 30, 2020, MWIG converted 1,145,568 shares of preferred stock of the Company
into 3,181,514 shares of common stock of the Company and sold those shares of common stock to affiliates of L1 Capital Fund, an Australian based global fund manager.

The rights and features of the Company’s preferred stock are as follows:

Dividends

The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than stock dividends) unless the holders of the preferred stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of preferred stock in an amount at least equal to the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (2) the number of shares of common stock issuable upon conversion of a share of preferred stock.

Liquidation

Upon the occurrence of a deemed liquidation event, as defined in the Company’s Amended and Restated Certificate of Incorporation, the holders of preferred stock shall be entitled to receive, before any distribution or payment to the holders of common stock, an amount equal to the greater of (1) preferred stock issue price per share for such preferred stock, as adjusted to reflect any combination or subdivision, stock dividend or other similar recapitalization, plus declared but unpaid dividends, if any, on such shares, and (2) the amount per share of common stock to which the holder would be entitled had all outstanding Preferred Stock shares been converted to common stock immediately before the distribution. After the distributions or payments to the holders of preferred stock have been paid in full, the entire remaining assets and funds, if any, will be distributed ratably among the holders of common stock in proportion to the number of shares of common stock held by them.

Conversion

The holder of each share of preferred stock has the option to convert the share at any time, into the number of fully paid and non-assessable shares of common stock that results from dividing the preferred stock issue price for the preferred stock share by the preferred stock conversion price that is in effect at the time of conversion. In addition, on (i) the consummation of Qualified Public Offering (as defined in the Company’s Amended and Restated Certificate of Incorporation) or (ii) with the consent of the holders of a majority of the outstanding shares of preferred stock, each share of preferred stock will be automatically converted. The preferred stock conversion price should initially be equal to the preferred stock issue price but subject to special adjustment upon either a Qualified Public Offering, a deemed liquidation event or a fair market value determination (each a “Conversion Price Adjustment Event”). Upon the occurrence of a Conversion Price Adjustment Event, the conversion price will be adjusted based on a formula, as defined in the Company’s Amended and Restated Certificate of Incorporation, which results in reductions to the preferred stock conversion price and additional value to the holder based on higher enterprise value; provided that in no event shall the preferred stock conversion price exceed $10.00 or be
31

less than $7.2014 (subject to appropriate adjustment in the event of any combination or subdivision, stock dividend or other similar recapitalization).

Voting rights

The holders of preferred, on an as-converted basis, and common stock vote together as a single class, except with respect to certain matters specified in the Company’s Amended and Restated Certificate of Incorporation that require the separate approval of the holders of preferred stock.

The Company classified the preferred stock in temporary equity in accordance with ASC 480-10-S99 because the preferred stock is redeemable for cash or other assets of the Company upon a Deemed Liquidation Event (as defined in the Company’s Amended and Restated Certificate of Incorporation) that are not solely within the control of the Company. The net carrying amount of the preferred stock is not currently accreted to a redemption value because the preferred stock is not currently redeemable or probable of becoming redeemable in the future.

In July 2021, due to the completion of
the IPO
, a public offering, all preferred stock outstanding was automatically converted into an aggregate of 27,368,102 shares
of common stock with a conversion price of $16.00
 per share
.
$16.00. There were 0sharesno shares of convertible preferred stock outstanding as of September 30,March 31, 2022 and December 31, 2021.

Note 14—15—Stock-based compensation

Issuance of restricted stock units

In connection with the transaction with MWIG described in
Note 1—Nature of the business and basis of presentation
, on M
a
rchMarch 15, 2019, the Company entered into a promotional agreement with Mark Wahlberg (“Mr. Wahlberg”), a member of the Company’s Board of Directors and an investor in MWIG, pursuant to which Mr. Wahlberg agreed to provide promotional services to the Company. In exchange for the agreed upon services provided in the promotional agreement, the Company issued 2,738,648 restricted stock units (RSUs) to Mr. Wahlberg.

The RSUs were to vest based on the Company attaining certain valuation thresholds upon a
vesting event, defined as: (i) a deemed liquidation event or change in control; (ii) the closing of a financing transaction including the sale, issuance or redemption of the Company’s (or one of its subsidiaries) equity securities, and any initial public offering; or (iii) at any time that the Company’s common stock is publicly traded, with the Company’s equity value exceeding the following thresholds:
Company Equity Value Threshold
Potential Restricted

Stock Units Vested
$1.0 billion912,882
$1.5 billion912,882
$2.0 billion912,884

The Company determined that the RSUs are equity classified awards that
contain
contained both performance (deemed liquidation event, closing of a financing transaction or the public trading of the Company’s common stock) and market conditions (achievement of prescribed Company equity values) in order for the units to vest.

On July 5, 2021, the Company approved the acceleration of Mr. Wahlberg’s RSUs such that 100% of the RSUs granted to Mr. Wahlberg wouldare fully vest concurrentlyvested concurrent with and subject to the consummation of the IPO, effectively eliminating the market condition based on the achievement of prescribed Company equity values. The RSUs shall be settled in shares of common stock on a date determined by the Company during 2022 but no later than March 15, 2022. All remaining terms and conditions in the original promotional agreement are still applicable. The Company determined the modification of the RSUs as a Type IV modification in accordance with ASC 718,
Compensation—Compensation - Stock Compensation
, because at the modification date, both the original and modified awards were considered
32

improbable of vesting as the performance condition hadhas not been met on the modification date of July 5, 2021. The Company utilized the assumed IPOinitial public offering price of $16.00 per share as the modification date fair value.

26
Table of Contents
In connection with the Company becoming publicly traded on July 15, 2021, the fair value of the RSUs of 2,738,648
RSUs
fully vested and was recognized as compensation expense in the amount of $43.8 million duringfor the three and nine monthsyear ended September 30,December 31, 2021, respectively, which iswas included in selling, general and administrative expenses onexpenses in the condensed consolidatedconsolidated statements of operationoperations and comprehensive income (loss) income.. The Company issued the fully vested RSUs during the three months ended March 31, 2022.

2021 Incentive Plan

The Company’s stock basedstock-based compensation plan, which became effective at the IPO date,
included
includes equity incentive compensation plans under which three3 types of share-based compensation plans are granted to the employees, directors and consultants of the Company, which are incentive stock options (ISOs)(SOs), RSUs and restricted stock awards (RSAs). The purpose of the plan is to assist the Company in securing and retaining the service of eligible award recipients to provide incentives to employees, directors and consultants and promote the long-term financial success of the Company and thereby increase stockholder value. As perIn accordance with the 2021 Equity Incentive Plan, subject to adjustment for certain dilutive or related events, the maximum aggregate number of Sharesshares that may be subject to Awardsstock awards and sold under various equity incentive compensation plansthis plan is 5,000,000 Shares.shares, or the share reserve (“Share Reserve”). Beginning on January 1, 2022 and ending on January 1, 2031, the Share Reserve will automatically increase on January 1 of each year during the term of the 2021 Incentive Plan in an amount equal to 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; provided, however, that the Company’s board of directors may provide that there will not be a January 1 increase in the Share Reserve in a given year or that the increase will be less than 5% of the shares of common stock outstanding on the preceding December 31.

Employees meeting certain employment qualifications are eligible to receive stock-based awards. In accordance with the Company’s accounting policy, forfeitures of ISOs,SOs, RSUs and RSAs are accounted for as they occur.
Incentive stock options (ISOs)

ISOsStock options

SOs granted under the incentive equity plans are generally
non-statutory
stock options, but the incentive equity plans permit some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over one to three years from the date of grant. The exercise price of a stock option is equal to the closing price of the Company’s stock on the option grant date. The majority of stock options issued by the Company containsare subject to only service vesting conditions.
For As of December 31, 2021, the nine months ended September 30, 2021 the
total number of shares authorized for ISOssubject to outstanding SOs was 252,737. As of March 31, 2022, the total number of shares subject to outstanding SOs was 673,292.
is
254,965.
The Company utilizes the Black-Scholes option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:

Weighted-average fair value (1)$4.694.14 
Expected volatility (2)26.3% - 29.20%
Risk-free interest rate (2)(3)0.92% - 2.55%
Expected dividend yield (3)(4)— 0  
Expected volatility (4)29.20%
Expected term in years5.765.46 - 6.25
33

(1)
(1)The weighted-average fair value based on stock options granted during the period.
(2)(2)Selected volatility is relevered equity volatility based on median asset volatility.
(3)The risk-free interest rate was estimated based on the yield on U.S. Treasury scripsscrips.
(4)(3)The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.
(4)
Selected volatility is re
-
levered equity volatility based on median asset volatility.
27
Table of Contents
A summary of option activity under the employee share option plan as of September 30, 2021,March 31, 2022, and changes during the period then ended is presented below:

   
Shares (In
thousands)
   
Weighted - Average

Exercise Price
   
Weighted - Average
Remaining Contractual
Term
   
Aggregate Intrinsic
Value (In thousands)
 
Outstanding at January 1, 2021
   0     $0          $0   
Granted   264   $16.00           
Exercised   0     $16.00           
Forfeited or expired   (9)   $16.00           
                     
Outstanding at September 30, 2021
   255   $16.00        $0   
                     
Vested and exercisable   66   $16.00        $0   
                     
Expected to vest   189   $16.00    1.8   $0   
                     
Shares (in thousands)Weighted - Average Exercise PriceWeighted - Average Remaining Contractual TermAggregate Intrinsic Value (in thousands)
Outstanding as of January 1, 2022252$15.92 0$— 
Granted441$12.47 
Exercised— 
Forfeited or expired(20)15.92 
Outstanding as of March 31, 2022673$13.66 $— 
Vested and Exercisable63$15.92 $— 
Expected to Vest610$13.43 1.86$— 

The aggregate intrinsic value in the table above represents the total
pre-tax
intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of September 30, 2021.
the quarter ended March 31, 2022. The aggregate intrinsic value of vested and unvested option as of September 30, 2021March 31, 2022 was $0, since the options are
were out-of-the-money.
The aggregate intrinsic value is the difference between the Company’s closing stock price of $14.96
per share 
$10.70 on the last trading day of September 30, 2021March 31, 2022 and the exercise price of $16.00
per shar
multiplied by the number of
in-the-money
options. All the options were
out-of-the-money.
The total grant date fair value of the options vested during During the three and nine months ended September 3
0
, 2021 was $0.3 million, which was included in selling, general and administrative expenses on the condensed consolidated statements of operation and comprehensive (loss) income.March 31, 2022, no options vested.

As of September 30, 2021,March 31, 2022, the total unrecognized
pre-tax
stock-based compensation expense related to t
h
e ISOnon-vested stock options was $0.9$2.5 million, which is expected to be recognized over a weighted-average vesting period of 1.81.86 years. The maximum contractual term of the ISOSO is approximately 3 years.three years.

Restricted stock units (RSUs)

RSUs may be granted at any time and from time to time as determined by the Company. The Company will set vesting criteria at its discretion, which, depending on the extent to which the criteria are met, will determine the number of RSUs that will be paid out to the participant. The Company may set vesting criteria based upon on the passage of time, the achievement of target levels of performance, or the occurrence of other events or any combination thereof as determined by the Company at its discretion. Dividend equivalents shall not be paid on a RSU during the period it is unvested. The RSUs issuedgranted by the Company currently only containare subject to service vesting conditions. RSUs also provide for accelerated vesting in certain circumstances as defined in the plans and related grant agreements. For the nine months ended September 30, 2021 theAs of March 31, 2022, the total number of shares authorized forsubject to outstanding RSUs iswas 1,385,683. During the three months ended March 31, 2022, the Company withheld 1,045,661 shares of common stock related to net share settlement of restricted stock units vested during the prior year.
3,438,555
.

The Company uses the closing stock price on the grant date to estimate the fair value of service-based RSUs. The Company estimates the fair value of RSUs subject to performance-adjusted vesting conditions using the closing stock price on the grant date.

28
Table of Contents
A summary of RSU’s activity is as follows:
34
   
Shares (In thousands)
   
Weighted - Average Grant

Date Fair Value Per Share
 
Outstanding at January 1,
 
2021
   —     $—   
Granted   3,591    15.54 
Vested   (2,370)    15.31 
Forfeited   (152)    16.00 
           
Outstanding at September 30,
 
2021
   1,069   $16.00 
           
The total grant date fair value of

Shares (in thousands)Weighted - Average Grant Date Fair Value Per Share
Outstanding as of January 1, 2022997 $15.74 
Granted389 12.85 
Vested— — 
Forfeited— — 
Outstanding as of March 31, 20221,386 $14.37 

No RSUs vested during the three and nine months ended September 30, 2021March 31, 2022. During the three months ended March 31, 2022, total recognized pre-tax stock-based compensation expense related to non-vested RSUs was $36.3 
million, respectively,$0, which was included in selling, general and administrative expenses onexpenses in the condensed consolidated statements of operationoperations and comprehensive income (loss) income. . As of September 30, 2021,March 31, 2022, total unrecognized
unrecognized pre-tax
stock-based compensation expense related to
non-vested
restricted stock units RSUs was
$17.1 $19.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.781.45 years. The maximum contractual term of RSUs is approximately 3three years.

Restricted stock awards (RSAs)

Subject to the terms and provisions of the plan, the Company, at any time and from time to time, may grant shares of restricted stock to service providers in such amounts as the Company, in its sole discretion, will determine. During the period of restriction, service providers holding shares of restricted stock may exercise full voting rights and will be entitled to receive all dividends and other distributions paid with respect to such shares, unless the Company determines otherwise. If any such dividends or distributions are paid in shares; the shares will be subject to the same restrictions on transferability and forfeitability as the shares of restricted stock with respect to which they were paid. The RSAs issuedgranted by the Company containsare subject to service vesting conditions. For the nine months ended September 30, 2021As of March 31, 2022, the total number of shares authorized forsubject to outstanding RSAs
was 103,748.
is
104,512
.

The Company uses the closing stock price on the grant date to estimate the fair value of service-based RSAs. The Company estimates the fair value of RSAs subject to performance-adjusted vesting conditions using the closing stock price on the grant date.

A summary of RSAs activity is as follows:
  
Shares (In thousands)
   
Weighted - Average Grant

Date Fair Value Per Share
 Shares (in thousands)Weighted - Average Grant Date Fair Value Per Share
Outstanding at January 1,
2021
   0     $0   
Outstanding as of January 1, 2022Outstanding as of January 1, 2022117 $14.60 
Granted   105    14.42 Granted— — 
Vested   0      0   Vested(8)15.15 
Forfeited   0      0   Forfeited(5)15.15 
       
Outstanding at September 30,
2021
   105   $14.42 
       
Outstanding as of March 31, 2022Outstanding as of March 31, 2022104 $15.09 
29

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The total grant date fair value of RSAs vested during the three and nine months ended September 30, 2021March 31, 2022 was $0. As of September 30, 2021,$0.1 million. For the three months ended March 31, 2022, total recognized
pre-tax
stock-based compensation expense related to
non-vested
RSAs was $0.3$0.5 million, which was included in selling, general and administrative expenses onexpenses in the condensed consolidated statements of operations and comprehensive income (loss) income.. Total unre
c
ognized
unrecognized pre-tax
stock-based compensation expense related to
non-vested
restricted stock awards was $1.2$0.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.670.21 years. The maximum contractual term ofof the RSAs is less than one year.

Non-employee promotional agreements

Non-employee
promotional agreements35

Liability-classified awards

As described in
Note 12—13—Commitments and contingencies
, the Company entered into promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP which included restricted stock unitsRSUs that contain equity-based payments, which have performance and market and service conditions.

The Company determined that the restricted stock unitsRSUs are liability classified
liability-classified awards that contain both performance (deemed liquidation event, closing of a financing transaction or the public trading of the Company’s common stock) and market conditions (achievement of prescribed Company equity values) in order for the units to vest. As of September 30, 2021,March 31, 2022, the market conditions have not been met on any of the
non-employee
promotional agreements.agreements other than those listed in Note 13 under the promotional agreement with DB Ventures. The Company began recognizing stock-based compensation expense ratably over the requisite service period when the performance condition was met through the achievement of the IPO on July 15, 2021.

Equity-classified awards

The promotional agreement with TK included RSAs that contain equity-based payment, which has a service condition. The Company determined that the RSAs granted to TK are equity based awards that contains a service condition to vest. The stock-based compensation expense related to the RSAs are recognized ratably over the requisite service period in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

Note 15—16—Basic and diluted netearnings (loss) income per share

The computation of netearnings (loss) income per share and weighted average shares of the Company’s common stock outstanding for the periods presented are as follows (in thousands, except share and per share data):
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2021
   
2020
   
2021
   
2020
 
Numerator:
                    
Net (loss) income  $(130,193)  $2,349   $(197,562)   $7,484 
Net income allocated to participating preferred shares  $—     $646   $—     $2,058 
                     
Net (loss) income attributable to common stockholders—basic and diluted  $(130,193)  $1,703   $(197,562)   $5,426 
                     
Denominator:
                    
Weighted average common shares outstanding—basic and diluted   85,463,755    58,000,000    48,214,724    58,000,000 
Net (loss) income per common share:
                    
Basic and diluted  $(1.52)   $0.03   $(4.10)  $0.09 
Anti-dilutive securities excluded from diluted loss per common share:
                    
Unvested restricted stock units   1,068,750    —      1,068,750    —   
Unvested restricted stock awards   104,512    —      104,512    —   
Stock options to purchase common stock   254,965    —      254,965    —   
                     
Total   1,428,227    —      1,428,227    —   
                     

30
For the Three Months Ended
March 31,
20222021
Numerator:
Net income (loss)$2,512 $(36,845)
Net income (loss) allocated to participating preferred shares— — 
Net income (loss) attributable to common stockholders—basic and diluted$2,512 $(36,845)
Denominator:
Weighted average common shares outstanding—basic95,709,671 29,281,514 
Effect of dilutive securities977,612 — 
Weighted average shares outstanding—diluted96,687,283 29,281,514 
Net earnings (loss) per share:
Basis earnings (loss) per share$0.03 $(1.26)
Diluted earnings (loss) per share$0.03 $(1.26)
Anti-dilutive securities excluded from diluted earnings (loss) per share:
Stock options to purchase common stock662,935 — 
Convertible preferred stock— 9,854,432 
Restricted stock units— 2,738,648 
Convertible notes— 5,856,302 
Total662,935 18,449,382 
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For the three and nine months ended September 30, 2020, the restricted stock units of 2,738,648 have no impact36

The contingently issuable shares in relation to the promotional agreements with ABG-Shark, MJE, and CDP are not included in diluted net incomeearnings (loss) per share computation as the performance condition as specified in
Note
14-Stock-based
compensation
hasmarket conditions have not been met to be vested as of September 30,
2020
.March 31, 2022.

Note 16—17—Segment and geographic area information

The Company’s operating segments align with how the Company manages its business and interacts with its franchisees on a geographic basis. F45 is organized by geographic region based on the Company’s strategy to become a globally recognized brand. F45 has three3 reportable segments: United States, Australia and Rest of World. The Company refers to “Australia” as the operations in Australia, New Zealand and the immediately surrounding island nations. The Company refers to “Rest of World” as the operations in locations other than the United States and Australia. The Company’s Chief Operating Decision Maker (“CODM”) group is comprised of two2 executive officers, Messrs. Adam Gilchrist and Chris Payne. Segment information is presented in the same manner that the Company’s CODM reviews the operating results in assessing performance and allocating resources. The CODM reviews revenue and gross profit for each of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment.

The Company does not allocate assets at the reportable segment level as these are managed on an entity wide group basis.

The following is key financial information by reportable segment which is used by management in evaluating performance and allocating resources:resources (in thousands):
                         
   
For the Three Months Ended

September 30, 2021
   
For the Three Months Ended

September 30, 2020
 
   
Revenue
   
Cost of revenue
   
Gross profit
   
Revenue
   
Cost of revenue
  
Gross profit
(loss)
 
United States:                             
Franchise  $11,117   $1,047   $10,070   $6,245   $1,774  $4,471 
Equipment and merchandise   4,162    2,239    1,923    3,583    1,857   1,726 
                              
   $15,279   $3,286   $11,993   $9,828   $3,631  $6,197 
                              
Australia:                             
Franchise  $4,330   $158   $4,172   $6,145   $248  $5,897 
Equipment and merchandise   2,234    1,992    242    2,707    2,305   402 
                              
   $6,564   $2,150   $4,414   $8,852   $2,553  $6,299 
                              
Rest of World:                             
Franchise  $3,066   $281   $2,785   $1,677   $(25)  $1,702 
Equipment and merchandise   2,268    1,521    747    1,606    1,085   521 
                              
   $5,334   $1,802   $3,532   $3,283   $1,060  $2,223 
                              
Consolidated:                             
Franchise  $18,513   $1,486   $17,027   $14,067   $1,997  $12,070 
Equipment and merchandise   8,664    5,752    2,912    7,896    5,247   2,649 
                              
   $27,177   $7,238   $19,939   $21,963   $7,244  $14,719 
                              

31
For the Three Months Ended
March 31, 2022		For the Three Months Ended
March 31, 2021
RevenueCost of revenueGross profitRevenueCost of revenueGross profit
United States:
Franchise$12,401 $1,015 $11,386 $7,015 $1,022 $5,993 
Equipment and merchandise22,848 7,754 15,094 2,481 1,478 1,003 
$35,249 $8,769 $26,480 $9,496 $2,500 $6,996 
Australia:
Franchise$3,448 $119 $3,329 $3,289 $178 $3,111 
Equipment and merchandise2,130 1,733 397 839 807 32 
$5,578 $1,852 $3,726 $4,128 $985 $3,143 
Rest of World:
Franchise$4,011 $97 $3,914 $2,852 $14 $2,838 
Equipment and merchandise5,170 1,456 3,714 1,715 896 819 
$9,181 $1,553 $7,628 $4,567 $910 $3,657 
Consolidated:
Franchise$19,860 $1,231 $18,629 $13,156 $1,214 $11,942 
Equipment and merchandise30,148 10,943 19,205 5,035 3,181 1,854 
$50,008 $12,174 $37,834 $18,191 $4,395 $13,796 

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For the Nine Months Ended

September 30, 2021
   
For the Nine Months Ended

September 30, 2020
 
   
Revenue
   
Cost of revenue
   
Gross profit
   
Revenue
   
Cost of revenue
   
Gross profit
(loss)
 
United States:                              
Franchise  $29,873   $3,377   $26,496   $21,954   $5,863   $16,091 
Equipment and merchandise   11,166    6,154    5,012    11,045    5,561    5,484 
                               
   $41,039   $9,531   $31,508   $32,999   $11,424   $21,575 
                               
Australia:                              
Franchise  $12,039   $430   $11,609   $10,985   $580   $10,405 
Equipment and merchandise   3,762    3,313    449    5,185    4,489    696 
                               
   $15,801   $3,743   $12,058   $16,170   $5,069   $11,101 
                               
Rest of World:                              
Franchise  $10,338   $355   $9,983   $6,827   $148   $6,679 
Equipment and merchandise   5,022    3,205    1,817    8,267    4,360    3,907 
                               
   $15,360   $3,560   $11,800   $15,094   $4,508   $10,586 
                               
Consolidated:                              
Franchise  $52,250   $4,162   $48,088   $39,766   $6,591   $33,175 
Equipment and merchandise   19,950    12,672    7,278    24,497    14,410    10,087 
                               
   $72,200   $16,834   $55,366   $64,263   $21,001   $43,262 
                               
Selling, general and administrative expenses, other expenses,
and taxes are not allocated to individual segments as these are managed on an entity wide group basis. The reconciliation between reportable segment gross profit to condensed consolidated net income (loss) income is as follows (in thousands):

         
   
For the Three Months Ended September 30,
 
   
2021
   
2020
 
Segment gross profit  $19,939   $14,719 
Selling, general and administrative expenses   110,492    10,100 
Loss on derivative liabilities   0      —   
Interest expense, net   41,897    534 
Other income, net   (2,035)    (238) 
(Benefit) provision for income taxes   (222)    1,974 
           
Net (loss) income  $(130,193)   $2,349 
           
37
         
   
For the Nine Months Ended September,
 
   
2021
   
2020
 
Segment gross profit  $55,366   $43,262 
Selling, general and administrative expenses   145,882    31,724 
Loss on derivative liabilities   48,603    —   
Interest expense, net   59,165    1,333 
Other income, net   (1,415)    (815) 
(Benefit) provision for income taxes   693    3,536 
           
Net (loss) income  $(197,562)   $7,484 
           

For the Three Months Ended
March 31,
20222021
Segment gross profit$37,834 $13,796 
Selling, general and administrative expenses32,090 16,828 
Loss on derivative liabilities, net— 25,505 
Interest expense, net126 8,415 
Other expense, net570 291 
Provision (benefit) for income taxes2,536 (398)
Net income (loss)$2,512 $(36,845)

For the three and nine months ended September 30,March 31, 2022, the Company had CIP additions of $0.1 million in the United States. For the three months ended March 31, 2021, and September 30, 2020, respectively, the Company’s long-lived asset additions were not significant.
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Note 17—18—Subsequent events

The Company has evaluated subsequent events from March 31, 2022 through May 16, 2022, the date on which the March 31, 2022 condensed consolidated financial statements were available for issuance, and has determined that there are no subsequent events requiring adjustments to or disclosure in the condensed consolidated financial statements, other than as discussed below.

F45 SPV Finance Company and Strategic Financing Facility with Affiliates of Fortress Credit Corp

On October 29, 2021,May 13, 2022, the Company entered into a sharecredit agreement (the “New Credit Agreement”) with a newly created subsidiary of the Company, F45 SPV Finance Company, LLC, as borrower (the “Borrower”), and Fortress Credit Corp., as administrative agent, collateral agent and a lender (“Fortress”), and the other parties party thereto from time to time. The New Credit Agreement provides for a $150 million (the “Maximum Committed Amount”) seven-year credit facility (the “Facility”); provided, that the Maximum Committed Amount may be increased to $300 million in certain circumstances under the terms of the New Credit Agreement (a “Facility Increase”). The New Credit Agreement requires that the Company enter into a limited guaranty, guaranteeing the Borrower’s obligations under the Facility, in an amount not to exceed 10% of the total Facility size (the “Guaranty”). The proceeds from the Facility will be used by the Borrower to purchase loans made by another subsidiary of the Company, F45 Intermediate Holdco, LLC, to certain franchisees of the Company (the “Receivables”). The obligations under the New Credit Agreement are secured by the Receivables.

In connection with the entry into the New Credit Agreement, on May 13, 2022, the Company entered into a warrant purchase agreement (the “Warrant Agreement”), pursuant to acquire 100%which the Company is obligated to issue warrants (the “Warrants”) to certain affiliates of Fortress (collectively, the “Holders”) in up to 4 tranches, each representing 1.25% of the outstandingfully diluted shares of common stock of Vive Active Brookvale Pty Ltd (Vive)the Company par value $0.00005 per share (the “Common Stock”), outstanding on the issue date of the Warrant (in the case of Immediately Exercisable Warrants (as defined herein)) or the Vesting Date (as defined herein) (in the case of a 50% Utilization Warrant (as defined herein)). Vive, locatedConcurrently with the execution of the Credit Agreement, the Company issued (i) immediately exercisable warrants (an “Immediately Exercisable Warrant”) to the Holders to purchase an aggregate of up to 1,211,210 shares of Common Stock (representing 1.25% of the fully diluted shares of Common Stock as of May 13, 2022) and (ii) warrants that will become exercisable on the date on which loans in Australia, provides Pilates classes through its online platforman amount equal to 50% of the Maximum Committed Amount (as in effect on the date any Warrant is issued) have been drawn under the Credit Agreement (a “50% Utilization Warrant”) (the date a 50% Utilization Warrant becomes exercisable upon reaching required utilization levels under the Facility, a “Vesting Date”) to the Holders to purchase up to 1.25% of the fully diluted shares of Common Stock as of the Vesting Date. In the event of a Facility Increase, the Company will issue additional Immediately Exercisable Warrants and 50% Utilization Warrants to the Holders, in each case, representing the right to purchase up to an aggregate of 1.25% of the fully diluted Common Stock of the Company as of the issue date of the Warrant (in the case of the Immediately Exercisable Warrants) or the Vesting Date (in the case of the 50% Utilization Warrants).

38

In connection with the entry into the New Credit Agreement, on May 13, 2022, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement. Pursuant to the Second Amendment, certain amendments were made to the terms of the Credit Agreement to permit the execution of the New Credit Agreement (including establishing the securitization of the franchisee loans described above) and the issuance of the Warrants pursuant to the Warrant Agreement.

Joint Venture with Club Sports Group LLC

On May 16, 2022, the Company announced the formation of a joint venture with Club Sports Group LLC, a Delaware limited liability company (“CSG”), to, among other things, make, hold and monetize certain loans to prospective franchisees of the Company who have prior military service, with such loans secured by first priority senior liens on the equity interests of such franchisees and all or substantially all of the assets of such franchisee and its studios.subsidiaries (if applicable). The stock acquisition wasjoint venture will be conducted through FAFC LLC, a strategic transaction to strengthennewly-formed Delaware limited liability company (“FAFC”). CSG is an affiliate of Kennedy Lewis Management LP, a significant stockholder of the Company which beneficially owns directly or indirectly through funds it manages, as of the date hereof, in excess of 10% of the Company’s positionoutstanding common stock and has the right to designate a member of the Company’s board of directors.

Also on May 16, 2022, and in connection with establishment of the joint venture, (i) the Company entered into a Limited Liability Company Agreement of FAFC, dated as of May [16], 2022 (the “LLC Agreement”), between the Company and CSG and (ii) FAFC entered in a Servicing Agreement, dated as of May 16, 2022 (the “Servicing Agreement”), between FAFC and CSG. The LLC Agreement is the primary operating document of the joint venture and contains the understanding of the Company and CSG regarding the governance and operation of FAFC. Pursuant to the LLC Agreement, the joint venture will be managed by its members, with day-to-day operations of the joint venture, subject to certain consent rights of the members, to be managed by CSG or one of its affiliates, pursuant to the fastest growing fitness franchisorsServicing Agreement.

The LLC Agreement provides, among other things: (i) unless earlier dissolved in accordance with the LLC Agreement, the term will continue until the soonest date after which all investments thereunder are fully resolved or otherwise sold and creating a leading global fitness trainingall other Company matters related to such investments have been wound up, (ii) each of the Company and lifestyle brand. The consideration exchangedCSG have an initial 50% equity interest in FAFC, (iii) procedures for the acquisition is $5 million less working capital adjustments.
ConsummationCompany to purchase CSG’s interest in FAFC in connection with a material breach of the acquisition remainsLLC Agreement by either member, (iii) that the Company or its affiliates shall enter into a franchise agreement and management services agreement with and provide all customary franchisee support services to each franchisee to whom loans are made through FAFC on substantially similar terms as the Company provides to its other franchisees, (iv) FAFC may, subject to customary closing conditions. 
The Company isthe conditions set forth in the processLLC Agreement, call additional capital from the members, provided that no member shall be required to fund aggregate capital contributions in excess of evaluatingfifty million dollars ($50,000,000.00) plus their pro rata share of any administrative expenses incurred by FAFC, (v) neither the natureCompany nor CSG may transfer its equity interest in FAFC without the consent of the stock purchaseother party and the consent of both parties is required in connection with the admission of any additional member and (vi) specific provisions regarding any distributions, and the priority and terms thereof, to determine whether the purchase is a business combination or an asset acquisition.members of FAFC. The LLC Agreement also contains other customary provisions and other agreements by the parties.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read theThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Historical Consolidated Financial and Other Data” section of our prospectus, our auditedcondensed consolidated financial statements and the related notes and the unaudited condensed consolidated financial statements appearing and other information found elsewhere in our prospectus, this report other filings with the SEC.Quarterly Report on Form 10-Q. In addition to historical financial information, thisthe following discussion and analysis contains forward-looking statements that are based upon current plans, expectations, and beliefs that involve risks uncertainties and assumptions.uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certainvarious factors, including but not limited to, those set forththe impact of the factors discussed in the section titled “Risk factors” sectionFactors” and elsewhere in our prospectus.
other parts of this Quarterly Report on Form 10-Q.

Overview

We are F45 Training, the fastest growing fitness franchisorsfranchisor in the world according to Entrepreneur in 2021, focused on creating a leading global fitness training and lifestyle brand. We primarily offer consumers functional
45-minute
workouts that are effective, fun, and community-driven. Our workouts combine elements of high-intensity interval, circuit, and functional training to offer consumers what we believe is the world’s best functional training workout. We deliver our workouts through our digitally-connected global network of studios, and we have built a differentiated, technology-enabled platform that allows us to create and distribute workouts to our global franchisee base. Our platform enables the rapid scalability of our model and helps to promote the success of our franchisees. We offer our members a continuously evolving fitness program in which virtually no two workouts are ever the same. Our vast and growing library of functional training content allows us to vary workout programs to keep consumers engaged with fresh content, stay at the forefront of consumer trends and drive maximum individual results, while helping our members achieve their fitness goals.

Impact of the
COVID-19
pandemic

The
COVID-19
pandemic and related
shelter-in-place
restrictions and other containment efforts havehas had and may continue to have a significant impact on the gym and fitness industry generally, as well as our business, financial condition and results of operations. Following the outbreak of the pandemic and at its initial peak, nearly all of our studios temporarily closed pursuant to local, state and federal mandates and guidelines.

As businesses have been allowed to
re-open
in certain jurisdictions pursuant to local and state mandates, we have worked closely with our franchisees in helping to
re-open
their studios subject to certain indoor capacity or other restrictions, including company-implemented health and safety policies. We have also been providing additional operating guidance to our franchisees by assisting with modifications to studio layouts and workouts to accommodate proper social distancing.

As of September 30, 2021,March 31, 2022, we had approximately 1,1971,691 Open Studios, which represents approximately 74%91% of our Total Studios. The remaining 26%9% of our Total Studios are generally located in regions that continue to face restrictions, which we expect to be relaxed over time.

We have found that, on average, studios that have
re-opened
following temporary closure quickly return close to
pre-pandemic
levels on a weekly revenue basis, and eventually exceed
pre-pandemic
levels on the same basis. As of September 30, 2021, the median weekly revenue of the 466 studios that have been
re-opened
the longest since temporary closure exceeded
pre-pandemic
levels.

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There have been frequent changes and variation in local and state regulation of the health club industry, and many local and state jurisdictions have returned to shelter in place restrictions after allowing for health club
re-openings.
While we are optimistic about our ability to continue to effectively manage through the
COVID-19
pandemic, we are unable to predict the duration or future impact of the pandemic on our business, financial condition and results of operations.

Our Segments
40

We operate and manage our business based on geographic regions and our strategy to become a leading global fitness and lifestyle brand. We have three reportable segments: United States, (which for segment reporting purposes includes ourAustralia and Rest of World. We refer to “United States” as the operations in the United States and South America), Australia and Rest of World. America. We refer to “Australia” as our operations in Australia, New Zealand and the immediately surrounding island nations. We refer to “Rest of World” or “ROW” as our operations in locations other than those in the United States and Australia.Australian segments. We evaluate the performance of our segments and allocate resources to them based on revenue and gross profit. Revenue and gross profit for all operating segments include only transactions with external customers and do not include inter-segment transactions. The tables on the following pages summarize the financial information for our segments for the years ended December 31, 2020 and 2019 and the three months ended September 30, 2021March 31, 2022 and 2020.2021. In all other sections of this filing when we present geographic data, we are presenting such data for the named region on a stand-alone basis.
basis

Our Franchise Model

We operate a nearly 100% franchise model. We believe our franchise model is attractive due to its potential for asset-light growth, strong profitability and robust cash flow generation, and has helped to facilitate our rapid growth and strong financial performance prior to the
COVID-19
pandemic. Despite challenges posed by the
COVID-19
pandemic, we grew our footprint and experienced minimal permanent closures during 2020, which we believe underscores the resilience of our business model. Between Q3Q1 2022 and Q1 2021, and Q3 2020, our Total Franchises Sold increased by 36%78% and our Total Studios increased by 18%25%. For the three months ended September 30, 2021,March 31, 2022, as compared with the same period in 2020,2021, our revenue increased by 24% as our network recovers from the175%.
COVID-19
pandemic.
Notwithstanding the ongoing challenges presented by the
COVID-19
pandemic, we believe we are well positioned to continue to successfully manage through the pandemic and drive growth in the future.

Our opportunities to drive the long-term growth of our business include:

expanding our studio footprint in the United States;
•expanding our studio footprint throughout the United States, Australia, and the Rest of World;
World (“ROW”);
•growing same store sales and transitioning to a franchise fee based on the greater of a fixed monthly franchise fee or percentage of gross monthly studio revenue model;
•expanding into new channels;
•developing new modalities and workout programs to access new target demographics; and
•driving increased member spend through ancillary product offerings.

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Key
Non-GAAP
Financial and Operating Metrics

In addition to our condensed consolidated 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.

Our financial condition and results of operationoperations have been, and will continue to be, affected by a number of important factors, including new franchises sold,Franchises Sold, new studio openings and number of visits. Many of these factors have been, and will continue to be, impacted by the
COVID-19
pandemic.


41

The following table sets forth our key performance indicators for the three and nine months ended September 30,March 31, 2022 and 2021 and 2020:
(in thousands except, net earnings (loss) per share):

Three Months Ended
March 31,
20222021
Net income (loss)$2,512 $(36,845)
Net earnings (loss) per share$0.03 $(1.26)
System-wide Sales$117,388 $94,052 
System-wide Visits7,216 6,776 
Same store sales growth6.2 %(21.2)%
New Franchises Sold, net706 3 
Total Franchises Sold, end of period4,007 2,247 
Initial Studio Openings, net117 50 
Total Studios, end of period1,866 1,487 
EBITDA6,974 (28,176)
Adjusted EBITDA$17,664 $5,270 
Adjusted EBITDA margin35.3 %29.0 %

   
Three months ended September 30,
  
Nine months ended September 30,
 
   
2021
  
2020
  
2021
  
2020
 
   
(in thousands)
 
Net income/(loss)
  $(130,193)  $2,349  $(197,562)  $7,484 
Earnings per share
  $(1.52)  $0.03  $(4.10)  $0.09 
System-wide Sales
  $99,436 $74,627 $296,474 $212,594
System-wide Visits
   6,350  5,420  20,081  14,194
Same store sales growth
   6.0%   (33.8%)   14.7%   (32.7%) 
New Franchises Sold, net
   210  155  767  322
Total Franchises Sold, end of period
   3,011  2,214  3,011  2,214
Initial Studio Openings, net
   63  101  181  236
Total Studios, end of period
   1,618  1,376  1,618  1,376
EBITDA
  $(87,127)  $5,448 $(134,211)  $14,106
Adjusted EBITDA
  $10,115 $7,381 $26,061 $20,021
Adjusted EBITDA margin
   37.2%   33.6%   36.1%   31.2% 
System-WideSystem-wide Sales

We define System-wide Sales as all payments made to our studios and includes payment for classes, apparel and other sales for a given period. We track System-wide Sales as an indication of the strength of our franchisee network.

Total System-wide Sales declined by 13% in 2020 as a result of widespread temporary studio closures. We generally experienced sequential improvement between April 2020 (which represented a though month in terms of Open Studios, Membership, and System-wide Sales) and
year-end.
In the United States, our System-wide Sales increased by 14% in 2020, which compares favorably versus the broader U.S. health club industry, which is estimated to have experienced a 58% decline in revenue according to IHRSA.
Our System-wide Sales have quickly recovered. ForDuring the three and nine months ended September 30, 2021,March 31, 2022, our System-wide Sales were approximately $99.4$117.4 million, and $296.5 million, respectively, which compares favorably to approximately $74.6 million and $212.6$94.1 million for the three and nine months ended September 30, 2020.
March 31, 2021, as presented in the table below:

36
Three Months Ended
March 31,
20222021
(in thousands)
United States$52,695 $30,473 
Australia42,953 51,998 
ROW21,740 11,581 
Total$117,388 $94,052 

TableSystem-wide Sales year-over-year growth of Contents73% in our US segment and 88% in our ROW segment was driven by both new studio openings during the period and a greater percentage of total studios which were not impacted by COVID-19 restrictions or temporary closures during the quarter. System-wide Sales year-over-year declined 17% for our Australian segment, driven by a greater percentage of studios in this segment being impacted by COVID-19 restrictions and temporary closures.

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
   
(in thousands)
 
United States
  $46,306   $20,154   $117,047   $59,633 
Australia
   33,965    40,937    135,121    114,434 
ROW
   19,165    13,536    44,306    38,527 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $99,436   $74,627   $296,474   $212,594 
  
 
 
   
 
 
   
 
 
   
 
 
 

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System-wide Visits

We define System-wide Visits as the number of registered individual workouts for any specified period. A workout is registered when the consumer checks into a class.

Our long-term growth will depend in part on our continued ability to attract and retain consumers to visit our studios for individual workouts. Our franchisees must continue to provide an experience that both attracts new consumers and retains existing and new consumers. We cannot be sure that we and our franchisees will be successful in attracting and retaining consumers for individual workouts or that visits will not materially decline due to any number of factors, such as harm to our brand or our inability to anticipate and meet consumer preferences and successfully introduce new workout programs to meet those demands.

Our System-wide Visits have quickly recovered. ForDuring the three and nine months ended September 30, 2021,March 31, 2022, our System-wide Visits were approximately 6approximately 7.2 million and 20 million, respectively,, which compares favorably to approximately 5 million and 146.8 million for the three and nine months ended September 30, 2020.
March 31, 2021, as presented in the table below:
   
Three months
ended
September 30,
   
Nine months ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
   
(in thousands)
 
United States
   3,025    1,406    8,141    3,550 
Australia
   2,047    3,120    9,015    8,112 
ROW
   1,278    894    2,925    2,532 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
   6,350    5,420    20,081    14,194 
  
 
 
   
 
 
   
 
 
   
 
 
 

Three Months Ended
March 31,
20222021
(in thousands)
United States3,101 2,266 
Australia2,674 3,742 
ROW1,441 768 
Total7,216 6,776 

System-wide Visits year-over-year growth of 37% in our US segment and 88% in our ROW segment was driven by both new studio openings during the period and a greater percentage of total studios which were not impacted by COVID-19 restrictions or temporary closures during the year. System-wide Visits year-over-year declined by 29% for our Australian segment, driven by fewer new studio openings during the period and a greater percentage of studios in this segment being impacted by COVID-19 restrictions and temporary closures.

New Franchises Sold

New Franchises Sold refers to the number of franchises sold during any specific period. We classify Total Franchises Sold, as of any specified date, as the total number of signed franchise agreements in place as of such date that have not been terminated. Each new franchise is included in the number of franchises sold from the date onin which we enter into a signed franchise agreement related to each such new franchise. Total Franchises Sold includes franchise arrangements in all stages of development after signing a franchise agreement, and includes franchises with open studios. Franchises are removed from Total Franchises Sold upon termination of the franchise agreement.

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Our long-term growth will depend in part on our continued ability to sell new franchises. We are still in the early stages of growth and expansion, particularly in the United States and ROW, and we believe we can significantly grow our franchisee base. If we cannot sell new franchises as quickly as we would like in these geographies, our operating results may be adversely affected.
Three Months Ended March 31, 2022Three Months Ended March 31, 2021
U.S.AustraliaROWTotalU.S.AustraliaROWTotal
Total Franchises Sold, beginning of period1,710 803 788 3,301 931 679 634 2,244 
New Franchises Sold, net(a)
692 1 13 706 10 (3)(4)3 
Total Franchises Sold, end of period2,402 804 801 4,007 941 676 630 2,247 
(a) New Franchises Sold are shown net of franchises that were signed but subsequently                 terminated prior to the initial studio opening.

43
   
Three months ended September 30,
2021
   
Three months ended September 30,
2020
 
   
U.S.
   
Australia
   
ROW
   
Total
   
U.S.
   
Australia
   
ROW
   
Total
 
Total Franchises Sold, beginning of period
   1,379   785   637   2,801   846   667   546   2,059
New Franchises Sold, net(a)
   87   15   108   210   68   8   79   155
Total Franchises Sold, end of period
   1,466   800   745   3,011   914   675   625   2,214

Year Ended December 31, 2021Year Ended December 31, 2020
  
Nine months ended September 30,
2021
   
Nine months ended September 30,
2020
 U.S.AustraliaROWTotalU.S.AustraliaROWTotal
  
U.S.
   
Australia
   
ROW
   
Total
   
U.S.
   
Australia
   
ROW
   
Total
 
Total Franchises Sold, beginning of period
   931   679   634   2,244   814   643   435   1,892Total Franchises Sold, beginning of period931 679 634 2,244 814 643 435 1,892 
New Franchises Sold, net(a)
   535   121   111   767   100   32   190   322
New Franchises Sold, net(a)
New Franchises Sold, net(a)
779 124 154 1,057 117 36 199 352 
Total Franchises Sold, end of period
   1,466   800   745   3,011   914   675   625   2,214Total Franchises Sold, end of period1,710 803 788 3,301 931 679 634 2,244 
(a) 
New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to the initial studio opening.
(a) New Franchises Sold are shown net of franchises that were signed but subsequently                 terminated prior to the initial studio opening.

During the three and nine months ended September 30, 2021,March 31, 2022, we sold a net average of 70 and 85235 new franchises per month, respectively.month. This compares favorably to the 52 and 361 net average new franchises soldFranchise Sold during the three and nine months ended September 30, 2020, respectively.March 31, 2021. This increase is supported by recent multi-unit franchise deals.

Initial Studio Openings and Total Studios

Initial Studio Openings refers to the number of studios that were determined to be first opened during such period. We classifyPrior to October 1, 2021, we classified an Initial Studio Opening to occur in the first month in which the studio first generates monthly revenue of at least $4,500. Starting on October 1, 2021, we classify an Initial Studio Opening to occur in the month in which we record the initial studio opening in our internal systems. Any studios that did not have an Initial Studio Opening under the prior definition are included as of October 1, 2021. We classify Total Studios, as of any specified date, as the total cumulative Initial Studio Openings as of that date less cumulative permanent studio closures as of that date. Neither Initial Studio Openings nor Total Studios are adjusted downward for studios that were temporarily closed due to the
COVID-19
pandemic or otherwise.

Our long-term growth will depend in part on our continued ability to open new studios. We believe that we will experience continued expansion of new studio openings in the United States and ROW. However, if delays or difficulties are encountered and new studio openings do not occur as quickly as we would like, our operating results may be adversely affected.

  
Three months ended September 30,
2021
   
Three months ended September 30,
2020
 Three Months Ended March 31, 2022Three Months Ended March 31, 2021
  
U.S.
   
Australia
   
ROW
   
Total
   
U.S.
   
Australia
   
ROW
   
Total
 U.S.AustraliaROWTotalU.S.AustraliaROWTotal
Total Studios, beginning of period
   556   628   371   1,555   396   595   284   1,275Total Studios, beginning of period654 653 442 1,749 486 616 335 1,437 
Initial Studio Openings, net(a)
   30   5   28   63   55   9   37   101
Initial Studio Openings, net(a)
Initial Studio Openings, net(a)
73 10 34 117 32 1 17 50 
Total Studios, end of period
   586   633   399   1,618   451   604   321   1,376Total Studios, end of period727 663 476 1,866 518 617 352 1,487 
   
Nine months ended September 30,
2021
   
Nine months ended September 30,
2020
 
   
U.S.
   
Australia
   
ROW
   
Total
   
U.S.
   
Australia
   
ROW
   
Total
 
Total Studios, beginning of period
   486   616   335   1,437   320   581   239   1,140
Initial Studio Openings, net(a)
   100   17   64   181   131   23   82   236
Total Studios, end of period
   586   633   399   1,618   451   604   321   1,376
(a) Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.
(a) 
Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.

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During the three and nine months ended September 30, 2021,March 31, 2022, we had net initial studio openings of average 21 and 2039 new franchises per month respectively. This comparesduring the three months ended March 31, 2022 compared to the average 34 and 26 net initial studio openings of 17 franchises per month during the three and nine months ended September 30, 2020.March 31, 2021. The decreaseslight increase in net initial studio openings was driven by lower gross studio openings in the US, Australia and ROW due to lingering impacts of
COVID-19.
generated by studio sales during the latter half our fiscal year ended December 31, 2021.
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EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

We use a variety of
non-GAAP
information, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and same store sales.

EBITDA is defined as net income or loss before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation and amortization and adjusted to exclude the impact of sales tax liability, transaction expenses, loss on derivative liabilities,
44

certain legal costs and settlements, forgiveness of loans to directors andstock-based compensation expense, COVID concessions, relocation costs, as well ascharitable donations, and certain other items identified as affecting comparability, when applicable. Adjusted EBITDA margin means Adjusted EBITDA divided by total revenue.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin have been included in this filing because they are important metrics used by management as one of the means by which it assesses our financial performance. EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing our company and its results of operations.

The
Three Months Ended
March 31,
20222021
Other Data:(in thousands)
EBITDA$6,974 $(28,176)
Adjusted EBITDA$17,664 $5,270 
Adjusted EBITDA margin (1)
35.3 %29.0 %
Same Store Sales growth (2)
6.2 %(21.2)%
non-GAAP
information in this filing should
(1)Management believes that EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are useful to
investors as they eliminate certain items identified as affecting the period-over-period comparability of our operating results. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin eliminate, among other items, non-cash depreciation and amortization expense that results from our capital investments and intangible assets, as well as income taxes, which may not be read in conjunctioncomparable with other companies based on our audited annual and unaudited interim financial statements and the related notes included elsewhere in our prospectus and this report. For a discussion of material risks and limitations of these measures, see “Prospectus Summary—Summary Historical Combined and Consolidated Financial and Other Data” within our prospectus filed in July 2021.tax structure.
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2021
  
2020
  
2021
  
2020
 
Other Data:
  (dollars in thousands) 
EBITDA
  $(87,127)  $5,448 $(134,211)  $14,106
Adjusted EBITDA
  $10,115 $7,381 $26,061 $20,021
Adjusted EBITDA margin
(1)
   37.2%   33.6%   36.1%   31.2% 
Same store sales growth
(2)
   6.0%   (33.8%)   14.7%   (32.7%) 

(1)
Management believes that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are useful to investors as they eliminate certain items identified as affecting the period-over-period comparability of our operating results. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin eliminate, among other items,
non-cash
depreciation and amortization expense that results from our capital investments and intangible assets, as well as income taxes, which may not be comparable with other companies based on our tax structure.
Other companies may define Adjusted EBITDA and Adjusted EBITDA margin differently, and as a result, our measures of Adjusted EBITDA and Adjusted EBITDA margin may not be directly comparable to those of other companies.companies. Although we use EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin as financial measures to assess the performance of our business, such use is limited because these measures do not include certain material costs necessary to operate our business. EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items. EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

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Table of Contents
Some of these limitations are:
•they do not reflect every cash expenditure, future requirements for capital expenditures or
contractual commitments;
•although depreciation and amortization are
non-cash
charges, the assets being depreciated
and amortized will often have to be replaced or require improvements in the future, and EBITDA, Adjusted EBITDA and Adjusted EBITDA margin do not reflect any cash
requirement for such replacements or improvements; and
•they are not adjusted for all
non-cash
income or expense items that are reflected in our statements of cash flows

Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not intended as alternatives to net income or as indicators of our operating performance and should
45

not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using EBITDA, Adjusted EBITDA and Adjusted EBITDA margin along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Our GAAP-based measures can be found in our condensed consolidated financial statements and related notes included elsewhere in this filing.

The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA:
EBITDA (in thousands):
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2021
   
2020
   
2021
   
2020
 
   (dollars in thousands, except per share amounts) 
Net (loss) income
  $(130,193)   $2,349  $(197,562)   $7,484
Net interest expense
   41,897   534   59,165   1,333
(Benefit) provision for income taxes
   (222)    1,974   693    3,536
Depreciation and amortization
   786   301   2,163   778
Amortization of deferred costs
   605    290    1,330   975
  
 
 
   
 
 
   
 
 
   
 
 
 
EBITDA
  $(87,127)   $5,448  $(134,211)   $14,106
  
 
 
   
 
 
   
 
 
   
 
 
 
Sales tax reserve (a)
   140   1   387   516
Transaction fees (b)
   5,485   1,124   8,816   3,780
Loss on derivative liability (c)
   —      —      48,603   —   
Certain legal costs and settlements (d)
   1,029   808   4,452   1,589
Stock-based compensation (e)
   85,745   —      85,745   —   
Recruitment (f)
   17   —      70   —   
COVID concessions (g)
   1,590   —      5,923   —   
Relocation (h)
   258   —      510   30
Development costs (i)
   932   —      3,720   —   
Charitable donation (j)
   2,046   —      2,046   —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted EBITDA
  $10,115  $7,381  $26,061  $20,021
  
 
 
   
 
 
   
 
 
   
 
 
 

(a)
Represents the impact of
one-time
sales tax liability arising from a change in timing of enforceability of certain contractual terms in arrangements with franchisees.
Three Months Ended
March 31,
20222021
Net income (loss)$2,512 $(36,845)
Interest expense, net126 8,415 
Provision (benefit) for income taxes2,536 (398)
Depreciation and amortization1,174 204 
Amortization of deferred costs626 448 
EBITDA$6,974 $(28,176)
Sales tax reserve (a)— 100 
Transaction fees (b)1,788 1,582 
Loss on derivative liabilities (c)— 25,505 
Certain legal costs and settlements (d)2,325 2,537 
Stock-based compensation (e)2,603 — 
Recruitment (f)655 — 
COVID concessions (g)896 2,482 
Relocation (h)724 69 
Development costs (i)1,699 1,171 
Adjusted EBITDA$17,664 $5,270 
(b) 
Represents transaction costs incurred as a part of a reorganization and the issuance of preferred shares, including legal, tax, accounting and other professional services.

(c) 
Represents loss on derivative liabilities associated with convertible note.
(a) Represents the impact of one-time sales tax liability arising from a timing change in the ability to enforce certain contractual terms in arrangements with franchisees.
(d) 
Represents legal costs related to litigation activities and legal settlements.
(b) Represents transaction costs incurred as a part of a reorganization, acquisition-related costs in a business combination, and the issuance of preferred and common shares, including legal, tax, accounting and other professional services.
(e) 
Represents stock-based compensation of our employees,
non-employees
and directors.
(c) Represents loss on derivative liabilities associated with the convertible note.
(f) 
Represents
one-time
recruitment expense of department leaders.
(d) Represents certain one-time legal costs, primarily related to litigation activities and legal settlements.
(g) 
Represents concessions made to studios impacted by COVID, including one time
COVID-19
related write-offs.
(e) Represents stock-based compensation of our employees, non-employees and directors associated with our initial public offering.
(h) 
Represents costs incurred as a part of the relocation of our corporate headquarters.
(f) Represents one-time recruitment expense of executive leadership and essential public-company roles.
(i) 
Represents
one-time
non-recurring
costs incurred with launch of new brand.
(g) Represents concessions made to studios impacted by COVID, including one time COVID-19 related write-offs.
(j) 
Represents
one-time
charitable donation made in the amount of total PPP loan forgiveness.
(h) Represents costs incurred as a part of the relocation of our corporate headquarters.
(2)
“Same store sales” means, for any reporting period, studio-level revenue generated by a comparable base of franchise studios, which we define as Total Studios that have been operating for more than 16 months. As of September 30, 2021 and December 31, 2020, there were 1,046 and 940 studios, respectively in our comparable base of franchise studios.
(i) Represents one-time non-recurring costs incurred with launch of new brands.

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(2)“Same Store Sales
Same store salesSales” means, for any reporting period, studio-level revenue generated by a comparable base of franchise studios, which we define as Total Studios that have been operating for more than 16 months. As of September 30,March 31, 2022 and 2021, and September 30, 2020, there were 1,1461,328 and 8771,010 studios, respectively in our comparable base of franchise studios.

46

Same Store Sales

We view same store salesSame Store Sales as a helpful measure to assess performance of our franchise studios.

Several factors impact our same store salesSame Store Sales in any given period, including the following:
•the number of studios that have been in operation for more than 16 months;
•the mix of recurring membership and workout pack revenue per studio;
•growth in total memberships and workout pack visits per studio;
•consumer recognition of our brand and our ability to respond to changing consumer preferences;
•our and our franchisees’ ability to operate studios effectively and efficiently to meet consumer expectations;
•marketing and promotional efforts;
•local competition;
•trade area dynamics;
•opening of new studios in the vicinity of existing locations; and
•overall economic trends, particularly those related to consumer spending.

Same store salesStore Sales of our international studios are calculated on a constant currency basis on a studio level, meaning that we translate the current year’s same store salesSame Store Sales of our international studios at the same exchange rates used in the prior year. We view same store salesSame Store Sales as a helpful measure to assess performance of our franchise studios.
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Components of Our Results of Operations

Revenue

We generate revenue from the following sources:
•Franchise Revenue
: Consists primarily of upfront establishment fees, monthly franchise fees, and other franchise-related fees, including fees related to marketing and other recurring fixed fees paid by franchisees on a monthly basis for various services we provide, such as the use of intranet, email and the studio’s website. Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement, generally for two additional five year terms, as well as the license for certain trademarks and systems to operate that studio.

Monthly franchise fees generally become payable six to nine months after we and a franchisee execute a franchise agreement, irrespective of whether the franchise has opened their studio. Historically, monthlyMonthly franchise fees wereare generally structured as the greater of i) fixed payments of
$1,000- $1,000-$3,000
per month per studio or the higher ofii) 7% of monthly gross sales. In July 2019, we transitioned our model in the United States for new franchisees to a franchise fee based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue, which we believe will help to further align our interests with those of our franchisees while also providing us with the opportunity to increase franchise revenue. In select markets outside of the United States, and for renewals of existing franchisees in the United States, we are in the process of developing a strategy for transitioning to a similar model.sales per studio.
•Equipment and Merchandise
Revenue: ConsistsConsist of fees paid to us in exchange for (i) World Packs for new F45 Training studios, which are comprehensive opening packs containing the standardized set of
F45-branded
fitness equipment and related technology required to operate an F45 Training studio and (ii) subsequent additional and/or replacement equipment and merchandise sales to franchisees including technology, apparel and other fitness-related products. Typically, a portion of the World Pack fee is required to be paid upon the execution of a franchise agreement, with the balance due upon the earlier of: (i) the date the franchisee orders the World Pack; or (ii) eight months from the effective date of the franchise agreement. The franchise agreement mandates all franchisees to order and update new equipment on an annual basis.

Expenses

We primarily incur the following expenses directly related to our cost of revenues:
•Cost of Franchise Revenue:
Consists of direct costs associated with franchise sales, lead generation and the provision of marketing services to our franchisees. Our cost of franchise revenue changes primarily based on the number of Total Franchises Sold and Total Studios.

•Cost of Equipment and Merchandise Revenue:
Primarily includes the direct costs associated with World Pack equipment as well as additional and replacement equipment and merchandise sales to new and existing franchisees. World Pack costs consist of the cost of the components included in opening packs sold to franchisees, including: (i) gym equipment; (ii) our tech pack (e.g., TVs, F45TV adapters / dongles, heart monitors); and (iii) uniforms and merchandise. Our cost of equipment and merchandise changes primarily based on the World Pack equipment sales, which is driven by the number of franchises sold.
Franchises Sold. Cost of equipment revenue is reduced by consideration (i.e. rebates) payable by the equipment supplier, in which the amount is recognized in the condensed consolidated statements of operations and comprehensive income (loss) generally upon delivery of the equipment.

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•Selling, General, and Administrative Expenses:
ConsistsPrimarily consists of costs associated with wages and salaries, stock-based compensation expense, depreciation and amortization expenses, and ongoing administrative and franchisee support functions related to our existing franchisees. TheseWages and salaries and costs related to ongoing administrative and franchisee support functions are primarily consist ofassociated with brand marketing, fitness programming development and testing, technology costs related to development and maintenance of our technology-enabled centralized
48

delivery platform, marketing and promotional activities for the F45 Training brand, and legal and accountingprofessional expenses.

•Other Expense,Income, Net:
Our other expense,income, net, primarily relates to realized and unrealized gains and losses on foreign currency transactions. .

Provision (Benefit) Provision for Income Taxes

Our effective income tax rate differed from the U.S. statutory tax rate of 21% primarily due to the effect of certain nondeductible expenses, permanent differences, foreign jurisdiction earnings taxed at different rates, reserves for uncertain tax positions, and a valuation allowance against certain domestic deferred tax assets that are not more likely than not to be realized.

Recent Transactions

On July 5,October 29, 2021, the Company approved the acceleration of Mr. Wahlberg’s RSUs such that 100% of the RSUs granted to Mr. Wahlberg are fully vested concurrent with and subject to the consummation of the IPO, effectively eliminating the market condition based on the achievement of prescribed Company equity values. The RSUs shall be settled in shares of common stock on a date determined by the Company during 2022 but no later than March 15, 2022. All remaining terms and conditions in the original promotional agreement are still applicable. The Company determined the modification of the RSUs as a Type IV modification in accordance with ASC 718,
Compensation—Stock Compensation
, because at the modification date, both the original and modified awards were considered improbable of vesting as the performance condition had not been met on the modification date of July 5, 2021. The Company utilized the assumed initial public offering price of $16.00 per share as the modification date fair value.
In connection with the Company becoming publicly traded on July 15, 2021, the fair value of the restricted stock units of 2,738,648 fully vested and was recognized as compensation expense in the amount of $43.8 million during the three and nine months ended September 30, 2021, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of operation and comprehensive (loss) income.
On July 15, 2021, the Company completed its IPO of 20,312,500 shares of the Company common stock, $0.00005 par value per share at an offering price of $16.00 per share. The Company sold 18,750,000 shares and certain existing stockholders sold an aggregate of 1,562,500 shares. The Company received aggregate net proceeds of approximately $277.8 million after deducting underwriting discounts, commissions and other offering costs.
On July 19, 2021, after the consummation of the IPO, the Company acquired certain assets of the Flywheel indoor cycling studio business for $25.0 million in cash consideration, effectively transferring control of the assets to the Company and terminating the license agreement entered into in April 2021. The acquisition was accounted as an asset acquisition. On the acquisition date, the Company reversed the net carrying amount of $19.8 million of intangible assets, net of accumulated amortization of $0.8 million, and $20.6 million of the related liability that was initially recorded under the license agreement, resulting in a decrease to the cash consideration transferred by $0.8 million. The purchase consideration of $24.2 million was allocated to the assets acquired on a relative fair value basis, which primarily consisted of the client relationship management (“CRM”) software and trade names. The CRM software is amortized on a straight-line basis over 9 years, while the trade name has indefinite life. The amortization expense of the CRM software was $0.5 million for each of the three and nine months ended September 30, 2021.
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The Company entered into a senior Secured Credit Agreement, dated as of September 18, 2019 (the “Secured Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Australian Security Trustee, Lender, Swingline Lender and Issuing Bank, consisting of a $20.0 million revolving credit facility (the “Revolving Facility”) and a $30.0 million term loan facility (the “Term Facility”). Initial borrowings of $30.0 million from the Term Facility and $11.9 millionshare purchase agreement to acquire 100% of the availability underoutstanding stock of Vive Active. Vive Active, located in Australia, provides Pilates classes through its online platform and its studios. The consideration exchanged for the Revolving Facility were usedacquisition amounts to repay, in full, amounts due$7.5 million (50% cash up front and 50% deferred cash paid no later than 6 months after completion and which is not subject to common stockholders asany other conditions). The stock acquisition was a result of the MWIG transaction. See
Note 13—Convertible preferred stockstrategic transaction to leverage Vive’s intellectual property, content, and stockholders’ equity (deficit)
for further discussion.
On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Term Facility. The Company used proceeds from its IPOexpertise to repay the Term Facility and Revolving Facility in the amount of $31.1 million and $7.0 million, respectively.
On August 13, 2021, the Company entered into an amended and restated credit agreement (“Credit Agreement”) which amended and restated the Secured Credit Agreement dated September 18, 2019. The Credit Agreement provides for a $90 million five-year senior secured revolving facility (“Facility”). The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $35 million. The proceeds from the Facility will be used for general corporate purposes. Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, atsupplement the Company’s election, the LIBOR rate plus a margin of 2.50%brands, to 3.50% per annum, or base rate plus a margin of 1.50% to 2.50%, in each case depending onexpand the Company’s totalcorporate footprint across Australia and key global markets, and to leverage ratio.
Vive management team’s experience in developing corporate-owned studios.
On July 21, 2021, in connection with the repayment in full of all outstanding obligations under the Subordinated Credit Agreement, the Company terminated the interest rate swap agreement. The Company paid $0.5 million to terminate the interest rate swap. As a result of the termination, the accumulated fair value of the interest rate swap was reclassified from accumulated other comprehensive loss to interest expense of $0.5 million for each of the three and nine months ended September 30, 2021, respectively, on the condensed consolidated statements of operations and comprehensive (loss) income.
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Results of Operations

The following tables summarize key components of our results of operations for the periods indicated:
Three Months Ended
March 31,
20222021
(dollars in thousands)
Revenues:
Franchise (Related party: $2,616 and $45 for the three months ended March 31, 2022 and 2021, respectively)$19,860 $13,156 
Equipment and merchandise (Related party: $7 and $0 for the three months ended March 31, 2022 and 2021, respectively)30,148 5,035 
Total revenues50,008 18,191 
Costs and operating expenses:
Cost of franchise revenue1,231 1,214 
Cost of equipment and merchandise (Related party: $3,286 and $941 for the three months ended March 31, 2022 and 2021, respectively)10,943 3,181 
Selling, general and administrative expenses32,090 16,828 
Forgiveness of loans to directors— — 
Total costs and operating expenses44,264 21,223 
Income (loss) from operations5,744 (3,032)
Loss on derivative liabilities, net— 25,505 
Interest expense, net126 8,415 
Other expense, net570 291 
Income (loss) before income taxes5,048 (37,243)
Provision (benefit) for income taxes2,536 (398)
Net income (loss)$2,512 $(36,845)
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2021
  
2020
  
2021
  
2020
 
   
(dollars in thousands)
 
Revenues:
                 
Franchise (Related party: $2,724 and $52 for the three months ended September 30, 2021 and 2020, respectively, and $3,329 and $277 for the nine months ended September 30, 2021 and 2020, respectively)
  $18,513  $14,067  $52,250  $39,766 
Equipment and merchandise (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $328 for the nine months ended September 30, 2021 and 2020, respectively)
   8,664   7,896   19,950   24,497 
   
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
   27,177   21,963   72,200   64,263 
Costs and operating expenses:
                 
Cost of franchise revenue (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $12 for the nine months ended September 30, 2021 and 2020, respectively)
   1,486   1,997   4,162   6,591 
Cost of equipment and merchandise (Related party: $1,561 and $355 for the three months ended September 30, 2021 and 2020, respectively, and $3,678 and $1,098 for the nine months ended September 30, 2021 and 2020, respectively)
   5,752   5,247   12,672   14,410 
Selling, general and administrative expenses
   110,492   10,100   145,882   31,724 
   
 
 
  
 
 
  
 
 
  
 
 
 
Total costs and operating expenses
   117,730   17,344   162,716   52,725 
   
 
 
  
 
 
  
 
 
  
 
 
 
(Loss) income from operations
   (90,553)   4,619   (90,516)   11,538 
Loss on derivative liabilities
   —     —     48,603   —   
Interest expense, net
   41,897   534   59,165   1,333 
Other income, net
   (2,035)   (238)   (1,415)   (815) 
   
 
 
  
 
 
  
 
 
  
 
 
 
(Loss) income before income taxes
   (130,415)   4,323   (196,869)   11,020 
(Benefit) provision for income taxes
   (222)   1,974   693   3,536 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net (loss) income
  $(130,193)  $2,349  $(197,562)  $7,484 
   
 
 
  
 
 
  
 
 
  
 
 
 
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49

Comparison of the three and nine months ended September 30,March 31, 2022 and 2021 and 2020

Revenue

Franchise Revenue

Three Months Ended
March 31,		Change
  
Three Months Ended

September 30,
   
Change
 20222021 $%
  
2021
   
2020
   
$
   
%
 
  
(dollars in thousands)
         (dollars in thousands)
Franchise
            Franchise
USA
  $11,117   $6,245   $4,872    78% USA$12,401 $7,015 $5,386 77 %
Australia
   4,330    6,145    (1,815)    (30)% Australia3,448 3,289 159 5 %
ROW
   3,066    1,677    1,389    83% ROW4,011 2,852 1,159 41 %
  
 
   
 
   
 
   
 
 
Total franchise revenue
  $18,513   $14,067   $4,446    32% Total franchise revenue$19,860 $13,156 $6,704 51 %
  
 
   
 
   
 
   
 
 
   
Nine Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
   
(dollars in thousands)
         
Franchise
                    
USA
  $29,873   $21,954   $7,919    36% 
Australia
   12,039    10,985    1,054    10% 
ROW
   10,338    6,827    3,511    51% 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total franchise revenue
  $52,250   $39,766   $12,484    31% 
   
 
 
   
 
 
   
 
 
   
 
 
 

  
Three months ended

September 30, 2021
   
Three months ended

September 30, 2020
 Three Months Ended March 31, 2022Three Months Ended March 31, 2021
  
U.S.
   
Australia
   
ROW
   
Total
   
U.S.
   
Australia
   
ROW
   
Total
 U.S.AustraliaROWTotalU.S.AustraliaROWTotal
Total Franchises Sold, beginning of period
   1,379    785    637    2,801    846    667    546    2,059 Total Franchises Sold, beginning of period1,710 803 788 3,301 931 679 634 2,244 
New Franchises Sold, net(a)
   87    15    108    210    68    8    79    155 692 1 13 706 10 (3)(4)3 
Total Franchises Sold, end of period
   1,466    800    745    3,011    914    675    625    2,214 Total Franchises Sold, end of period2,402 804 801 4,007 941 676 630 2,247 
   
Nine months ended

September 30, 2021
   
Nine months ended

September 30, 2020
 
   
U.S.
   
Australia
   
ROW
   
Total
   
U.S.
   
Australia
   
ROW
   
Total
 
Total Franchises Sold, beginning of period
   931    679    634    2,244    814    643    435    1,892 
New Franchises Sold, net
   535    121    111    767    100    32    190    322 
Total Franchises Sold, end of period
   1,466    800    745    3,011    914    675    625    2,214 

Three Months Ended March 31, 2022Three Months Ended March 31, 2021
U.S.AustraliaROWTotalU.S.AustraliaROWTotal
Total Studios, beginning of period654 653 442 1,749 486 616 335 1,437 
Initial Studio Openings, net(a)
73 10 34 117 32 1 17 50 
Total Studios, end of period727 663 476 1,866 518 617 352 1,487 

The $4.9$5.4 million, or 78%77%, increase in franchise revenue in the United States for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020 was primarily attributable to the increase in establishment and other-franchise-related fees. The increase in fees was reflective of increased number of franchises sold in the United States. The number of total franchises sold increased by 552 or 60%, from 914 during the three months ended September 30, 2020 to 1,466 during the three months ended September 30, 2021. Total studios opened in this region increased by 135 or 30%, from 451 studios opening during the three months ended September 30, 2020 to 586 during the three months ended September 30, 2021. As a result of the increase in studio openings, marketing revenue increased approximately by $0.3 million during this period.
The $7.9 million, or 36%, increase in franchise revenue in the United States for the nine months ended September 30,March 31, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in the number of franchises soldfranchise sales as well as an increase in studio openings in the United States driven by the increase in the number of franchise sales as well as the increase in studios openings in the United States. The amount of total franchises soldFranchises Sold in the United States increased by 5521,461, or 60%155%, from 914 during the nine months ended September 30, 2020941 Franchises Sold as of March 31, 2021 to 1,466 during the nine months ended September 30, 2021.2,402 Franchises Sold as of March 31, 2022. In addition, the number of new studio openingsstudios open in the United States increased by 135209, or 30%40%, from 451 new studio openings during the nine months September 30, 2020518 studios as of March 31, 2021 to 586 during the nine months ended September 30, 2021.
727 studios as of March 31, 2022.

The $1.8$0.2 million, or 30%5%, decreaseincrease in franchise revenue in Australia for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020March 31, 2021 was primarily attributable to the impact of COVID credits provided to franchisees within Australia, thus reducing the monthly franchise revenue. The decrease in franchise revenue was slightly offset by the increase in number of total franchises sold. The number of total franchises sold in Australia increased by 125 or 19%, from 675 during the three months ended September 30, 2020 to 800 for the three months ended September 30, 2021. The total number of studios opened in this region increased by 29 or 5%, from 604 during the three months ended September 30, 2020 to 633 during the three months ended September 30, 2021.
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The $1.1 million, or 10%, increase in
franchise revenue in Australia for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in the number of total franchises sold as well as an increasefranchise sales in studio openings in Australia. Australia, partially offset by the impact of COVID restrictions impacting the three months ended March 31, 2022. The total amount of total franchises soldFranchises Sold in Australia increased by 125128, or 19%, from 675 during the nine months ended September 30, 2020676 Franchises Sold as of March 31, 2021 to 800 during the nine months ended September 30, 2021.804 Franchises Sold as of March 31, 2022. In addition, the number of new studio openings studios open in Australia increased by 2946, or 5%7%, from 604 new studio openings during the nine months ended September 30, 2020617 studios as of March 31, 2021 to 633 during the nine months ended September 30, 2021.663 studios as of March 31, 2022.

The $1.4$1.2 million, or 83%41%, increase in franchise revenue in ROW for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020March 31, 2021 was primarily attributable to the increase in the number
of total franchises soldfranchise sales as well as an increase in studio openings in ROW. The total number of total franchises soldFranchises Sold in ROW increased by 120171, or 19%27%, from 625 during the three months ended September 30, 2020630 Franchises Sold as of March 31, 2021 to 745 during the three months ended September 30, 2021. The total number801 Franchises Sold as of new studio openings in this region increased by 78 or 24%, from 321 new studio openings during the three months ended September 30, 2020 to 399 during the three months ended September 30, 2021.
The $3.5 million, or 51%, increase in franchise revenue in ROW for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the
increase in total franchises sold as well as an increase in studios openings in ROW. The number of total franchises sold in this region increased by 120 or 19%, from 625 during the nine months ended September 30, 2020 to 745 during the nine months ended September 30, 2021.March 31, 2022. In addition, the number of new studios openingopen in ROW increased by 78124, or 24%35%, from 321 new studio openings during the nine months ended September 30, 2020352 studios as of March 31, 2021 to 399 during the nine months ended September 30, 2021.476 studios as of March 31, 2022.
50

Equipment and Merchandise Revenue

Three Months Ended
March 31,		Change
  
Three Months Ended

September 30,
   
Change
 20222021 $%
  
2021
   
2020
   
$
   
%
 
  
(dollars in thousands)
         (dollars in thousands)
Equipment and merchandise
            Equipment and merchandise
USA
  $4,162   $3,583   $579    16% USA$22,848 $2,481 $20,367 821 %
Australia
   2,234    2,707    (473)    (17)% Australia2,130 839 1,291 154 %
ROW
   2,268    1,606    662    41% ROW5,170 1,715 3,455 201 %
  
 
   
 
   
 
   
 
 
Total equipment and merchandise revenue
  $8,664   $7,896   $768    10% Total equipment and merchandise revenue$30,148 $5,035 $25,113 499 %
  
 
   
 
   
 
   
 
 

   
Nine Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
   
(dollars in thousands)
         
Equipment and merchandise
                    
USA
  $11,166   $11,045   $121    1% 
Australia
   3,762    5,185    (1,423)    (27)% 
ROW
   5,022    8,267    (3,245)    (39)% 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total equipment and merchandise revenue
  $19,950   $24,497   $(4,547)    (19)% 
   
 
 
   
 
 
   
 
 
   
 
 
 
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The $0.6$20.4 million, or 16%821%, increase in equipment and merchandise revenue in the United States for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020. The increaseMarch 31, 2021 was primarily attributable to the increase in equipment and merchandise deliveries that was driven by purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment. The total deliveries of equipment and merchandise to 27increased by 151, or 719%, from 21 studios during the three months ended September 30,March 31, 2021 compared to deliveries to 25172 studios during the three months ended September 30, 2020.
March 31, 2022.

The $0.5$1.3 million, or 17%154%, decreaseincrease in equipment and merchandise revenue in Australia for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020March 31, 2021 in Australia was largely attributable to the decreaseincrease in equipment deliveries, including the launch of FS8 and its associated equipment deliveries for the FS8 studios. The total deliveries of equipment as a result ofincreased by 11, or 220%, from 5 studios during the government lockdownthree months ended March 31, 2021 to combat16 studios during the COVID-19 pandemic.
three months ended March 31, 2022.

The $1.4$3.5 million, or 27%, decrease in equipment and merchandise revenue in Australia for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 in Australia was largely attributable to the decrease in deliveries of equipment as a result of the government lockdown to combat the COVID-19 pandemic.
The $0.7 million, or 41%201%, increase in equipment and merchandise revenue for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020March 31, 2021 in ROW was primarily attributable to the increase in
top-up
equipment sold compared to the prior comparative period. The increase is partially offset by the decrease in equipment and merchandise sales, driven bydeliveries, the global supply chain delays.
majority of which related to purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment. The $3.2 million, or 39%, decrease intotal deliveries of equipment and merchandise revenue forincreased by 31, or 148%, from 21 studios during the ninethree months ended September 30,March 31, 2021 compared to 52 studios during the ninethree months ended September 30, 2020 in ROW was primarily attributable to the decrease in equipment and merchandise revenue, driven by the global supply chain delays.
March 31, 2022.

Cost of revenue

Cost of franchise revenue

Three Months Ended
March 31,		Change
  
Three Months Ended

September 30,
 
Change
 20222021 $%
  
2021
 
2020
 
$
   
%
 
  
(dollars in thousands)
       (dollars in thousands)
Franchise
          Franchise
USA
  $1,047  $1,774  $(727)    (41)% USA$1,015 $1,022 $(7)(1)%
Australia
   158   248   (90)    (36)% Australia119 178 (59)(33)%
ROW
   281   (25)   306    1224% ROW97 14 83 593 %
  
 
  
 
  
 
   
 
 
Total cost of franchise revenue
  $1,486  $1,997  $(511)    (26)% Total cost of franchise revenue$1,231 $1,214 $17 1 %
  
 
  
 
  
 
   
 
 
Percentage of franchise revenue
   8%   14%      Percentage of franchise revenue6 %9 %
   
Nine Months Ended

September 30,
  
Change
 
   
2021
  
2020
  
$
   
%
 
   
(dollars in thousands)
        
Franchise
                  
USA
  $3,377  $5,863  $(2,486)    (42)% 
Australia
   430   580   (150)    (26)% 
ROW
   355   148   207    140% 
   
 
 
  
 
 
  
 
 
   
 
 
 
Total cost of franchise revenue
  $4,162  $6,591  $(2,429)    (37)% 
   
 
 
  
 
 
  
 
 
   
 
 
 
Percentage of franchise revenue
   8%   17%          
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51

The $0.7less than $0.1 million, or 41%1%, decrease in cost of franchise revenue in the United States for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 are attributable to the group marketing initiatives, which we reclassified from cost of sales to selling, general, and administrative expenses in 2021.
The $2.5 million, or 42%, decrease in cost of franchise revenue in the United States for the nine months ended September 30, 2021March 31, 2022 as compared to the same period in 20202021 was primarily attributable to the decrease in marketing expenses due to the
COVID-19
pandemic and reflective of the reduction in marketing revenue on hold during the COVID-19 pandemic.

The less than $0.1 million, or 36%33%, decrease in cost of franchise revenue in Australia during the three months ended September 30, 2021March 31, 2022 as compared to the same period in 20202021 was attributable to a decrease in expenses related to the membership marketing programs.
programs due in large part to temporary studio closures as a result of the COVID-19 pandemic.

The $0.1 million, or 593%, increase in cost of franchise revenue in ROW during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to the increase in marketing expense from additional 34 of Franchises Opened in the three months ended March 31, 2022.

Cost of equipment and merchandise
revenue
   
Three Months Ended

September 30,
  
Change
 
   
2021
  
2020
  
$
   
%
 
   
(dollars in thousands)
        
Equipment and merchandise
                  
USA
  $2,239  $1,857  $382    21% 
Australia
   1,992   2,305   (313)    (14)% 
ROW
   1,521   1,085   436    40% 
   
 
 
  
 
 
  
 
 
   
 
 
 
Total equipment and merchandise cost of revenue
  $5,752  $5,247  $505    10% 
   
 
 
  
 
 
  
 
 
   
 
 
 
Percentage of equipment and merchandise revenue
   66%   66%          

Three Months Ended
March 31,		Change
  
Nine Months Ended

September 30,
 
Change
 20222021 $%
  
2021
 
2020
 
$
   
%
 
  
(dollars in thousands)
       (dollars in thousands)
Equipment and merchandise
          Equipment and merchandise
USA
  $6,154  $5,561  $593    11% USA$7,754 $1,478 $6,276 425 %
Australia
   3,313   4,489   (1,176)    (26)% Australia1,733 807 926 115 %
ROW
   3,205   4,360   (1,155)    (26)% ROW1,456 896 560 63 %
  
 
  
 
  
 
   
 
 
Total equipment and merchandise cost of revenue
  $12,672  $14,410  $(1,738)    (12)% 
  
 
  
 
  
 
   
 
 
Total cost of equipment and merchandise revenueTotal cost of equipment and merchandise revenue$10,943 $3,181 $7,762 244 %
Percentage of equipment and merchandise revenue
   64%   59%      Percentage of equipment and merchandise revenue36 %63 %

The $0.4$6.3 million, or 21%425%, increase in cost of equipment and merchandise revenue for the United States for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to the increase in equipment and merchandise deliveries, offset by $2.7 million of rebates that was recorded as a reduction to the cost of equipment delivered to franchisees in the quarter ended March 31, 2022.

The $0.9 million, or 115%, increase in cost of equipment and merchandise for the United StatesAustralia for the three months ended September 30, 2021March 31, 2022 as compared to the same period in 20202021 was primarily attributable to the increase in freight and storage costs due to an increase in equipment and merchandise deliveries, offset by $0.2 million of rebates that was recorded as a reduction to the cost of equipment and merchandise.
delivered to franchisees in the quarter ended March 31, 2022.

The $0.6 million, or 11%, increase in cost of equipment and merchandise in revenue in the United States for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in shipping and freight costs related to the deliveries of equipment and merchandise, which increased nearly 95%, due to the global supply chain issues.
The $1.2 million, or 26%, decrease in cost of equipment and merchandise revenue in Australia for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a decrease in equipment and merchandise costs due to the decrease in franchise openings in 2020 as a result of the pandemic, as well as decrease in sales of apparel and protein supplements.
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The $0.4 million, or 40%63%, increase in cost of equipment and merchandise for ROW for the three months ended September 30, 2021March 31, 2022 as compared to the same period in 2020 is2021 was primarily attributable to an increase in shipping and freight costs related to the deliveries of equipment and merchandise which increased nearly 190%, duedeliveries, offset by $0.3 million of rebates that was recorded as a reduction to global supply chain issues.
The $1.2 million, or 26%, decrease inthe cost of equipment and merchandisedelivered to franchisees in ROW for the nine monthsquarter ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to a decrease in equipment costs, which are due to the decrease in new franchise openings in ROW and decrease in merchandise costs.
March 31, 2022.

Selling, general, and administrative expenses
Three Months Ended
March 31,		Change
20222021$%
(dollars in thousands)
Selling, general and administrative expenses$32,090 $16,828 $15,262 91 %
Percentage of revenue64 %93 %

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Three Months Ended

September 30,
  
Change
 
   
2021
  
2020
  
$
   
%
 
   
(dollars in thousands)
        
Selling, general and administrative expenses
  $110,492  $10,100  $100,392    994% 
Percentage of revenue
   407%   46%          
   
Nine Months Ended

September 30,
  
Change
 
   
2021
  
2020
  
$
   
%
 
   
(dollars in thousands)
        
Selling, general and administrative expenses
  $145,882  $31,724  $114,158    360% 
Percentage of revenue
   202%   49%          
The $100.4$15.3 million, or 994%91%, increase in selling, general, and administrative expenses during the three months ended September 30, 2021March 31, 2022 as compared to the same period in 20202021 was primarily attributable to a $36.9 million increase in stock based compensation granted to certain employees and directors related to the Company’s IPO, a $4.3$5.8 million increase of payroll related to the increase in headcount from 111122 to 144225 due to the continuing expansion of the business, a $1.7$4.0 million increase in bonus payments to certain employees granted at the Company’s IPO, an increase of $2.3 million in marketing expenses due to our ongoing brand awareness campaigns with worldwide celebrities, an increase of $48.9 million in stock awards from existing promotional agreements granted by the Company’s IPO, an increase of $2.4 million in business travel expenses related to site visits due to our continuingfor the Company’s continued brand expansion and increaseeasing of $0.9 million in other expenses related to the day-to-day operations of our business, and a $2.2 million increase in charitable contributions related to the forgiveness of the PPP Loan. In addition, an increase of $0.4 million in bad debt expense from terminated studios affected by the on-going effects of the COVID-19 pandemic, a $0.5 million increase in depreciation and amortization expense mainly related to the amortization of Flywheel intangible.
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The $114.2 million, or 360%, increase in selling, general, and administrative expenses during the nine months ended September 30, 2021 asCOVID restrictions globally compared to the same period in 2020 was primarily attributable toprior year quarter, a $36.9$3.0 million increase in stock based compensation granted to certain employees and directors related to the Company’s IPO, a $6.6 million increase of payroll related the increase in headcount from 111 to 144 due to the continuing expansion of the business, a $1.9 million increase in bonus payments to certain employees granted at the Company’s IPO, an increase of $7.7 million in marketing expenses due to ongoing brand awareness campaigns with worldwide celebrities an increase of $48.9 million in stock awards from existing promotional agreements granted by the Company’s IPO, $2.2 million from an increase in business travel expenses related to site visits due to our continueand localized brand expansion, $2.5 million in other expenses related to the day-to-day operations of our business,events, a $2.2$2.1 million increase in charitable contributions mainly relatedstock-based compensation issued to brand ambassadors and certain employees and directors as the forgiveness ofCompany’s incentive plan became effective at the PPP Loan,IPO date, and a $1.4 million increase in professional services mainly from accounting and tax firms, a $1.4$1.0 million increase in depreciation and amortization expense mainly related to the amortization of Flywheel intangible and a $0.5 million increase in rent. In addition, an increaseamortization of $2.0 million in bad debt expense from terminated studios affected by the on-going effectsintangible assets associated with our acquisition of the COVID-19 pandemic.
Vive.

Loss on derivative liabilities

   
Three Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
   
(dollars in thousands)
         
Loss on derivative liabilities
  $—     $—     $—        
Three Months Ended
March 31,		Change
20222021$%
(dollars in thousands)
Loss on derivative liabilities, net$— $25,505 $(25,505)(100)%

   
Nine Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
   
(dollars in thousands)
         
Loss on derivative liabilities
  $48,603   $—     $48,603    100% 
On October 6, 2020, we entered into a subordinated convertible debt agreement, or the
Convertible Notes, whereby we issued $100 million of Convertible Notes to certain holders maturing on
September 30, 2025. The Convertible Notes contain embedded derivatives that required bifurcation and recognition as liabilities on the condensed consolidated balance sheet. The liabilities for these embedded
derivatives werewas measured at fair value as of October 6, 2020, and the subsequent change in the
estimated fair value was recorded as a loss during the three and nine months ended September 30, 2020.
March 31, 2021.

In conjunction withThe $25.5 million decrease in the loss on derivative liabilities was attributable to the change in the derivative liabilities’ fair value resulting from the Company’s growing equity value and increasing probability of the IPO event from when the Company entered into the subordinated convertible debt agreement in October 2020 to the consummation of the IPO on July 15, 2021,2021. The embedded derivatives were extinguished in connection with the outstanding Convertible Notesrepayment of $106.3 million of principal and interest were converted into 14,847,066 shares of common stock at a conversion price of $16.00. There was no loss on derivative liabilities as a result from the conversion.
debt upon the IPO.

Interest expense, net

   
Three Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
   
(dollars in thousands)
         
Interest expense, net
  $41,897   $534   $41,363    7746% 
Three Months Ended
March 31,		Change
20222021$%
(dollars in thousands)
Interest expense, net$126 $8,415 $(8,289)(99)%

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Nine Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
                 
   
(dollars in thousands)
     
Interest expense, net
  $59,165   $1,333   $57,832    4338% 
The increase$8.3 million, or approximately 99%, decrease in interest expense, including the amortization of debt discounts, net for the three and nine months ended September 30, 2021March 31, 2022 compared to the same periodsperiod in 20202021 was primarily attributable to a reduction of outstanding debt obligations during the write off of debt discounts and penalties as a result of the earlythree months ended March 31, 2022 due to repayments of indebtedness on our Term Facility and conversion of our outstanding Convertible Notes in connection with the IPO. The following table reflects the write off of debt discounts and penalties incurredIPO during the three and nine months ended September 30, 2021 that are included in the interest expense (in thousands):
July 2021.
   
Debt Discount
   
Penalty
   
Total
 
Subordinated Convertible Debt
  $23,740   $—     $23,740 
Subordinated Second Lien Term Loan
   4,463    13,034    17,497 
First Lien Loan
   241    —      241 
   
 
 
   
 
 
   
 
 
 
   $28,444   $13,034   $41,478 
   
 
 
   
 
 
   
 
 
 

Other income, net53

   
Three Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
                 
   
(dollars in thousands)
         
Other income, net
  $(2,035)   $(238)   $1,797    755% 
Other expense, net
Three Months Ended
March 31,		Change
20222021$%
(dollars in thousands)
Other expense, net$570 $291 $279 96 %

   
Nine Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
                 
   
(dollars in thousands)
         
Other income, net
  $(1,415)   $(815)   $600    74% 
The $1.8$0.3 million, and $0.6 millionor 96%, increase in other income,expense, net represents realized and unrealized gains
and losses on foreign currency transactions for the three and nine months ended September 30, 2021, respectively.transactions. This increase during the three and nine months ended September 30, 2021,March 31, 2022, was mostly due to the volatility of foreign exchange rates during the three and nine months ended September 30, 2021 under the
COVID-19
pandemic compared to theMarch 31, 2022 as a result of strengthening of the U.S. dollar relative to the Australian dollar during the same period in prior year.2021.

Provision (benefit) for income taxes

   
Three Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
                 
   
(dollars in thousands)
         
(Benefit) provision for income taxes
  $(222)   $1,974   $(2,196)    (111)% 
Three Months Ended
March 31,		Change
20222021$%
(dollars in thousands)
Provision (benefit) for income taxes$2,536 $(398)$2,934 737 %
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Nine Months Ended

September 30,
   
Change
 
   
2021
   
2020
   
$
   
%
 
                 
   
(dollars in thousands)
         
(Benefit) provision for income taxes
  $693   $3,536   $(2,843)    (80)% 

The decrease$2.9 million, or 737%, increase in the provision (benefit) for income taxes was primarily driven by an increase in pretax losspre-tax income reported by the US and Australia segments in the three months ended September 30, 2021.March 31, 2022. The declineincrease in lossincome before income taxes was most significantly driven by the operational challenges experienced due toincrease in equipment and merchandise revenue driven by the
COVID-19
pandemic.
increase in Total Franchises Sold during the prior twelve months.

Liquidity and Capital Resources

Overview

As of September 30, 2021,March 31, 2022, we held $52.6$14.0 million of cash and cash equivalents, of which $4.8$12.2 million was held by our foreign subsidiaries outside of the United States. In the event that we repatriate these funds from our foreign subsidiaries, we would need to accrue and pay applicable United Sates taxes and withholding taxes payable to various countries. As of September 30, 2021,March 31, 2022, our intent was to permanently reinvest these funds outside of the United States. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately $38.7$43.9 million of undistributed earnings from these foreign subsidiaries as those earnings continue to be permanently reinvested. It is not practicable to estimate income tax liabilities that might be incurred if such earnings were remitted to the United States due to the complexity of the underlying calculation. Although we have no intention to repatriate the undistributed earnings of our foreign subsidiaries for the foreseeable future, if such funds are needed for operations in the United States, to the extent applicable and material, we will revise future filings to address the potential tax implications. Our primary cash needs are for the funding of
day-to-day
operations, financing capital investments and to address our working capital needs.

We believe that our operating cash flowflows and cash on hand will be adequate to meet our operating, investing and financing needs for the next 12 months. If necessary, we may borrow funds under the Revolving Facilityfrom our $90 million five-year senior secured revolving facility (“Facility”) to finance our liquidity requirements, subject to customary borrowing conditions. There was no outstandingThe available balance of the Revolving Facility as of September 30, 2021.March 31, 2022 was $56.9 million. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained
54

through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in our prospectusthis Form 10-Q under the heading “Risk Factors.” In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be our ability to globally expand our franchisee footprint.

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Cash flow

Three Months Ended
March 31,
  
Nine Months Ended September 30,
 20222021
  
2021
   
2020
 
  
(dollars in thousands)
 (dollars in thousands)
Net cash used in operating activities
  $(34,758)   $(9,297) Net cash used in operating activities$(44,990)$(201)
Net cash used in investing activities
   (27,370)    (905) Net cash used in investing activities(3,413)(179)
Net cash provided by financing activities
   85,576   7,957
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities20,609 (1,313)
Effect of exchange rate changes on cash and cash equivalents
   203   (171) Effect of exchange rate changes on cash and cash equivalents(218)(384)
  
 
   
 
 
Net decrease in cash and cash equivalents
  $23,651  $(2,416) Net decrease in cash and cash equivalents$(28,012)$(2,077)
  
 
   
 
 

Net cash used in operating activities

In all periods presented, our largest source of cash inflow stemmed from our collections of establishment and World Pack fees from our franchisees. The most significant cash outflow is our equipment/merchandise costs and employee costs. Historically, we have produced positive net cash flow. We have seen a decrease in operating cash flows due to the pandemic and studio shutdowns during
COVID-19.
For the nine months ended September 30, 2021, netNet cash used in operating activities amountedduring the three months ended March 31, 2022, was $45.0 million, which resulted from a net income of $2.5 million, adjusted for non-cash charges of $5.7 million and net cash outflow of $53.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $2.1 million for stock-based compensation expense and $1.5 million provision for bad debt. The net cash outflow from changes in operating assets and liabilities were primarily the result of a $20.1 million increase in prepaid expenses, which increased due to $34.8our deposits placed on equipment and merchandise, a $16.4 million comparedincrease in accounts receivable, which increased primarily due to netorders on equipment and merchandise, a $12.5 million increase in other current assets and an $8.1 million increase in other assets due to an increase in unbilled receivables, a $4.2 million increase in inventory, partially offset by a $3.5 million increase in deferred revenue, and a $2.0 million increase in accounts payable and accrued expenses.

Net cash used in operating activities of $9.3 million for the nine months ended September 30, 2020. This $25.5 million decrease in net cash used in operating activities was primarily attributable to a $205.0 million fluctuation in net loss being offset by a net decrease of $194.4 million in
non-cash
adjustments to net income including a no loss on derivative liabilities, which was included induring the three months ended September 30,March 31, 2021, was $0.2 million, which resulted from a net loss of $36.8 million, adjusted for non-cash charges of $36.0 million and notnet cash inflow of $0.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $25.5 million for loss on derivative liability, $6.3 million of paid-in-kind interest, and $1.7 million provision for bad debt. The net cash outflow from changes in operating assets and liabilities were primarily the same periodresult of a $6.9 million increase in the prior year. This change was further impactedaccounts payable and accrued expenses, a $3.7 million increase in deferred revenue, a $1.3 million increase in other liabilities, partially offset by a net $14.8$5.3 million decreaseincrease in working capital primarily due to defer payment terms provided to franchiseesaccounts receivable, a $3.5 million increase in inventory, and investmentsa $1.6 million increase in online development deals during the nine months ended September 30, 2021 compared to the same period in the prior year.other assets.

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Net cash used in investing activities

For the nine months ended September 30, 2021, ourNet cash used in investing activities increased by $26.5during the three months ended March 31, 2022, of $3.4 million compared to theresulted primarily from purchases of property and equipment of $2.1 million and capitalization of internal-use software development costs, trademarks, and patents of $1.3 million.

Net cash used in investing activities forduring the ninethree months ended September 30, 2020, mainly attributable to the asset acquisitionMarch 31, 2021 of Flywheel CRM$0.2 million resulted primarily from purchases of property and equipment of $0.1 million and capitalization of internal-use software development costs, trademarks, and Flywheel brand names, which in total amounted to $25patents of $0.1 million.

Net cash used inprovided by (used in) financing activities

Net cash provided by financing activities
For of $20.6 million during the ninethree months ended September 30, 2021,March 31, 2022, was primarily due to borrowings under our Revolving Facility of $31.6 million during the three months ended March 31, 2022 to provide cash to fund purchases and deposits placed on equipment. The net change in cash provided by financing activities was $85.6partially offset by $11.0 million comparedof taxes paid related to net share settlement of equity awards.

Net cash provided byused in financing activities of $8.0$1.3 million during the ninethree months ended September 30, 2020, a decrease of $77.6 million. This increaseMarch 31, 2021 was mainly attributabledue to the proceeds of $277.8 million from issuance of common stock, net of offering costs, during the IPO lessrequired repayments of debt facilities of $188.6 million in connection to the IPO, $2.6 million of repayment on the Term Facility prior to the settlementunder our term facility.

Contractual Obligations and $1.0 million of payments on debt issuance costs in connection to the modification of the Revolving Facility during the three and nine months ended September 30, 2021.
Commitments

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Contractual obligations and commitments
Contractual obligations and commitments as of September 30, 2021March 31, 2022, consisted of $16.3$24.1 million in operating leases, all of which is due within the next four years and thereafter. Please see “Note 7 - Debt” and “Note 12—Note 8—Debt and Note 13—Commitments and contingencies”contingencies to the interim unaudited condensed consolidated financial statements for discussion of the contractual obligations under the Term Facility and Revolving Facility related to our debt and operating leases.
leases, respectively.

Off-Balance
Sheet Arrangements

As of September 30, 2021,March 31, 2022, our
off-balance
sheet arrangements consisted of operatingguaranties provided by the Company for leases for office space. space by unconsolidated organizations. See “Note 12—Note 13—Commitments and Contingencies”contingencies to the interim unaudited condensed consolidated financial statements included elsewhere in this filing for more information regarding these operating leases.guaranties.

Critical Accounting Policies and Use of Estimates

Our condensed consolidated financial statements included elsewhere in this filing have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenuesrevenue, costs and expenses. We baseexpenses, and related disclosures. Such estimates include, but are not limited to, allowance for doubtful accounts, deferred contract acquisition costs, the capitalization and estimated useful life of internal-use software, the assessment of recoverability of intangible assets and their useful lives, the valuation and recognition of stock-based compensation expense, and accounting for income taxes. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. ActualOur actual results maycould differ materially from these estimates under different assumptions or conditions. While

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
56

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, are more fully described insee the notes to our condensed consolidated financial statements included elsewhere in this filing,filing.

Revenue Recognition

Our contracts with customers are typically comprised of multiple performance obligations, including exclusive franchise rights to access our intellectual property to operate an F45 Training-branded fitness facility in a specific territory (franchise agreements), a material right related to discounted renewals of the franchise agreements, and equipment and merchandise.

Franchise revenue

Our primary performance obligation under the franchise agreement is granting certain exclusive rights to access the Company’s intellectual property to operate an F45 Training-branded fitness facility in a defined territory. This performance obligation is a right to access our intellectual property, which is satisfied ratably over the term of the franchise agreement. Renewal fees are generally recognized over the renewal term for the respective agreement from the start of the renewal period. Transfer fees are recognized over the remaining term of the franchise agreement beginning at the time of transfer.

Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement. Earlier franchise agreements had an initial term of three years while more recent agreements have an initial term of five years. With our approval, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is paid. Our arrangements have no financing elements as there is no difference between the promised consideration and the cash selling price. Additionally, we believehave assessed that a significant amount of the following accounting policiescosts incurred under the contract to perform are incurred up-front.

Franchise revenue consists primarily of upfront establishment fees, monthly franchise fees, and other franchise-related fees. The upfront establishment fee is payable by the franchisee upon signing a new franchise agreement and monthly franchise and related fees are payable throughout the term of the franchise license. Historically, franchisees have paid a fixed monthly franchise fee. For new franchisees, the franchise fee is based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue.

Discounted franchise agreement renewal fees

Our franchise agreements may include discounted renewal options allowing franchisees to renew at no cost or at a reduction of the initial upfront establishment fee. The resulting discount in fees at renewal provides a material right to franchisees. Our obligation to provide future discounted renewals to franchisees are accounted for as separate performance obligations. The value of these material rights related to the future discount was determined by reference to the estimated franchise agreement term, which has been estimated to be 10 years, and related estimated transaction price. The estimated transaction price allocated to the franchise agreements, including the upfront establishment fee, is recognized as revenue over the estimated contract term of 10 years, which gives recognition to the renewal option containing a material right. At the end of the initial contract term, any unrecognized transaction price would be recognized during the renewal term, if exercised, or when the renewal option expires, if unexercised.

Equipment and merchandise revenue

We require our franchisees to purchase fitness and technology equipment directly from us and payment is required to be made prior to the placement of the franchisees’ orders. Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the franchisee, which is when the franchisee obtains physical possession of the goods, legal title has transferred, and the franchisee has all risks and rewards of ownership. The franchisees are charged for all freight costs incurred for the delivery of equipment.
57


Allocation of transaction price

Our contracts include multiple performance obligations—typically the franchise license, equipment and material rights for discounted renewal fees. Judgment is required to determine the standalone selling price for these performance obligations. We do not sell the franchise license or World Pack equipment on a stand-alone basis (our contracts with customers almost always include both performance obligations), as such the standalone selling price of the performance obligations are not directly observable on a stand-alone basis. Accordingly, we estimate the standalone selling prices using available information including the prices charged for each performance obligation within its contracts with customers in the relevant geographies and market conditions. Individual standalone selling prices are estimated for each geographic location, primarily the United States, Australia, and ROW, due to the unique market conditions of those performance obligations in each region.

Business combination

We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill based on the expected benefit from the business combination. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Valuation methods include, but not limited to, multi-period excess earnings for customer contracts, relief from royalty methods for brand names, and replacement cost for software. Such methods are widely-accepted valuation techniques, which inherently use critical assumptions such as future revenue growth rates, royalty rates, and discount rates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Stock-based compensation

Our stock-based compensation plan, which became effective at the IPO date, includes equity incentive compensation plans under which three types of share-based compensation plans are granted to our employees, directors, and consultants, including stock options (“SOs”), restricted stock units (“RSUs”), and restricted stock awards (“RSAs”). Stock-based compensation cost is measured at the grant date, based on the fair value of the award. We estimate the fair value of stock-based payment awards subject to both performance and market conditions on the date of grant using a Monte Carlo simulation model. Stock-based compensation cost for awards whose vesting is subject to the occurrence of both a performance condition and market condition is recognized immediately at the time the performance condition is achieved. Liability-classified awards are accounted at fair value at the grant date and remeasured at each reporting period until the awards are settled. In determining the valuation, we have utilized the valuation report prepared by third-party valuation specialists, as well as any significant internal and external events occurring subsequent to the report that may impact the fair value of the awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimates used in our valuation of stock-based compensation are highly complex and subjective. The valuation and estimates are critical to our business operations and understanding of our financial results.
common stock value are no longer necessary as we will rely on market price to determine the market value of our shares going forward from the IPO.

Our critical accounting policies are describedIncome taxes

We account for income taxes under the heading “Management’s Discussionliability method. Under this method, deferred tax assets and Analysisliabilities are determined based on differences between financial reporting and tax reporting bases of Financial Conditionassets and Resultsliabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of Operations—Critical Accounting Policiesdeferred tax assets is dependent upon future earnings, the timing and Useamount of Estimates”which are uncertain.
58


We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits, which to date have not been material, are recognized within (benefit) provision for income taxes.

Contract assets

Our contract assets primarily consist of unbilled revenue where we are utilizing our costs incurred
as the measure of progress of satisfying our performance obligation. When the contract price is
invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. The unbilled receivable represents the amount expected to be billed and collected for services performed through period-end in accordance with contract terms.

Deferred costs

Deferred costs consist of incremental costs to obtain (e.g., commissions) and fulfill (e.g., payroll costs) a contract with a franchisee. Both the Prospectusincremental costs to obtain and fulfill a contract with a franchisee are capitalized and amortized on a straight-line basis over the notesexpected period if we expect to the audited consolidated financial statements appearing in the Prospectus.recover those costs. As of March 31, 2022 and December 31, 2021, we had $14.5 million and $13.8 million of deferred costs, respectively, to obtain and fulfill contracts with franchisees. During the three and nine months ended September 30,March 31, 2022 and 2021, therewe recognized $0.6 million and $0.4 million in amortization of these deferred costs, respectively.
Impairment of long-lived assets, including intangible assets

We assess potential impairments to our long-lived assets, which include property and equipment,
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. 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. There were no material changesimpairment charges recorded on long-lived assets during the three months ended March 31, 2022 and 2021.

We evaluate our indefinite-lived intangible asset (trademark) to determine whether current events and circumstances continue to support an indefinite useful life. In addition, our indefinite-lived
intangible asset is tested for impairment annually. The indefinite-lived intangible asset impairment test consists of a comparison of the fair value of each asset with its carrying value, with any excess of
carrying value over fair value being recognized as an impairment loss. We are also permitted to make a qualitative assessment of whether it is more likely than not an indefinite-lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If, based on our qualitative assessment, it is more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment may be required.

We perform our annual impairment test for our indefinite-lived intangible asset during the fourth quarter of the calendar year. We also test for impairment whenever events or circumstances indicate that the fair value of such indefinite-lived intangible asset has been impaired. No impairment of our indefinite-lived intangible asset was recorded during the three months ended March 31, 2022 and 2021.

59

Internal-use software

We capitalize certain development costs incurred in connection with our internal-use software and
website. These capitalized costs are primarily related to our critical accounting policies from those discussedsoftware tools that are hosted by us and accessed by our customers on a subscription basis. Costs incurred in our Prospectus.
the preliminary stages of
Stock-based compensation
development are expensed as incurred. Once an application has reached the development stage,
internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial
See “Note 14—Stock-based compensation”testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the consolidated financial statements included elsewhereexpenditures will result in this filing for discussionsadditional features and functionality. Maintenance costs are expensed as incurred. Internal use software is amortized on the stock-based compensation.
a straight-line basis over its estimated useful life,
generally three years.

Recent accounting pronouncements
Accounting Pronouncements

See “NoteNote 2—Summary of significant accounting policies”policies to the condensed consolidated financial statements included elsewhere in this filing for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statementstatements of financial position included in this filing.
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Table of Contents
Jumpstart Our Business Startups Act of 2012

We have chosen to apply the provision of the JOBS Act that permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised
accounting standards applicable to public companies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk

As of September 30, 2021,March 31, 2022, we had cash and cash equivalents of $52.6$14.0 million deposited with major financial institutions, which consisted of bank deposits. Due to the short-term nature of these
instruments, our exposure to interest rate risk is limited to changes in our bank interest rates for which an immediate one percent change would not have had a material effect on our financial condition or operating results.

Foreign exchange risk

We report our results in U.S. dollars, which is our reporting currency. The operations of Australia
and ROW that are denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency regulations. The majority of Australia’s operations, income, revenues, expenses and cash flows are denominated in Australian dollars, which we translate to U.S. dollars for financial reporting purposes. ROW revenues and expenses in their respective local currencies are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates.

During the threethree months ended September 30, 2021,March 31, 2022, income from operations would have decreased or increased approximately $0.1$0.4 million if all foreign currencies uniformly weakened or strengthened 10%
relative to the U.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may move in uniform or
different directions and in different magnitudes.
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Item 4. Controls and Procedures

Evaluation of Disclosure and Procedures

We maintainThe Company’s disclosure controls and procedures (as defined in Rule
13a-15(e)
and
15d-15(e)
of the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed by the Company in our reports that we filefiled or submitsubmitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periodperiods specified in the SEC’s rules and forms,forms. The Company’s disclosure controls and thatprocedures are also designed to ensure such information is accumulated and communicated to management, including the officers who certify the Company’sprincipal executive and principal financial reports and to other members of senior management and the Board of Directorsofficers, as appropriate to allow to allow for timely decisions regarding disclosure.required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.

57
As previously described in the Company’s Annual Report on Form 10-K dated March 23, 2022, for the year ended December 31, 2021, management had identified a material weakness in our internal controls over financial reporting related to the financial close process. Specifically, management noted that the Company had identified control deficiencies within the financial close processes as the Company has not properly designed or maintained effective controls over our financial closing and reporting process to record, review and monitor compliance with generally accepted accounting principles for transactions on a timely basis. This includes an inadequate level of precision in management’s reviews of accounting documentation and journal entries, including a lack of evidence to support that a review had been performed.

TableThe Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Quarterly Report present fairly, in all material respects, the consolidated financial positions, results of Contentsoperations and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

As required by Rule
13a-15(b)
Rule13a-15(b) of the Exchange Act, we havethe Company has evaluated, under the supervision and with the participation of senior management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based upon our evaluation, certainour principal executive officer and principal financial officer concluded that as of March 31, 2022, our disclosure controls and procedures were not effective as of March 31, 2022, due to the material weaknesses were identified in our internal control over financial reporting indescribed above.

Remediation Plan and Status

Based on deficiencies identified above, the course of preparing the financial statements included in our prospectus filed in July 2021.
Material Weakness in Internal Control Over Financial Reporting
The material weaknesses related to a failure to properly staffCompany has identified and design our financial closing and reporting team andimplemented additional processes, a lack of segregation of duties in certain key financial reporting processes and a lack of formal documentation of policies and internal controls being followed by us, including, but not limited to, controls involving risk assessment procedures tools to prevent a cybersecurity breach and controls designedas noted below to prevent or detect fraud. For more information, see “Risk Factors—We have identified certain material weaknesses inimprove the effectiveness of our internal control over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and procedures in this area. The Company initiated and implemented the following corrective actions:

•developed, formalized and implemented additional management review controls across the organization in order to add more comprehensive levels of review and approval for significant transactions;

•enhanced and refined our quarterly and annual financial analysis and procedures to allow for more timely and substantive review of financial results before the filing of the quarterly reports of Form 10-Q and Annual Report on Form 10-K;

•commenced the implementation of certain modules within our accounting system to automate and provide better tracking and more timely reporting of certain processes; and

61

•retained an outside consultant to assist the Company in refining and testing the internal controlcontrols over financial reporting our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired”that are in our Final Prospectus, dated July 14, 2021, filed in connection with our IPO.
Remediation Measures
To address the material weakness described above,place at the Company, continues to takeincluding within the following steps including:
financial close process.

adopt formal internal control processes and documentation related to controls that address the elements of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Framework;
hired additional accounting personnel to implement more robust internal controls and enhanced financial reporting;
maintain sufficient accounting personnel so that journal entries and account reconciliations are reviewed by someone other than the preparer, including retaining evidence of the reviews performed by management;
implemented a more robust enterprise resource planning, or ERP, system to assist with the monthly close process, segregation of duties and the timely review and recording of financial transactions; and
restrict access to our financial systems to appropriate personnel and implementing segregation of duties within our finance and accounting processes.
We believeThe Company believes the actions described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. However, the steps taken to address the material weakness have not operated for a sufficient amount of time to conclude that the material weakness has been remediated. WeThe Company will continue to monitor the effectiveness of these controls and will make further changes management determines appropriate.

Changes in Internal Control over Financial Reporting

ThereOther than those actions described above, there have been no changes in our internal control over financial reporting (as defined in Rule
13a-15(f)
Rule13a-15(f) and
15d-15(f)
of the Exchange Act) that occurred during the quarter ended September 30, 2021March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Table of ContentsPart II. Other Information
PART II—OTHER INFORMATION

Item 1. Legal Proceedings.
Proceedings

We are currently,See Part I, “Financial Information – Note 13 – Commitments and from time to time may become, involved in legal or regulatory proceedings arising in the ordinary course of our business, including personal injury claims, employment disputes and commercial contract disputes. Although theContingencies – Litigation.” The outcome of these and other claims cannot be predicted with certainty and exceptlitigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for those matters discussed below, we are not currently a party to any litigation or regulatory proceeding that would reasonably be expected to have a material adverse effect on our business, results of operations,amounts above management’s expectations, the Company’s financial condition or cash flows.
and operating results for that reporting period could be materially adversely affected.
We have received demand letters from a number of performance rights organizations in the United States and Australia with respect to our and our franchisees’ use of music in studios. On July 1, 2019, we received a letter from Universal Music Group, or UMG alleging copyright infringement and licensing violations in connection with our distribution of music to our franchisees. We have entered into an ongoing tolling agreement with UMG and are having ongoing discussions regarding resolution of the matter. In addition, we previously received demand letters from APRA AMCOS and PPCA, and entered into licensing arrangements with these rights holders. In response to the allegations, we have contracted with Soundtrack Your Brand, a streaming service for businesses, which provides a global database of licensed music that is made available directly to our franchisees. We believe our relationship with Soundtrack Your Brand and the services provided by Soundtrack Your Brand will help to mitigate the risk of future copyright infringement allegations regarding use of music in our studios and during our classes.

Item 1A. Risk Factors.Factors

There have been no material changes to our risk factors from those disclosed under the risk factors disclosedheading “Risk Factors” in Part I, Item 1A of our Final Prospectus dated July 14, 2021 Annual Report, filed in connection with our initial public offering.the SEC on March 23, 2022. The risks and uncertainties described in our Final Prospectus, in addition to the other information set forth in this Quarterly2021 Annual Report on Form
10-Q,
are not the only risks facingones we face. Additional risks and uncertainties not currentlypresently known to us or that we currently deem to be immaterial may also may materially adversely affect our business, financial condition and/or operating results.results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Proceeds

Use of Proceeds

In connection with our initial public offering, we filed a Registration Statement on Form
S-1
(File
(File No. 333-257193)
on June 21, 2021. The registration statement, as amended, registered up to 19,375,000 shares of our common stock to be issued and sold by us and up to 3,984,375 shares of common stock to be issued and sold by MWIG LLC, one of our stockholders. The SEC declared the registration statement effective on July 14, 2021. The offering commenced immediately thereafter. In the initial public offering, we sold 19,057,889 shares of our common stock (including 307,889 shares that were sold on August 17, 2021 to the underwriters pursuant to exercise of their overallotmentover-allotment option) and MWIG LLC sold 2,794,055 shares of our common stock (including 1,231,555 shares that were sold on August 17, 2021 to the underwriters pursuant to the exercise of their overallotmentover-allotment option) at a public offering price of $16.00 per share, resulting in aggregate gross proceeds to us of approximately $304.9 million and aggregate gross proceeds to MWIG LLC of approximately $44.7 million.

The net offering proceeds received by us after deducting total estimated expenses were $277.8 million. Our estimated expenses incurred of $23.5 million consisted of $21 millionThere has been no material change in underwriting discounts, fees and commissions and $2.5 million in other offering expenses. No payments for such expenses were made directly or indirectly to any of our officers, directors or their associates, to any persons owning 10% or more of any class of our equity securities or to any of our affiliates. We did not receive any proceeds from the sale of shares of our common stock by MWIG LLC. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC served as the representativesexpected use of the underwriters.
We used (i) approximately $188.6 million to repay indebtedness, including repayment of our First Lien Term Facility, Revolving Facility, Subordinated Term Facility and PPP loan; (ii) approximately $25.0 million to pay the purchase price for our acquisition of certain assets of the Flywheel indoor cycling studio business; (iii) approximately $1.7 million to pay cash bonuses to certain of our employees, including certain of our executive officers, in connection withnet proceeds from our initial public offering; (iv) approximately $5.8 millionoffering as described in our final prospectus, dated June 21, 2021, filed with the SEC pursuant to pay expenses incurred in connection withRule 424(b) relating to our initial public offering; and (v) approximately $2.4 million for working capital and general corporate purposes.
Registration Statement.
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Item 3. Defaults Upon Senior Securities.Securities

62

None.

Item 4. Mine Safety Disclosures.
Disclosures

Not applicable.

Item 5. Other Information.
Information

None.

Item 6. Exhibits.
Exhibits

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

EXHIBIT INDEX

Exhibit
Number
Description
31.1*
10.1*Amended and Restated Credit Agreement, dated as of August 13, 2021, among F45 Training Holdings Inc., the guarantors party, JPMorgan Chase Bank, N.A., as Administrative Agent and Australian Security Trustee, and other lender parties thereto (filed as Exhibit 10.1 to the Company’s Current Report Form 8-K filed with the SEC on August 16, 2021 and incorporated herein by reference)
31.1*
31.2*
31.2*
32.1*
32.1**
32.2*
32.2**

101.INS*
101.INS*Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*
101.SCH*Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 104*Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed herewith.
*
Filed herewith.
**
Exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
**Exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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Table of ContentsSIGNATURES
SIGNATURES63


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

F45 Training Holdings Inc.
Date: November 15, 2021May 16, 2022By:
/s/ Chris E. Payne
Chris E. Payne
Chief Financial Officer
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