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$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 consolidated statements of changes in convertible preferred stock and stockholders’ 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$10.00 per share under the 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.
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. Immediately after the closing of the IPO, all outstanding shares of convertible preferred stock converted into 27,368,102 shares of common stock.
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 be31
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 classifiesclassified the preferred stock in temporary equity in accordance with ASCbecause 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.
480-10-S99
In July 2021, due to the completion of 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. There were no shares of convertible preferred stock outstanding as of March 31, 2022 and December 31, 2021.
Note 13—15—Stock-based compensation
Issuance of restricted stock units
In connection with the transaction with MWIG described in, on March 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.
Note 1—Nature of the business and basis of presentation
The restricted stock unitsRSUs 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 | |||||||||
$1.0 billion | 912,882 | |||||||||
$1.5 billion | 912,882 | |||||||||
$2.0 billion | 912,884 | |||||||||
The Company determined that the RSUs are equity classified awards that 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 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
32
improbable of vesting as the performance condition has 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 RSUs of 2,738,648 fully vested and was recognized as compensation expense in the amount of $43.8 million for the year ended December 31, 2021, which was included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). The Company issued the fully vested RSUs during the three months ended March 31, 2022.
2021 Incentive Plan
The Company’s stock-based compensation plan, which became effective at the IPO date, includes equity incentive compensation plans under which 3 types of share-based compensation plans are granted to the employees, directors and consultants of the Company, which are stock options (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. In accordance with the 2021 Incentive Plan, subject to adjustment for certain dilutive or related events, the maximum aggregate number of shares that may be subject to stock awards and sold under this plan is 5,000,000 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 SOs, RSUs and RSAs are accounted for as they occur.
Stock 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 are subject to only service vesting conditions. As of December 31, 2021, the total number of shares subject to outstanding SOs was 252,737. As of March 31, 2022, the total number of shares subject to outstanding SOs was 673,292.
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) | $ | 4.14 | ||||||
| Expected volatility (2) | 26.3% - 29.20% | |||||||
| Risk-free interest rate (3) | 0.92% - 2.55% | |||||||
| Expected dividend yield (4) | — | |||||||
| Expected term in years | 5.46 - 6.25 | |||||||
33
| (1) | The weighted-average fair value based on stock options granted during the period. | ||||
| (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 scrips. | ||||
| (4) | The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award. | ||||
A summary of option activity under the employee share option plan as of 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 as of January 1, 2022 | 252 | $ | 15.92 | 0 | $ | — | ||||||||
| Granted | 441 | $ | 12.47 | |||||||||||
| Exercised | — | |||||||||||||
| Forfeited or expired | (20) | 15.92 | ||||||||||||
| Outstanding as of March 31, 2022 | 673 | $ | 13.66 | $ | — | |||||||||
| Vested and Exercisable | 63 | $ | 15.92 | $ | — | |||||||||
| Expected to Vest | 610 | $ | 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 the quarter ended March 31, 2022. The aggregate intrinsic value of vested and unvested option as of March 31, 2022 was $0, since the options were out-of-the-money. The aggregate intrinsic value is the difference between the Company’s closing stock price of $10.70 on the last trading day of March 31, 2022 and the exercise price of $16.00 multiplied by the number of in-the-money options. All the options were out-of-the-money. During the three months ended March 31, 2022, no options vested.
As of March 31, 2022, the total unrecognized pre-tax stock-based compensation expense related to non-vested stock options was $2.5 million, which is expected to be recognized over a weighted-average vesting period of 1.86 years. The maximum contractual term of the SO is approximately three years.
Restricted stock units
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 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 granted by the Company are subject to service vesting conditions. RSUs also provide for accelerated vesting in certain circumstances as defined in the plans and related grant agreements. As of March 31, 2022, the total number of shares subject to outstanding RSUs was 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.
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.
A summary of RSU’s activity is as follows:
34
| Shares (in thousands) | Weighted - Average Grant Date Fair Value Per Share | |||||||
| Outstanding as of January 1, 2022 | 997 | $ | 15.74 | |||||
| Granted | 389 | 12.85 | ||||||
| Vested | — | — | ||||||
| Forfeited | — | — | ||||||
| Outstanding as of March 31, 2022 | 1,386 | $ | 14.37 | |||||
No RSUs vested during the three months ended March 31, 2022. During the three months ended March 31, 2022, total recognized pre-tax stock-based compensation expense related to non-vested RSUs was $0, which was included in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). As of March 31, 2022, total unrecognized pre-tax stock-based compensation expense related to non-vested RSUs was $19.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.45 years. The maximum contractual term of RSUs is approximately three years.
Restricted stock awards
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 equity classifiedpaid 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 granted by the Company are subject to service vesting conditions. As of March 31, 2022, the total number of shares subject to outstanding RSAs was 103,748.
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 | |||||||
| Outstanding as of January 1, 2022 | 117 | $ | 14.60 | |||||
| Granted | — | — | ||||||
| Vested | (8) | 15.15 | ||||||
| Forfeited | (5) | 15.15 | ||||||
| Outstanding as of March 31, 2022 | 104 | $ | 15.09 | |||||
The total grant date fair value of RSAs vested during the three months ended March 31, 2022 was $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 $0.5 million, which was included in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). Total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards was $0.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.21 years. The maximum contractual term of the RSAs is less than one year.
Non-employee promotional agreements
35
Liability-classified awards
As described in Note 13—Commitments and contingencies, the Company entered into promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP which included RSUs that contain equity-based payments, which have performance and market conditions.
The Company determined that the RSUs are 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 March 31, 2022, the market conditions have not been met on any of the non-employee promotional 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 performanceIPO 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 is not probable until one of the vesting events has occurs, 0 stock-based compensation expense was recognized during the three and six months ended June 30, 2021 and 2020 related to these awards.
vest. The weighted-average grant date fair value of the restricted stock units was $0.38 as of the grant date. There were 0 restricted stock units that vested or were cancelled or forfeited during the three and six months ended June 30, 2021 and 2020. In addition, there were 0 restricted stock units granted during the three and six months ended June 30, 2021 and 2020. As of June 30, 2021, there was approximately $1.0 million of unrecognized stock-based compensation expense related to the unvested restricted stock units. There was no stock compensation expense recorded forRSAs are recognized ratably over the threerequisite service period in selling, general and six months ended June 30, 2021 and 2020. The Company determined the fair value of the restricted stock units using a Monte-Carlo simulation in a risk-neutral framework considering both an initial public offering and a Company sale scenario with an implied equity value based upon the $10 preferred stock price. The other significant assumptions usedadministrative expenses in the analysis were as follows:
condensed consolidated statements of operations and comprehensive income (loss).Scenario: | IPO | Sale | ||||||
Probability | 50.0 | % | 50.0 | % | ||||
Term (years) | 0.75 | 3.50 | ||||||
Remaining Term of the RSUs (years) | 5.00 | 3.50 | ||||||
Dividend Yield | 0— | % | 0— | % | ||||
Risk-free rate | 2.4 | % | 2.4 | % | ||||
Volatility | 35.0 | % | 35.0 | % | ||||
Note 14—16—Basic and diluted net lossearnings (loss) per share
The computation of net lossearnings (loss) 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):
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| 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—basic | 95,709,671 | 29,281,514 | |||||||||||||||||||||
| Effect of dilutive securities | 977,612 | — | |||||||||||||||||||||
| Weighted average shares outstanding—diluted | 96,687,283 | 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 stock | 662,935 | — | |||||||||||||||||||||
| Convertible preferred stock | — | 9,854,432 | |||||||||||||||||||||
| Restricted stock units | — | 2,738,648 | |||||||||||||||||||||
| Convertible notes | — | 5,856,302 | |||||||||||||||||||||
| Total | 662,935 | 18,449,382 | |||||||||||||||||||||
36
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Numerator: | ||||||||||||||||
Net (loss) income | $ | (30,524 | ) | $ | 5,868 | $ | (67,369 | ) | $ | 5,135 | ||||||
Net (loss) income allocated to participating preferred shares | $ | — | $ | 1,614 | $ | — | $ | 1,412 | ||||||||
Net (loss) income attributable to common stockholders—basic and diluted | $ | (30,524 | ) | $ | 4,254 | $ | (67,369 | ) | $ | 3,723 | ||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding—basic and diluted | 29,281,514 | 58,000,000 | 29,281,514 | 58,000,000 | ||||||||||||
Net (loss) income per common share: | ||||||||||||||||
Basic and diluted | $ | (1.04 | ) | $ | 0.07 | $ | (2.30 | ) | $ | 0.06 | ||||||
Anti-dilutive securities excluded from diluted loss per common share: | ||||||||||||||||
Convertible preferred stock | 9,854,432 | — | 9,854,432 | — | ||||||||||||
Restricted stock units | 2,738,648 | — | 2,738,648 | — | ||||||||||||
Convertible notes | 5,856,302 | — | 5,856,302 | — | ||||||||||||
Total | 18,449,382 | — | 18,449,382 | — | ||||||||||||
Note 15—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
3reportable 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 June 30, 2021 | For the Three Months Ended June 30, 2020 | For the Three Months Ended March 31, 2022 | For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | Cost of revenue | Gross profit | Revenue | Cost of revenue | Gross profit | Revenue | Cost of revenue | Gross profit | Revenue | Cost of revenue | Gross profit | ||||||||||||||||||||||||||||||||||||||||||||||||
| United States: | United States: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Franchise | $ | 11,741 | $ | 1,308 | $ | 10,433 | $ | 7,461 | $ | 1,158 | $ | 6,303 | Franchise | $ | 12,401 | $ | 1,015 | $ | 11,386 | $ | 7,015 | $ | 1,022 | $ | 5,993 | ||||||||||||||||||||||||||||||||||
Equipment and merchandise | 4,523 | 2,437 | 2,086 | 1,383 | 678 | 705 | Equipment and merchandise | 22,848 | 7,754 | 15,094 | 2,481 | 1,478 | 1,003 | ||||||||||||||||||||||||||||||||||||||||||||||
| $ | 35,249 | $ | 8,769 | $ | 26,480 | $ | 9,496 | $ | 2,500 | $ | 6,996 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 16,264 | $ | 3,745 | $ | 12,519 | $ | 8,844 | $ | 1,836 | $ | 7,008 | ||||||||||||||||||||||||||||||||||||||||||||||||
Australia: | Australia: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Franchise | $ | 4,420 | $ | 94 | $ | 4,326 | $ | 2,089 | $ | 173 | $ | 1,916 | Franchise | $ | 3,448 | $ | 119 | $ | 3,329 | $ | 3,289 | $ | 178 | $ | 3,111 | ||||||||||||||||||||||||||||||||||
Equipment and merchandise | 689 | 514 | 175 | 960 | 902 | 58 | Equipment and merchandise | 2,130 | 1,733 | 397 | 839 | 807 | 32 | ||||||||||||||||||||||||||||||||||||||||||||||
| $ | 5,109 | $ | 608 | $ | 4,501 | $ | 3,049 | $ | 1,075 | $ | 1,974 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 5,578 | $ | 1,852 | $ | 3,726 | $ | 4,128 | $ | 985 | $ | 3,143 | ||||||||||||||||||||||||||||||||||||||||||||||||
Rest of World: | Rest of World: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Franchise | $ | 4,420 | $ | 60 | $ | 4,360 | $ | 2,511 | $ | 79 | $ | 2,432 | Franchise | $ | 4,011 | $ | 97 | $ | 3,914 | $ | 2,852 | $ | 14 | $ | 2,838 | ||||||||||||||||||||||||||||||||||
Equipment and merchandise | 1,039 | 788 | 251 | 3,054 | 1,252 | 1,802 | Equipment and merchandise | 5,170 | 1,456 | 3,714 | 1,715 | 896 | 819 | ||||||||||||||||||||||||||||||||||||||||||||||
| $ | 9,181 | $ | 1,553 | $ | 7,628 | $ | 4,567 | $ | 910 | $ | 3,657 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 5,459 | $ | 848 | $ | 4,611 | $ | 5,565 | $ | 1,331 | $ | 4,234 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated: | Consolidated: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Franchise | $ | 20,581 | $ | 1,462 | $ | 19,119 | $ | 12,061 | $ | 1,410 | $ | 10,651 | Franchise | $ | 19,860 | $ | 1,231 | $ | 18,629 | $ | 13,156 | $ | 1,214 | $ | 11,942 | ||||||||||||||||||||||||||||||||||
Equipment and merchandise | 6,251 | 3,739 | 2,512 | 5,397 | 2,832 | 2,565 | Equipment and merchandise | 30,148 | 10,943 | 19,205 | 5,035 | 3,181 | 1,854 | ||||||||||||||||||||||||||||||||||||||||||||||
| $ | 50,008 | $ | 12,174 | $ | 37,834 | $ | 18,191 | $ | 4,395 | $ | 13,796 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 26,832 | $ | 5,201 | $ | 21,631 | $ | 17,458 | $ | 4,242 | $ | 13,216 | ||||||||||||||||||||||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2021 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||
Revenue | Cost of revenue | Gross profit | Revenue | Cost of revenue | Gross profit | |||||||||||||||||||
| United States: | ||||||||||||||||||||||||
Franchise | $ | 18,756 | $ | 2,330 | $ | 16,426 | $ | 15,709 | $ | 4,089 | $ | 11,620 | ||||||||||||
Equipment and merchandise | 7,004 | 3,915 | 3,089 | 7,462 | 3,704 | 3,758 | ||||||||||||||||||
| $ | 25,760 | $ | 6,245 | $ | 19,515 | $ | 23,171 | $ | 7,793 | $ | 15,378 | |||||||||||||
Australia: | ||||||||||||||||||||||||
Franchise | $ | 7,709 | $ | 272 | $ | 7,437 | $ | 4,840 | $ | 332 | $ | 4,508 | ||||||||||||
Equipment and merchandise | 1,528 | 1,321 | 207 | 2,478 | 2,184 | 294 | ||||||||||||||||||
| $ | 9,237 | $ | 1,593 | $ | 7,644 | $ | 7,318 | $ | 2,516 | $ | 4,802 | |||||||||||||
Rest of World: | ||||||||||||||||||||||||
Franchise | $ | 7,272 | $ | 74 | $ | 7,198 | $ | 5,150 | $ | 173 | $ | 4,977 | ||||||||||||
Equipment and merchandise | 2,754 | 1,684 | 1,070 | 6,661 | 3,275 | 3,386 | ||||||||||||||||||
| $ | 10,026 | $ | 1,758 | $ | 8,268 | $ | 11,811 | $ | 3,448 | $ | 8,363 | |||||||||||||
Consolidated: | ||||||||||||||||||||||||
Franchise | $ | 33,737 | $ | 2,676 | $ | 31,061 | $ | 25,699 | $ | 4,594 | $ | 21,105 | ||||||||||||
Equipment and merchandise | 11,286 | 6,920 | 4,366 | 16,601 | 9,163 | 7,438 | ||||||||||||||||||
| $ | 45,023 | $ | 9,596 | $ | 35,427 | $ | 42,300 | $ | 13,757 | $ | 28,543 | |||||||||||||
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 37
For the Three Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Segment gross profit | $ | 21,631 | $ | 13,216 | ||||
Selling, general and administrative expenses | 18,562 | 7,633 | ||||||
Loss on derivative liabilities | 23,098 | — | ||||||
Interest expense, net | 8,853 | 421 | ||||||
| Other expense (income), net | 329 | (2,258 | ) | |||||
Provision for income taxes | 1,313 | 1,552 | ||||||
Net (loss) income | $ | (30,524 | ) | $ | 5,868 | |||
For the Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Segment gross profit | $ | 35,427 | $ | 28,543 | ||||
Selling, general and administrative expenses | 35,390 | 21,624 | ||||||
Loss on derivative liabilities | 48,603 | — | ||||||
Interest expense, net | 17,268 | 799 | ||||||
| Other expense (income), net | 620 | (577 | ) | |||||
Provision for income taxes | 915 | 1,562 | ||||||
Net (loss) income | $ | (67,369 | ) | $ | 5,135 | |||
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Segment gross profit | $ | 37,834 | $ | 13,796 | |||||||
| Selling, general and administrative expenses | 32,090 | 16,828 | |||||||||
| Loss on derivative liabilities, net | — | 25,505 | |||||||||
| Interest expense, net | 126 | 8,415 | |||||||||
| Other expense, net | 570 | 291 | |||||||||
| Provision (benefit) for income taxes | 2,536 | (398) | |||||||||
| Net income (loss) | $ | 2,512 | $ | (36,845) | |||||||
For the three and six months ended June 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 June 30, 2020 , respectively, the Company’s long-lived asset additions were not significant.
Note 16—18—Subsequent events
F45 Training Holdings Inc. 2021 Equity Incentive Plan, or the 2021 Plan (which includes 3,590,900 shares of the Company’s common stock issuable upon the settlement of restricted stock units, or RSUs, and 263,684 shares of the Company’s common stock issuable upon the exercise of stock options granted in connection with the IPO under the 2021 Plan to certain of the Company’s employees (including certain executive officers), with the stock options to have an exercise price per share equal to $16.00 per share) and (ii) 2,738,648 RSUs, which were issued to Mr. Wahlberg pursuant to a promotional services agreement that we entered into in connection with the MWIG investment, whose RSUs will vest in connection with offering, but not settle until 2022.
On July 21, 2021, the Company settled its interest rate swap agreement for
$150 million
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 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 fully diluted shares of common stock of 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)). Concurrently 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 an 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 accrue interest at(a “50% Utilization Warrant”) (the date a rate equal50% Utilization Warrant becomes exercisable upon reaching required utilization levels under the Facility, a “Vesting Date”) to either, at the Company’s election,Holders to purchase up to 1.25% of the LIBO rate plusfully diluted shares of Common Stock as of the Vesting Date. In the event of a margin of
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 Company’s total leverage ratio.
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 an additional
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 all other Company matters related to such investments have been wound up, (ii) each of the Company and CSG have an initial 50% equity interest in FAFC, (iii) procedures for the Company to purchase CSG’s interest in FAFC in connection with a selling stockholder at $
priority and terms thereof, to the members of FAFC. The LLC Agreement also contains other customary provisions and other agreements by the parties.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are F45 Training, one of the fastest growing fitness franchisorsfranchisor in the United States based on number of franchises sold world according to Entrepreneur in the United States,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
Theand relatedshelter-in-placerestrictions 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.
COVID-19
pandemic 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 tore-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 June 30, 2021,March 31, 2022, we had approximately 1,4151,691 Open Studios, which represents approximately 91% of our Total Studios. The remaining 9% of our Total Studios are generally located in regions that continue to face restrictions, which we expect to be relaxed over time. The following chart illustrates the number of Open Studios as a percentage of Total Studios at the end of each month for the 15 months ending June 30, 2021.
We have found that, on average, studios that have As of June 30, 2021, the median weekly revenue of the 618 studios that have been
re-opened
following temporary closure quickly return close topre-pandemic
levels on a weekly revenue basis, and eventually exceedpre-pandemic
levels on the same basis.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 theCOVID-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
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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 our 17 studios in Central 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 intersegmentinter-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 June 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.
basisOur 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 theQ2Q1 2022 and Q1 2021, and Q2 2020, our Total Franchises Sold increased by 36%78% and our Total Studios increased by 22%25%. For the three months ended June 30, 2021,March 31, 2022, as compared with the same period in 2020,2021, our revenue increased by 54% as our network recovers from the175%.
COVID-19
pandemic. Despite challenges posed by theCOVID-19
pandemic, we grew our footprint and experienced minimal permanent closures during 2020, which we believe underscores the resilience of our business model. Between 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 throughout the United States, Australia, and the Rest of World;
•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.
Key Factors Affecting Our BusinessNon-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 months ended March 31, 2022 and 2021 (in thousands except, net earnings (loss) per share):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| 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 Visits | 7,216 | 6,776 | |||||||||
| Same store sales growth | 6.2 | % | (21.2) | % | |||||||
| New Franchises Sold, net | 706 | 3 | |||||||||
| Total Franchises Sold, end of period | 4,007 | 2,247 | |||||||||
| Initial Studio Openings, net | 117 | 50 | |||||||||
| Total Studios, end of period | 1,866 | 1,487 | |||||||||
| EBITDA | 6,974 | (28,176) | |||||||||
| Adjusted EBITDA | $ | 17,664 | $ | 5,270 | |||||||
| Adjusted EBITDA margin | 35.3 | % | 29.0 | % | |||||||
System-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.
During the three months ended March 31, 2022, our System-wide Sales were approximately $117.4 million, which compares favorably to approximately $94.1 million for the three months ended March 31, 2021, as presented in the table below:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| United States | $ | 52,695 | $ | 30,473 | |||||||
| Australia | 42,953 | 51,998 | |||||||||
| ROW | 21,740 | 11,581 | |||||||||
| Total | $ | 117,388 | $ | 94,052 | |||||||
System-wide Sales year-over-year growth of 73% 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.
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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 consumers.
During the three months ended March 31, 2022, our System-wide Visits were approximately 7.2 million, which compares favorably to approximately 6.8 million for the three months ended March 31, 2021, as presented in the table below:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| United States | 3,101 | 2,266 | |||||||||
| Australia | 2,674 | 3,742 | |||||||||
| ROW | 1,441 | 768 | |||||||||
| Total | 7,216 | 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.
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, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | ||||||||||||||||||||||||||||||||||||||||
| Total Franchises Sold, beginning of period | 1,710 | 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 period | 2,402 | 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 June 30, 2021 | Three Months Ended June 30, 2020 | Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | |||||||||||||||||||||||||||||||||||||
Total Franchises Sold, beginning of period | 941 | 676 | 630 | 2,247 | 826 | 653 | 480 | 1,959 | 814 | 643 | 435 | 1,892 | ||||||||||||||||||||||||||||||||||||
New Franchises Sold, net(a) | 438 | 109 | 7 | 554 | 20 | 14 | 66 | 100 | 117 | 36 | 199 | 352 | ||||||||||||||||||||||||||||||||||||
Total Franchises Sold, end of period | 1,379 | 785 | 637 | 2,801 | 846 | 667 | 546 | 2,059 | 931 | 679 | 634 | 2,244 | ||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2021 | Year Ended December 31, 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(a) | 779 | 124 | 154 | 1,057 | 117 | 36 | 199 | 352 | |||||||||||||||||||||||||||||||||||||||
| Total Franchises Sold, end of period | 1,710 | 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.
During the yearthree months ended DecemberMarch 31, 2019,2022, we sold a net average of 52235 new franchises per month. DuringThis compares favorably to the 181 net average new Franchise Sold during the three months ended June 30, 2021, we sold a net average of 51 new franchises per month,March 31, 2021. This increase is supported by recent multi-unit clubfranchise deals. Of the 909 net franchises sold during the 18 months ending June 30, 2021, 258 were sold as part of a limited time offer made by F45 exclusively to existing franchisees to stimulate sales in response to theCOVID-19pandemic. The offer provided for a reduced dollar establishment fee and no franchise fee payments until the earlier of the studio opening and January 1, 2022, as well as deferred equipment purchasing until November 2021.
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 March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | ||||||||||||||||||||||||||||||||||||||||
| Total Studios, beginning of period | 654 | 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 period | 727 | 663 | 476 | 1,866 | 518 | 617 | 352 | 1,487 | |||||||||||||||||||||||||||||||||||||||
(a) Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.
Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | |||||||||||||||||||||||||||||||||||||
Total Studios, beginning of period | 518 | 617 | 352 | 1,487 | 376 | 593 | 273 | 1,242 | 320 | 581 | 239 | 1,140 | ||||||||||||||||||||||||||||||||||||
Initial Studio Openings, net | 38 | 11 | 19 | 68 | 20 | 2 | 11 | 33 | 166 | 35 | 96 | 297 | ||||||||||||||||||||||||||||||||||||
Total Studios, end of period | 556 | 628 | 371 | 1,555 | 396 | 595 | 284 | 1,275 | 486 | 616 | 335 | 1,437 | ||||||||||||||||||||||||||||||||||||
During the three months ended March 31, 2022, we had net initial studio openings of 39 new franchises per month during the three months ended March 31, 2022 compared to the net initial studio openings of 17 franchises per month during the three months ended March 31, 2021. The slight increase in net initial studio openings was driven by gross studio openings in the Australia and ROW generated by studio sales during the latter half our fiscal year ended December 31, 2021.
Monthly System-wide Sales for the 18 Months Ended June 30, 2021 ($ in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
JAN | FEB | MAR | APR | MAY | JUNE | JULY | AUG | SEP | OCT | NOV | DEC | JAN | FEB | MAR | APR | MAY | JUN | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
United States | $ | 10 | $ | 10 | $ | 8 | $ | 3 | $ | 4 | $ | 5 | $ | 6 | $ | 7 | $ | 7 | $ | 9 | $ | 9 | $ | 8 | $ | 10 | $ | 9 | $ | 12 | $ | 12 | $ | 14 | $ | 15 | ||||||||||||||||||||||||||||||||||||
Australia | 19 | 19 | 16 | 4 | 5 | 11 | 13 | 14 | 14 | 16 | 17 | 17 | 18 | 16 | 18 | 17 | 17 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
ROW | 8 | 7 | 5 | 1 | 1 | 2 | 3 | 5 | 5 | 6 | 5 | 4 | 4 | 3 | 5 | 4 | 4 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 36 | $ | 36 | $ | 29 | $ | 9 | $ | 10 | $ | 18 | $ | 23 | $ | 25 | $ | 26 | $ | 30 | $ | 31 | $ | 29 | $ | 31 | $ | 29 | $ | 35 | $ | 33 | $ | 35 | $ | 35 | ||||||||||||||||||||||||||||||||||||
We use a variety of
non-GAAP
information, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and same store sales.Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Other Data: | (dollars in thousands) | |||||||||||||||
EBITDA | (18,908 | ) | 8,449 | (47,084 | ) | 8,658 | ||||||||||
Adjusted EBITDA | 10,676 | 10,026 | 15,946 | 12,640 | ||||||||||||
Adjusted EBITDA margin (1) | 39.8 | % | 57.4 | % | 35.4 | % | 29.9 | % | ||||||||
Same store sales growth (2) | 126.0 | % | (65.0 | )% | 19.5 | % | (32.1 | )% | ||||||||
44
certain legal costs and settlements, stock-based compensation expense, COVID concessions, relocation costs, charitable 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.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| 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) | % | |||||||
(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.
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 depreciatedand 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 flowsBecause 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
| (dollars in thousands, except per share amounts) | ||||||||||||||||
Net (loss) income | (30,524 | ) | 5,868 | (67,369 | ) | 5,135 | ||||||||||
Net interest expense | 8,853 | 421 | 17,268 | 799 | ||||||||||||
Provision for income taxes | 1,313 | 1,552 | 915 | 1,562 | ||||||||||||
Depreciation and amortization | 1,173 | 249 | 1,377 | 477 | ||||||||||||
Amortization of deferred costs | 277 | 359 | 725 | 685 | ||||||||||||
EBITDA | (18,908 | ) | 8,449 | (47,084 | ) | 8,658 | ||||||||||
Sales tax reserve (a) | 147 | 12 | 247 | 515 | ||||||||||||
Transaction fees (b) | 1,749 | 1,214 | 3,331 | 2,656 | ||||||||||||
Loss (gain) on derivative liability (c) | 23,098 | — | 48,603 | — | ||||||||||||
Certain legal costs and settlements (d) | 886 | 351 | 3,423 | 781 | ||||||||||||
Forgiveness of loans to directors (e) | — | — | — | — | ||||||||||||
Recruitment (f) | 53 | — | 53 | — | ||||||||||||
Inventory write-off (g) | — | — | — | — | ||||||||||||
COVID concessions (h) | 1,851 | — | 4,333 | — | ||||||||||||
Relocation (i) | 183 | — | 252 | 30 | ||||||||||||
Development costs (j) | 1,617 | — | 2,788 | — | ||||||||||||
Adjusted EBITDA | 10,676 | 10,026 | 15,946 | 12,640 | ||||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income (loss) | $ | 2,512 | $ | (36,845) | |||||||
| Interest expense, net | 126 | 8,415 | |||||||||
| Provision (benefit) for income taxes | 2,536 | (398) | |||||||||
| Depreciation and amortization | 1,174 | 204 | |||||||||
| Amortization of deferred costs | 626 | 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 expenses,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.
(c) Represents loss on derivative liabilities associated with the convertible note.
(d) Represents certain one-time legal costs, primarily related to litigation activities and settlements, forgivenesslegal settlements.
(e) Represents stock-based compensation of loansour employees, non-employees and directors associated with our initial public offering.
(f) Represents one-time recruitment expense of executive leadership and essential public-company roles.
(g) Represents concessions made to directors and relocationstudios impacted by COVID, including one time COVID-19 related write-offs.
(h) Represents costs incurred as well as certain other items identified as affecting comparability, when applicable. Adjusted EBITDA margin means Adjusted EBITDA divided by total revenue.
(i) Represents one-time non-recurring costs incurred with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing our company and its resultslaunch of operations.
new brands.(2)“Same Store Sales
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. .
47
Components of Our Results of Operations
Revenue
We generate revenue from the following sources:
•Franchise Revenue
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-$3,000per month per studio. In July 2019, we transitioned our model in the United States for new franchisees to a franchise fee based on the greaterstudio or ii) 7% 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.
•Equipment and Merchandise
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:
•Cost of Equipment and Merchandise Revenue:
•Selling, General, and Administrative Expenses:
48
delivery platform, marketing and promotional activities for the F45 Training brand, and legal and accountingprofessional expenses.
•Other Expense,Income, Net:
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 March 15, 2019, MWIG acquired a minority investment in us. Such investment was effectuated through the following transactions:
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (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 revenues | 50,008 | 18,191 | |||||||||||||||||||||
| Costs and operating expenses: | |||||||||||||||||||||||
| Cost of franchise revenue | 1,231 | 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 expenses | 32,090 | 16,828 | |||||||||||||||||||||
| Forgiveness of loans to directors | — | — | |||||||||||||||||||||
| Total costs and operating expenses | 44,264 | 21,223 | |||||||||||||||||||||
| Income (loss) from operations | 5,744 | (3,032) | |||||||||||||||||||||
| Loss on derivative liabilities, net | — | 25,505 | |||||||||||||||||||||
| Interest expense, net | 126 | 8,415 | |||||||||||||||||||||
| Other expense, net | 570 | 291 | |||||||||||||||||||||
| Income (loss) before income taxes | 5,048 | (37,243) | |||||||||||||||||||||
| Provision (benefit) for income taxes | 2,536 | (398) | |||||||||||||||||||||
| Net income (loss) | $ | 2,512 | $ | (36,845) | |||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Franchise (Related party: $50 and $137 for the three months ended June 30, 2021 and 2020, respectively, and $100 and $234 for the six months ended June 30, 2021 and 2020, respectively) | $ | 20,581 | $ | 12,061 | $ | 33,737 | $ | 25,699 | ||||||||
Equipment and merchandise (Related party: $0 and $112 for the three months ended June 30, 2021 and 2020, respectively, and $0 and $112 for the six months ended June 30, 2021 and 2020, respectively) | 6,251 | 5,397 | 11,286 | 16,601 | ||||||||||||
Total revenues | 26,832 | 17,458 | 45,023 | 42,300 | ||||||||||||
Costs and operating expenses: | ||||||||||||||||
Cost of franchise revenue (Related party $0 and $0 for the three months ended June 30, 2021 and 2020, respectively, and $0 and $12 for the six months ended June 30, 2021 and 2020, respectively) | 1,462 | 1,410 | 2,676 | 4,594 | ||||||||||||
Cost of equipment and merchandise (Related party: $1,203 and $265 for the three months ended June 30, 2021 and 2020, respectively, and $2,144 and $1,316 for the six months ended June 30, 2021 and 2020, respectively) | 3,739 | 2,832 | 6,920 | 9,163 | ||||||||||||
Selling, general and administrative expenses | 18,562 | 7,633 | 35,390 | 21,624 | ||||||||||||
Forgiveness of loans to directors | — | — | — | — | ||||||||||||
Total costs and operating expenses | 23,763 | 11,875 | 44,986 | 35,381 | ||||||||||||
Income (losses) from operations | 3,069 | 5,583 | 37 | 6,919 | ||||||||||||
Loss on derivative liabilities | 23,098 | — | 48,603 | — | ||||||||||||
Interest expense, net | 8,853 | 421 | 17,268 | 799 | ||||||||||||
Other expense (income), net | 329 | (2,258 | ) | 620 | (577 | ) | ||||||||||
(Loss) income before income taxes | (29,211 | ) | 7,420 | (66,454 | ) | 6,697 | ||||||||||
Provision for income taxes | 1,313 | 1,552 | 915 | 1,562 | ||||||||||||
Net (loss) income | $ | (30,524 | ) | $ | 5,868 | $ | (67,369 | ) | $ | 5,135 | ||||||
49
Comparison of the three and six months ended June 30,March 31, 2022 and 2021 and 2020
Revenue
Franchise Revenue
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Change | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||
2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
Franchise | Franchise | ||||||||||||||||||||||||||||||||||||||
USA | $ | 11,741 | $ | 7,461 | $ | 4,280 | 57 | % | USA | $ | 12,401 | $ | 7,015 | $ | 5,386 | 77 | % | ||||||||||||||||||||||
Australia | 4,420 | 2,089 | 2,331 | 112 | % | Australia | 3,448 | 3,289 | 159 | 5 | % | ||||||||||||||||||||||||||||
ROW | 4,420 | 2,511 | 1,909 | 76 | % | ROW | 4,011 | 2,852 | 1,159 | 41 | % | ||||||||||||||||||||||||||||
Total franchise revenue | $ | 20,581 | $ | 12,061 | $ | 8,520 | 71 | % | Total franchise revenue | $ | 19,860 | $ | 13,156 | $ | 6,704 | 51 | % | ||||||||||||||||||||||
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | ||||||||||||||||||||||||||||||||||||||||
| Total Franchises Sold, beginning of period | 1,710 | 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 period | 2,402 | 804 | 801 | 4,007 | 941 | 676 | 630 | 2,247 | |||||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Franchise | ||||||||||||||||
USA | $ | 18,756 | $ | 15,709 | $ | 3,047 | 19 | % | ||||||||
Australia | 7,709 | 4,840 | 2,869 | 59 | % | |||||||||||
ROW | 7,272 | 5,150 | 2,122 | 41 | % | |||||||||||
Total franchise revenue | $ | 33,737 | $ | 25,699 | $ | 8,038 | 31 | % | ||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | Stores | % | |||||||||||||
(in units) | ||||||||||||||||
Number of studios open | ||||||||||||||||
USA | $ | 556 | $ | 396 | 160 | 40 | % | |||||||||
Australia | 628 | 595 | 33 | 6 | % | |||||||||||
ROW | 371 | 284 | 87 | 31 | % | |||||||||||
Total studios open | $ | 1,555 | 1,275 | 280 | 22 | % | ||||||||||
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | Australia | ROW | Total | U.S. | Australia | ROW | Total | ||||||||||||||||||||||||||||||||||||||||
| Total Studios, beginning of period | 654 | 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 period | 727 | 663 | 476 | 1,866 | 518 | 617 | 352 | 1,487 | |||||||||||||||||||||||||||||||||||||||
The $4.3$5.4 million, or 57%77%, increase in franchise revenue in the United States for the three months ended June 30, 2021March 31, 2022 compared to the three months ended June 30, 2020March 31, 2021 was primarily attributable to the increase in the number of newfranchise sales as well as an increase in studio openings in the United States during the period. The number of new studio openings increaseddriven by 17 from 23 new studio openings for the three months ended June 30, 2020 to 40 new studio openings for the three months ended June 30, 2021. Due to the increase in the number of new studio openings, marketing revenue forfranchise sales as well as the period increased by $0.3 million. Franchise-related fees and other recurring fixed fees remained relatively consistent for the three months period ended June 30, 2021 and June 30, 2020. The increase in numberstudios openings in the United States. The amount of new studio openings was driven by the reduced impact ofCOVID-19pandemic compared to the significant impact at the emergence of the pandemictotal Franchises Sold in the United States duringincreased by 1,461, or 155%, from 941 Franchises Sold as of March 31, 2021 to 2,402 Franchises Sold as of March 31, 2022. In addition, the period ended June 30, 2020.
The number of new studio openings decreased by 5 from 79 new studio openings for the six months ended June 30, 2020 to 74 new studio openings for the six months ended June 30, 2021. Due to the decrease in number of new studio openings, marketing revenue for the period decreased by $0.7 million. Franchise-related fees and other recurring fixed fees remained relatively consistent for the six months period ended June 30, 2021 and June 30, 2020. The decline in number of new studio openings was primarily as a result of theCOVID-19pandemic which had less of an overall impact for the six months ended June 30, 2020 compared to the six months ended June 30, 2021.
The $2.9$1.2 million, or 59%, increase in franchise revenue in Australia for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to increase franchise fees paid by franchisees as a result of an increase in number of open studios. Open studios increased from 595 as of June 30, 2020 to 628 as of June 30, 2021, which is a 6% increase compared to the equivalent period in 2020. Our Australia segment continues to see a moderate increase in its franchise revenue as a result of our mature presence in the Australian market.
50
Equipment and Merchandise Revenue
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Change | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||
2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
Equipment and merchandise | Equipment and merchandise | ||||||||||||||||||||||||||||||||||||||
USA | $ | 4,523 | $ | 1,383 | $ | 3,140 | 227 | % | USA | $ | 22,848 | $ | 2,481 | $ | 20,367 | 821 | % | ||||||||||||||||||||||
Australia | 689 | 960 | (271 | ) | (28 | )% | Australia | 2,130 | 839 | 1,291 | 154 | % | |||||||||||||||||||||||||||
ROW | 1,039 | 3,054 | (2,015 | ) | (66 | )% | ROW | 5,170 | 1,715 | 3,455 | 201 | % | |||||||||||||||||||||||||||
Total equipment and merchandise | $ | 6,251 | $ | 5,397 | $ | 854 | 16 | % | |||||||||||||||||||||||||||||||
| Total equipment and merchandise revenue | Total equipment and merchandise revenue | $ | 30,148 | $ | 5,035 | $ | 25,113 | 499 | % | ||||||||||||||||||||||||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Equipment and merchandise | ||||||||||||||||
USA | $ | 7,004 | $ | 7,462 | $ | (458 | ) | (6 | )% | |||||||
Australia | 1,528 | 2,478 | (950 | ) | (38 | )% | ||||||||||
ROW | 2,754 | 6,661 | (3,907 | ) | (59 | )% | ||||||||||
Total equipment and merchandise | $ | 11,286 | $ | 16,601 | $ | (5,315 | ) | (32 | )% | |||||||
The $3.1$20.4 million, or 227%821%, increase in equipment and merchandise revenue in the United States for the three months ended June 30, 2021March 31, 2022 compared to the three months ended June 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 World Pack sales during the second quarterrequired top-up equipment. The total deliveries of 2021. World Pack salesequipment and merchandise increased by $2.8 million as a result of 40 new studio openings during the period, compared to 20 new studio openings151, or 719%, from 21 studios during the three months ended June 30, 2020. Top Up sales increased by $0.3 million in the United States as a result of prior period deliveries recognizedMarch 31, 2021 to 172 studios during the second quarter of 2021.
three months ended March 31, 2022.The $0.5$1.3 million, or (6)%154%, decrease in equipment and merchandise revenue in the United States for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to the $0.8 million decrease in Work Pack sales during the second quarter of 2021 driven by a deferral of World Pack deliveries due to theCOVID-19pandemic offset by a $0.3 million increase in Top Up sales in the United States as a result of prior period deliveries recognized during the second quarter of 2021.
The $1.0$3.5 million, or 38%201%, decrease in equipment and merchandise revenue in Australia for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 in Australia was largely attributable to the decrease of new studio sales during and lower merchandise revenue. World Pack sales decreased by $1.0 million from 15 new studio opening during the period, compared to World Pack sales to 14 new studio openings during the six months ended June 30, 2020. The decrease in World Pack sales during the six months ended June 30, 2021 was driven by a reduction in studio openings due to theCOVID-19pandemic.
Cost of revenue
Cost of franchise revenue
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Franchise | |||||||||||||||||||||||
| USA | $ | 1,015 | $ | 1,022 | $ | (7) | (1) | % | |||||||||||||||
| Australia | 119 | 178 | (59) | (33) | % | ||||||||||||||||||
| ROW | 97 | 14 | 83 | 593 | % | ||||||||||||||||||
| Total cost of franchise revenue | $ | 1,231 | $ | 1,214 | $ | 17 | 1 | % | |||||||||||||||
| Percentage of franchise revenue | 6 | % | 9 | % | |||||||||||||||||||
51
Three Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Franchise | ||||||||||||||||
USA | $ | 1,308 | $ | 1,158 | $ | 150 | 13 | % | ||||||||
Australia | 94 | 173 | (79 | ) | (46 | )% | ||||||||||
ROW | 60 | 79 | (19 | ) | (24 | )% | ||||||||||
Total cost of franchise revenue | $ | 1,462 | $ | 1,410 | $ | 52 | 4 | % | ||||||||
Percentage of franchise revenue | 7 | % | 12 | % | ||||||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Franchise | ||||||||||||||||
USA | $ | 2,330 | $ | 4,089 | $ | (1,759 | ) | (43 | )% | |||||||
Australia | 272 | 332 | (60 | ) | (18 | )% | ||||||||||
ROW | 74 | 173 | (99 | ) | (57 | )% | ||||||||||
Total cost of franchise revenue | $ | 2,676 | $ | 4,594 | $ | (1,918 | ) | (42 | )% | |||||||
Percentage of franchise revenue | 8 | % | 18 | % | ||||||||||||
The $0.2less than $0.1 million, or 13%1%, increasedecrease in cost of franchise revenue in the United States for the three months ended June 30, 2021March 31, 2022 as compared to the same period in 20202021 was primarily attributable to $0.1 million increase related tothe decrease in marketing programs was driven by the reduced impact ofCOVID-19pandemic comparedexpenses due to the significant impact at the emergenceCOVID-19 pandemic and reflective of the pandemicreduction in the United States during the period ended June 30, 2020.
COVID-19
pandemic.The less than $0.1 million, or 46%33%, decrease in cost of franchise revenue in Australia during the three months ended June 30, 2021March 31, 2022 as compared to the same period in 20202021 was attributable to a decrease in marketing expenses as most studios were closed duerelated to the
membership marketing programs due in large part to temporary studio closures as a result of the COVID-19
pandemic.The less than $0.1 million, or 18%593%, decrease in cost of franchise revenue in Australia during the six months ended June 30, 2021 as compared to the same period in 2020 was primarily attributable to decrease in marketing expenses as most studios were closed due to theCOVID-19pandemic.
Cost of equipment and merchandise
Three Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Equipment and merchandise | ||||||||||||||||
USA | $ | 2,437 | $ | 678 | $ | 1,759 | 259 | % | ||||||||
Australia | 514 | 902 | (388 | ) | (43 | )% | ||||||||||
ROW | 788 | 1,252 | (464 | ) | (37 | )% | ||||||||||
Total equipment and merchandise cost of revenue | $ | 3,739 | $ | 2,832 | $ | 907 | 32 | % | ||||||||
Percentage of equipment and merchandise revenue | 60 | % | 52 | % | ||||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Equipment and merchandise | |||||||||||||||||||||||
| USA | $ | 7,754 | $ | 1,478 | $ | 6,276 | 425 | % | |||||||||||||||
| Australia | 1,733 | 807 | 926 | 115 | % | ||||||||||||||||||
| ROW | 1,456 | 896 | 560 | 63 | % | ||||||||||||||||||
| Total cost of equipment and merchandise revenue | $ | 10,943 | $ | 3,181 | $ | 7,762 | 244 | % | |||||||||||||||
| Percentage of equipment and merchandise revenue | 36 | % | 63 | % | |||||||||||||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Equipment and merchandise | ||||||||||||||||
USA | $ | 3,915 | $ | 3,704 | $ | 211 | 6 | % | ||||||||
Australia | 1,321 | 2,184 | (863 | ) | (40 | )% | ||||||||||
ROW | 1,684 | 3,275 | (1,591 | ) | (49 | )% | ||||||||||
Total equipment and merchandise cost of revenue | $ | 6,920 | $ | 9,163 | $ | (2,243 | ) | (24 | )% | |||||||
Percentage of equipment and merchandise revenue | 61 | % | 55 | % | ||||||||||||
The $1.8$6.3 million, or 259%425%, increase in cost of equipment and merchandise revenue for the United States for the three months ended June 30, 2021March 31, 2022 as compared to the same period in 20202021 was primarily attributable to an increase of $1.7 million in equipment costs from the increase in new studio openings during the periodequipment and merchandise deliveries, offset by $2.7 million of rebates that was recorded as a result ofreduction to theCOVID-19pandemic.
The $0.4$0.9 million, or 43%115%, decreaseincrease in cost of equipment and merchandise for Australia for the three months ended June 30, 2021March 31, 2022 as compared to the same period in 2020 relates2021 was primarily due to a decreasean increase in equipment costs from the decrease in equipmentand merchandise deliveries, during the period dueoffset by $0.2 million of rebates that was recorded as a reduction to theCOVID-19pandemic.
The $0.5$0.6 million, or 37%63%, decreaseincrease in cost of equipment and merchandise for ROW for the three months ended June 30, 2021March 31, 2022 as compared to the same period in 2020 is2021 was primarily attributable to a decreasean increase in equipment costs from the decrease in equipment costsand merchandise deliveries, offset by $0.3 million of rebates that was recorded as a result of the decrease in equipment deliveries during the period duereduction to theCOVID-19pandemic.
Selling, general, and administrative expenses
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 32,090 | $ | 16,828 | $ | 15,262 | 91 | % | |||||||||||||||
| Percentage of revenue | 64 | % | 93 | % | |||||||||||||||||||
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Three Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Selling, general and administrative expenses | 18,562 | 7,633 | $ | 10,929 | 143 | % | ||||||||||
Percentage of revenue | 69 | % | 44 | % | ||||||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Selling, general and administrative expenses | 35,390 | 21,624 | $ | 13,766 | 64 | % | ||||||||||
Percentage of revenue | 79 | % | 51 | % | ||||||||||||
The $10.9$15.3 million, or 143%91%, increase in selling, general, and administrative expenses during the three months ended June 30, 2021March 31, 2022 as compared to the same period in 20202021 was primarily attributable to a $3.4$5.8 million increase of payroll related to the increase in headcount from 122 to 225 due to the continuing expansion of the business, a $4.0 million increase in business travel expenses related to site visits for the Company’s continued brand expansion and easing of COVID restrictions globally compared to the prior year quarter, a $3.0 million increase in marketing $2.0 million increase in salaries, $1.2 million increase in professional service fees from the continued expansion of our business, ourexpenses due to ongoing brand awareness campaigns with worldwide celebrities and overhead incidental today-to-dayoperations across our expanding global footprint, and $0.9localized brand events, a $2.1 million increase in depreciationstock-based compensation issued to brand ambassadors and amortization. In addition, an increase of $1.8 million to bad debt from terminated studios affected bycertain employees and directors as the ongoing effects ofCompany’s incentive plan became effective at theCOVID-19pandemic.
Loss on derivative liabilities
Three Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Loss on derivative liabilities | 23,098 | — | $ | 23,098 | 100 | % | ||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Loss on derivative liabilities, net | $ | — | $ | 25,505 | $ | (25,505) | (100) | % | |||||||||||||||
Six Months Ended June 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 was 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 six months ended June 30,March 31, 2021.
The $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. The embedded derivatives were extinguished in connection with the repayment of the debt upon the IPO.
Interest expense, net
Three Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Interest expense, net | 8,853 | 421 | $ | 8,432 | 2003 | % | ||||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Interest expense, net | 17,268 | 799 | $ | 16,469 | 2061 | % | ||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest expense, net | $ | 126 | $ | 8,415 | $ | (8,289) | (99) | % | |||||||||||||||
The increase$8.3 million, or approximately 99%, decrease in interest expense, including the amortization of debt discounts, net for the three and six months ended June 30, 2021March 31, 2022 compared to the same periodsperiod in 20202021 was primarily attributable to a resultreduction of outstanding debt obligations during the new borrowings taken outthree months ended March 31, 2022 due to repayments of indebtedness on October 6, 2020. The borrowingsour Term Facility and conversion of our outstanding as of June 30, 2020 were $49.7 million, while total debt (including convertible debt) outstanding as of June 30, 2021 increased to $255.3 million.Convertible Notes in connection with the IPO during July 2021.
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Other expense, net
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Other expense, net | $ | 570 | $ | 291 | $ | 279 | 96 | % | |||||||||||||||
Three Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Other expense (income), net | 329 | (2,258 | ) | $ | 2,587 | (115 | )% | |||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Other expense (income), net | 620 | (577 | ) | $ | 1,197 | (207 | )% | |||||||||
The $2.6$0.3 million, and $1.2 millionor 96%, increase in other (income) expense, net represents realized and unrealized gains and losses on foreign currency transactions for the three and six months ended June 30, 2021, respectively.transactions. This increase during the three and six months ended June 30, 2021,March 31, 2022, was mostly due to the volatility of foreign exchange rates during the three and six months ended June 30, 2021 under theCOVID-19pandemic 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 June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Provision for income taxes | 1,313 | 1,552 | $ | (239 | ) | (15 | )% | |||||||||
Six Months Ended June 30, | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Provision for income taxes | 915 | 1,562 | $ | (647 | ) | (41 | )% | |||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Provision (benefit) for income taxes | $ | 2,536 | $ | (398) | $ | 2,934 | 737 | % | |||||||||||||||
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 June 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 theCOVID-19pandemic. increase in Total Franchises Sold during the prior twelve months.
Liquidity and Capital Resources
Overview
As of June 30, 2021,March 31, 2022, we held $16.6$14.0 million of cash and cash equivalents, of which $3.1$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 June 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 $53.0$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 ofoperations, financing capital investments and to address our working capital needs.
day-to-day
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. The outstandingavailable balance of the Revolving Facility as of June 30, 2021March 31, 2022 was $7.0$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
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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.
Cash flow
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
(dollars in thousands) | ||||||||
Net cash used in operating activities | $ | (7,579 | ) | $ | (10,541 | ) | ||
Net cash used in investing activities | (902 | ) | (877 | ) | ||||
Net cash (used in) provided by financing activities | (2,625 | ) | 8,270 | |||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | $ | 300 | $ | (291 | ) | |||
Net decrease in cash, cash equivalents, and restricted cash | $ | (10,806 | ) | $ | (3,439 | ) | ||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Net cash used in operating activities | $ | (44,990) | $ | (201) | |||||||||||||||||||||||||||||||
| Net cash used in investing activities | (3,413) | (179) | |||||||||||||||||||||||||||||||||
| 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) | |||||||||||||||||||||||||||||||
Net cash used in operating activities
Net cash used in operating activities of $10.5 million for the six months ended June 30, 2020. This $2.9 million decrease in net cash used in operating activities was primarily attributable to a $72.5 million fluctuation in net loss being offset by a net decrease of $67.9 million innon-cashadjustments to net income including a $48.6 million loss on derivative liabilities, which was included induring the three months ended June 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 $7.6$5.3 million decreaseincrease in working capital primarily due to higher legalaccounts receivable, a $3.5 million increase in inventory, and professional fees as well as higher marketing costs during the six months ended June 30, 2021 compared to the same perioda $1.6 million increase in the prior year.other assets.
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Net cash used in investing activities
Net cash used in investing activities forduring the sixthree months ended June 30, 2020, as our investing activities included a decreaseMarch 31, 2021 of less than $0.1$0.2 million of purchases of intangibles and less than $0.1 million of downward change inresulted primarily from purchases of property and equipment.
equipment of $0.1 million and capitalization of internal-use software development costs, trademarks, and patents of $0.1 million.Net cash provided by (used in) provided by financing activities
Net cash used in financing activities of $1.3 million during the three months ended March 31, 2021 was due to required repayments under our First Lien Loan of $2.6 million during the six months ended June 30, 2021.term facility.
Contractual Obligations and Commitments
Contractual obligations and commitments as of June 30, 2021March 31, 2022, consisted of $16.1$24.1 million in operating leases, all of which is due within the next four years and thereafter. Please see “Note 6—Debt” and “Note 11—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 ArrangementsAs of June 30, 2021,March 31, 2022, ouroperatingguaranties provided by the Company for leases for office space. space by unconsolidated organizations. See “Note 11—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.
off-balance
sheet arrangements consisted of 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
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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, we believe that the following accounting policies and estimates are critical to our business operations and understanding of our financial results.
filing.Revenue from contracts with customers
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 franchisefranchise agreements, (both reflected in franchise revenue in the consolidated statements of operations and comprehensive (loss) income), and equipment and merchandise. Taxes collected from customers and remitted to government authorities are recorded on a net basis.
Franchise revenue
Our primary performance obligation under the franchise agreement is granting certain exclusive rights to access ourthe 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 have assessed that a significant amount of the costs incurred under the contract to perform are incurred
53
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 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. Freight revenue is recorded within equipment and merchandise revenue and freight costs are recorded within cost of equipment and merchandise revenue.
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Allocation of transaction price
Our contracts include multiple performance obligations – 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 pricesprice 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 ourits 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 Australia,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 of our 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.
Income taxes
We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities 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 deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
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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 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 we expect to recover those costs. As of June 30, 2021March 31, 2022 and December 31, 2020,2021, we had $13.6$14.5 million and $12.8$13.8 million of deferred costs, respectively, to obtain and fulfill contracts with franchisees. During the three months ended June 30,March 31, 2022 and 2021, and 2020, we recognized $0.3$0.6 million and $0.4 million in amortization of these deferred costs, respectively. During the six months ended June 30, 2021 and 2020, we recognized $0.7 million and $0.7 million in amortization of these deferred costs, respectively. 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 consolidated statements of operations and comprehensive (loss) income.
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 impairment charges recorded on long-lived assets during the three and six months ended June 30, 2021March 31, 2022 and 2020.
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 triggers were observedof our indefinite-lived intangible asset was recorded during the three and six months ended June 30, 2021March 31, 2022 and 2020.2021.
We capitalize certain development costs incurred in connection with our
internal-use
software andwebsite. These capitalized costs are primarily related to our software tools that are hosted by us and accessed by our customers on a subscription basis. Costs incurred in the preliminary stages of
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
testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. Maintenance costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life,
generally three years.
Recent 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.
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 June 30, 2021,March 31, 2022, we had cash and cash equivalents of $16.6$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 June 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
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.
The 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 operations 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 Rule13a-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 werein internal control over financial reporting described above.
Remediation Plan and Status
Based on deficiencies identified inabove, the Company has identified and implemented additional processes, procedures and controls as noted below to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures in this area. The Company initiated and implemented the coursefollowing corrective actions:
•developed, formalized and implemented additional management review controls across the organization in order to add more comprehensive levels of preparingreview 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
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•retained an outside consultant to assist the Company in refining and testing the internal controls over financial reporting that are in place at the Company, including within the financial statements included in our prospectus filed in July 2021.close process.
The material weaknesses related to a failure to properly staff and design our financial closing and reporting team and 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 designed to prevent or detect fraud.
Changes in Internal Control over Financial Reporting
15d-15(f)
of the Exchange Act) that occurred during the quarter ended Item 1. Legal Proceedings.
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 Form10-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.
Use of Proceeds
In connection with our initial public offering, we filed a Registration Statement on Form(Fileoverallotmentover-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.
S-1
(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 Item 3. Defaults Upon Senior Securities.Securities
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None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. 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* | ||||||
| 31.2* | ||||||
| 32.1* | ||||||
| 32.2* | ||||||
| 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* | ||||||
| Inline XBRL Taxonomy Extension Schema Document. | ||||||
| 101.CAL* | ||||||
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||
| 101.DEF* | ||||||
| Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||||
| 101.LAB* | ||||||
| Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||||
| 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.
**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.
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: | By: | /s/ Chris E. Payne | ||||||||||||
| Chris E. Payne | ||||||||||||||
| Chief Financial Officer | ||||||||||||||