F45 TRAINING HOLDINGS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including the impact of the factors discussed in the section titled "Risk Factors" and in other parts of this Quarterly Report on Form 10-Q.
Overview
We areF45 Training , a fast growing fitness franchisor focused on creating a leading global fitness training and lifestyle brand. We primarily offer consumers functional 45-minute workouts that are effective, fun, and community-driven. Our workouts combine elements of high-intensity interval, circuit, and functional training to offer consumers what we believe is the world's best functional training workout. We deliver our workouts through our digitally-connected global network of studios, and we have built a differentiated, technology-enabled platform that allows us to create and distribute workouts to our global franchisee base. Our platform enables the rapid scalability of our model and helps to promote the success of our franchisees. We offer our members a continuously evolving fitness program in which virtually no two workouts are ever the same. Our vast and growing library of functional training content allows us to vary workout programs to keep consumers engaged with fresh content, stay at the forefront of consumer trends and drive maximum individual results, while helping our members achieve their fitness goals.
Impact of the COVID-19 pandemic
The COVID-19 pandemic has had and may continue to have a significant impact on the gym and fitness industry generally, as well as our business, financial condition and results of operations. Following the outbreak of the pandemic and at its initial peak, nearly all of our studios temporarily closed pursuant to local, state and federal mandates and guidelines. As businesses have been allowed to re-open in certain jurisdictions pursuant to local and state mandates, we have worked closely with our franchisees in helping to re-open their studios subject to certain indoor capacity or other restrictions, including company-implemented health and safety policies. We have also been providing additional operating guidance to our franchisees by assisting with modifications to studio layouts and workouts to accommodate proper social distancing. There have been frequent changes and variation in local and state regulation of the health club industry, and many local and state jurisdictions have returned to shelter in place restrictions after allowing for health club re-openings. While we are optimistic about our ability to continue to effectively manage through the COVID-19 pandemic, we are unable to predict the duration or future impact of the pandemic on our business, financial condition and results of operations.
Our Segments
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 ,Australia and Rest of World. We refer to "United States" as the operations inthe United States andSouth America . We refer to "Australia" as our operations inAustralia ,New Zealand and the immediately surrounding island nations. We refer to "Rest of World" or "ROW" as our operations in locations other than those inthe United States and Australian segments. We evaluate the performance of our segments and allocate resources to them based on revenue and gross profit. Revenue and gross profit for all operating segments include only transactions with external customers and do not include inter-segment transactions. The tables on the following pages summarize the financial information for our segments for 46 --------------------------------------------------------------------------------
the three and nine months ended
Our Franchise Model
We operate a nearly 100% franchise model. We believe our franchise model is attractive due to its potential for asset-light growth, strong profitability and robust cash flow generation, and has helped to facilitate our rapid growth and strong financial performance prior to the COVID-19 pandemic. Despite challenges posed by the COVID-19 pandemic, we grew our footprint and experienced minimal permanent closures during 2020 and 2021, which we believe underscores the resilience of our business model. Between Q3 2022 and Q3 2021, our Total Franchises Sold increased by 22% and ourTotal Studios increased by 26%. For the nine months endedSeptember 30, 2022 , as compared with the same period in 2021, our revenue increased by 51%. 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 throughoutthe United States ,Australia , and the Rest of World ("ROW"); •growing same store sales and transitioning to a franchise fee based on the greater of a fixed monthly franchise fee or percentage of gross monthly studio revenue model; •expanding into new channels; •developing new modalities and workout programs to access new target demographics; and •driving increased member spend through ancillary product offerings.
Recent Developments
Departure of President and Chief Executive Officer
OnJuly 26, 2022 , the Company entered into a Separation Agreement with President, Chief Executive Officer and Chairman of the Board,Adam J. Gilchrist , in conjunction with his stepping down from those roles as ofJuly 24, 2022 (the "Separation Agreement").Mr. Gilchrist will remain a director of the Company and the Board will appoint a new Chairman. Under the terms of the Separation Agreement,Mr. Gilchrist will be eligible to receive certain payments and benefits, subject to certain agreed conditions set forth in the Separation Agreement, including: (i) a one-time cash payment of$4.8 million ; (ii) a one-time payment by the Company of$1.2 million for the 12-month lease ofMr. Gilchrist's residence inFlorida ; (iii) reimbursement for COBRA premiums forMr. Gilchrist and his covered dependents for up to eighteen months; (iv) relocation expenses up to$20,000 ; (v) reimbursement of legal fees related to the Separation Agreement; and (vi) a one-time cash payment of$1.0 million .
Appointment of Interim Chief Executive Officer
OnJuly 24, 2022 , the Board appointedBen Coates , a current member of the Board, as Interim Chief Executive Officer, to serve while the Board conducts a formal search for a permanent successor toMr. Gilchrist . In addition to his new role as Interim Chief Executive Officer,Mr. Coates will continue to serve as a member of the Company's Board. OnSeptember 20, 2022 , the Company entered into an employment agreement withMr. Coates in connection with his service as the Interim Chief Executive Officer (the "Employment Agreement"). The Employment Agreement provides for a term that expires upon the earlier ofJanuary 31, 2023 and the 47 -------------------------------------------------------------------------------- dateMr. Coates' employment with the Company terminates for any reason.Mr. Coates will receive a base salary at a rate of$1,500,000 per annum with (i)$1,000,000 payable in cash and (ii)$500,000 paid in the form of a restricted stock units award that vest in 12 equal installments at the end of each calendar month. The number of shares subject to the restricted stock units award was based on the closing price of the Company's common stock onAugust 17, 2022 . The Employment Agreement provides thatMr. Coates is eligible to participate in any employee benefits or compensation practices generally available to other executive officers, including paid time off policies. The Employment Agreement contains certain severance provisions which provide for the benefits to be received byMr. Coates upon termination of employment prior toJanuary 31, 2023 . In the event ofMr. Coates' termination of employment due toMr. Coates' dismissal or discharge other than for cause or by reason of his death or disability, and subject to certain conditions,Mr. Coates will receive a cash severance payment in an amount equal to 50% of his base salary, less any amounts paid by the Company fromJuly 24, 2022 through the date of termination. Upon such termination,Mr. Coates' unvested stock options, restricted stock, restricted stock units, performance stock units and other equity-based awards that would have become vested based on continued employment throughJanuary 31, 2023 , will become immediately vested on the date of termination.
Reduction in Force
OnJuly 26, 2022 , the Board of Directors of the Company initiated a reduction in force, reducing its number of employees by approximately 110 employees, which represented approximately 45% of the Company's total employees globally. This decision was made in light of ongoing macroeconomic uncertainty in order to best position itself to achieve sustained growth over the near and long-term, as well as the loss of growth capital as a result of the termination of the Company's$150 million credit agreement, dated as ofMay 13, 2022 , withFortress Credit Group . Additionally, the Company committed to the closures of certain office and warehouse locations, entered into a separation agreement with its Chief Executive Officer, and amended the employment agreement with its Chief Financial Officer (these actions are collectively referenced as "the Restructuring Plan"). The Company anticipates the Restructuring Plan to be substantially complete by the end of the 2022 fiscal year. As a result of this workforce reduction and other restructuring related charges, the Company incurred pre-tax cash charges of$14.4 million and pre-tax non-cash charges of$12.4 million , inclusive of previously described amounts included within the Separation Agreement and those incurred in connection with the termination of the Fortress Credit Facility.
Termination of Fortress Credit Facility
OnMay 13, 2022 , the Company entered into a credit agreement (the "New Credit Agreement") with a newly created subsidiary of the Company,F45 SPV Finance Company, LLC as "Borrower" andFortress Credit Group ("Fortress"), as administrative agent, collateral agent, and lender, consisting of a$150 million (the "Maximum Commitment Amount") seven-year credit facility (the "New Facility"). The Maximum Committed Amount may be increased to$300 million in certain circumstances under the terms of the New Credit Agreement. The New Credit Agreement required that the Company enter into a limited guaranty, guaranteeing the Company's obligations under the New Facility, in an amount not to exceed 10% of the total New Facility size. The proceeds from the New Facility were to be used by the Borrower to purchase loans made by another subsidiary of the Company,F45 Intermediate Holdco, LLC , to certain franchisees of the Company (the "Receivables"). DuringJuly 2022 , the Company determined it was no longer in compliance with covenants requiring minimum market capitalization thresholds in the New Credit Agreement. Subsequently, onAugust 14, 2022 ,F45 SPV Finance Company, LLC , delivered a notice to Fortress, as administrative agent, terminating it's the New Credit Agreement. There were no borrowings outstanding under the New Credit Agreement at the time of termination.
European Master Franchise Agreement
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On October 26, 2022 , the Company entered into a Master Franchise Agreement
("MFA") with Club Sports Group, LLC ("Club Sports "), an affiliate of KLIM,
pursuant to which the Company granted Club Sports the master franchise rights
for F45 in Austria , Belgium , Finland , France , Germany , Ireland , Italy ,
Luxembourg, Netherlands , Norway , Portugal , Spain , Sweden , Switzerland , and the
United Kingdom . In exchange, the Company will receive certain fees and
royalties, including a percentage of the revenue generated by Club Sports . In
accordance with the agreement, F45 will assign existing franchise agreement
rights to approximately 103 studios previously signed by the Company.
Unsolicited Bid
OnSeptember 30, 2022 , the Company received an unsolicited preliminary non-binding proposal fromKennedy Lewis Investment Management LP ("KLIM") to acquire all of the outstanding shares of common stock of the Company, not already beneficially owned by KLIM or other stockholders participating in the proposed transaction, at a price per share equal to$4.00 in cash. Consistent with its fiduciary duties, the Company's Board of Directors will evaluate KLIM's proposal with its advisors and pursue the course of action it determines to be in the best interests of the Company and its stockholders. There is no certainty that any transaction will be consummated. The proposal was required to be disclosed by KLIM under Regulation 13D by theU.S. Securities and Exchange Commission .
Key Non-GAAP Financial and Operating Metrics
In addition to our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"), we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees, and monitor our business. Our financial condition and results of operations have been, and will continue to be, affected by a number of important factors, including new Franchises Sold, new studio openings and number of visits. Many of these factors have been, and will continue to be, impacted by the COVID-19 pandemic. The following table sets forth our key performance indicators for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands except, net earnings (loss) per share): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net loss$ (60,010) $ (130,193) $ (92,424) $ (197,562) Net loss per share$ (0.62) $ (1.52) $ (0.96) $ (4.10) System-wide Sales$ 130,594 $ 99,436 $ 375,088 $ 296,474 System-wide Visits 7,569 6,350 22,118 20,081 Same store sales growth 15.5 % 6.0 % 9.2 % 14.7 % New Franchises Sold, net (152) 210 381 767 Total Franchises Sold, end of period 3,682 3,011 3,682 3,011 Initial Studio Openings, net 84 63 293 181Total Studios , end of period 2,042 1,618 2,042 1,618 EBITDA (30,659) (87,127) (52,082) (134,211) Adjusted EBITDA$ 6,140 $ 10,115 $ 16,466 $ 26,061 Adjusted EBITDA margin 20.9 % 37.2 % 15.1 % 36.1 % System-wide Sales 49
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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 and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
United States $ 61,139 $ 46,306 $ 171,953 $ 117,047
Australia 40,783 33,965 125,597 135,121
ROW 28,672 19,165 77,538 44,306
Total $ 130,594 $ 99,436 $ 375,088 $ 296,474
During the three months ended September 30, 2022 , System-wide Sales
year-over-year growth of 32% in our U.S. segment and 50% 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. During the nine months ended September 30, 2022 ,
System-wide Sales year-over-year growth of 47% in our U.S. segment and 75% 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 period. During the three and nine
months ended September 30, 2022 , System-wide Sales year-over-year increased by
20% and decreased by 7%, respectively, for our Australian segment. The decrease
during the nine months ended September 30, 2022 was primarily driven by
increased market competition and a greater percentage of studios in this segment
recovering from the impact of government mandated closures resulting from
COVID-19 restrictions during the second half of 2021 and the three months ended
March 31, 2022 .
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 and nine months ended September 30, 2022 , our System-wide
Visits were approximately 7.6 million and 22.1 million, respectively, which
compares favorably to approximately 6.4 million and 20.1 million, respectively,
for the three and nine months ended September 30, 2021 , as presented in the
table below:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
United States 3,319 3,025 9,688 8,141
Australia 2,492 2,047 7,517 9,015
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ROW 1,758 1,278 4,913 2,925 Total 7,569 6,350 22,118 20,081 During the three months endedSeptember 30, 2022 , System-wide Visits year-over-year growth of 10% in ourU.S. segment and 38% 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. During the nine months endedSeptember 30, 2022 , System-wide Visits year-over-year growth of 19% in ourU.S. segment and 68% 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 period. During the three and nine months endedSeptember 30, 2022 , System-wide Visits year-over-year increased by 22% and decreased by 17%, respectively, for our Australian segment, primarily driven by increased market competition and a greater percentage of studios in this segment recovering from the impact of government mandated closures resulting from COVID-19 restrictions during the second half of 2021 and the three months endedMarch 31, 2022 .
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, (i) the total number of signed franchise agreements in place as of such date for which an establishment fee has been paid and (ii) the total number of franchises committed in a multi-studio agreement in place as of such date for which an upfront payment has been made, in each case that have not been terminated. Each new franchise is included in the number of franchises sold from the date in 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 inthe 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 September 30, 2022 Three Months Ended September 30, 2021 U.S. Australia ROW Total U.S. Australia ROW Total Total Franchises Sold, beginning of period 2,227 803 804 3,834 1,379 785 637 2,801 New Franchises Sold, net(a) (167) (5) 20 (152) 87 15 108 210 Total Franchises Sold, end of period 2,060 798 824 3,682 1,466 800 745 3,011 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 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) 350 (5) 36 381 535 121 111 767 Total Franchises Sold, end of period 2,060 798 824 3,682 1,466 800 745 3,011
(a) New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to the initial studio opening.
During the three and nine months endedSeptember 30, 2022 , we sold a net average of (51) and 42 new franchises per month, respectively, as compared to the 70 and 84 net average New Franchises Sold, respectively, during the three and nine months endedSeptember 30, 2021 . Negative New Franchises Sold, net, represents periods in which terminations were in excess of new franchises sold. Decreases in the net change inthe United States was primarily attributable to terminations from multi-unit franchise deals signed during the first quarter of 2022. 51 --------------------------------------------------------------------------------
Initial Studio Openings and
Initial Studio Openings refers to the number of studios that were determined to be first opened during such period. Prior toOctober 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 onOctober 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 ofOctober 1, 2021 . We classifyTotal 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 norTotal 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 inthe United States and ROW. However, if delays or difficulties are encountered and new studio openings do not occur as quickly as we would like, our operating results may be adversely affected. Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 U.S. Australia ROW Total U.S. Australia ROW TotalTotal Studios , beginning of period 783 674 501 1,958 556 628 371 1,555 Initial Studio Openings, net(a) 61 5 18 84 30 5 28 63Total Studios , end of period 844 679 519 2,042 586 633
399 1,618
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 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) 190 26 77 293 100 17 64 181
Total Studios , end of
period 844 679 519 2,042 586 633 399 1,618
(a) Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.
During the three and nine months endedSeptember 30, 2022 , we had net initial studio openings of 28 and 33 new franchises per month, respectively, compared to the net initial studio openings of 21 and 20 franchises per month during the three and nine months endedSeptember 30, 2021 , respectively. The increase in net initial studio openings during the three and nine months endedSeptember 30, 2022 was driven by gross studio openings inAustralia and ROW generated by studio sales during the latter half of our fiscal year endedDecember 31, 2021 .
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin
We use a variety of non-GAAP information, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and same store sales.
EBITDA is defined as net income or loss before interest, taxes, depreciation and
amortization. We define Adjusted EBITDA as net income or loss before interest,
taxes, depreciation and amortization and adjusted to exclude the impact of sales
tax liability, transaction expenses, loss on derivative liabilities, 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
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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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Other Data: (in thousands) (in thousands)
EBITDA $ (30,659) $ (87,127) $ (52,082) $ (134,211)
Adjusted EBITDA $ 6,140 $ 10,115 $ 16,466 $ 26,061
Adjusted EBITDA margin(1) 20.9 % 37.2 % 15.1 % 36.1 %
Same Store Sales growth(2) 15.5 % 6.0 % 9.2 % 14.7 %
(1)Management believes that EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are useful to investors as they eliminate certain items identified as affecting the period-over-period comparability of our operating results. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin eliminate, among other items, non-cash depreciation and amortization expense that results from our capital investments and intangible assets, as well as income taxes, which may not be comparable with other companies based on our tax structure. Other companies may define Adjusted EBITDA and Adjusted EBITDA margin differently, and as a result, our measures of Adjusted EBITDA and Adjusted EBITDA margin may not be directly comparable to those of other companies. 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
depreciated and amortized will often have to be replaced or require improvements
in the future, and EBITDA, Adjusted EBITDA and Adjusted EBITDA margin do not
reflect any cash requirement for such replacements or improvements; and
•they are not adjusted for all non-cash income or expense items that are
reflected in our statements of cash flows
Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
are not intended as alternatives to net income or as indicators of our operating
performance and should 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.
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The following table reconciles net loss to EBITDA and Adjusted EBITDA (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net loss $ (60,010) $ (130,193) $ (92,424) $ (197,562)
Interest expense, net 12,620 41,897 13,442 59,165
Provision (benefit) for income taxes 14,010 (222) 20,061 693
Depreciation and amortization 1,371 786 3,807 2,163
Amortization of deferred costs 1,350 605 3,032 1,330
EBITDA $ (30,659) $ (87,127) $ (52,082) $ (134,211)
Sales tax reserve(a) 429 140 1,489 387
Transaction fees(b) 743 5,485 8,335 8,816
Loss on derivative liabilities(c) - - - 48,603
Certain legal costs and settlements(d) 7,459 1,029 16,329 4,452
Stock-based compensation(e) 8,117 85,745 12,951 85,745
Recruitment(f) - 17 1,138 70
COVID concessions(g) 3,744 1,590 8,283 5,923
Relocation(h) 219 258 1,658 510
Development costs(i) 1,538 932 3,815 3,720
Charitable donation(j) - 2,046 - 2,046
Restructuring costs(k) 14,550 - 14,550 -
Adjusted EBITDA $ 6,140 $ 10,115 $ 16,466 $ 26,061
(a) Represents the impact of one-time sales tax liability arising from a timing
change in the ability to enforce certain contractual terms in arrangements with
franchisees.
(b) Represents transaction costs incurred as a part of a reorganization,
acquisition-related costs in a business combination, and the issuance of
preferred and common shares, including legal, tax, accounting and other
professional services.
(c) Represents the gain on derivative liabilities related to the warrants and
the loss on derivative liabilities associated with the convertible note.
(d) Represents certain one-time legal costs, primarily related to litigation
activities and legal settlements.
(e) Represents stock-based compensation of our 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 studios impacted by COVID, including one time
COVID-19 related write-offs.
(h) Represents costs incurred as a part of the relocation of our corporate
headquarters.
(i) Represents one-time non-recurring costs incurred with launch of new brands.
(j) Represents one-time charitable donation made in the amount of total PPP loan
forgiveness pursuant to the use of proceeds discussed in our IPO prospectus.
(k) Represents costs incurred related to the restructuring performed in July
2022 (see Note 3-Restructuring in the condensed consolidated financial
statements).
(2)"Same Store Sales" means, for any reporting period, studio-level revenue
generated by a comparable base of franchise studios, which we define as Total
Studios that have been operating for more than 16 months. As of September 30,
2022 and 2021, there were 1,468 and 1,146 studios, respectively in our
comparable base of franchise studios.
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We view Same Store Sales as a helpful measure to assess performance of our franchise studios.
Several factors impact our Same 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 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 Sales of our international studios at the same exchange rates used in
the prior year. We view Same Store Sales as a helpful measure to assess
performance of our franchise studios.
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--------------------------------------------------------------------------------Components of Our Results of Operations
Revenue
We generate revenue from the following sources:
•Franchise Revenue: Consists primarily of upfront establishment fees, monthly franchise fees, and other franchise-related fees, including fees related to our brand fund, marketing and other recurring fixed fees paid by franchisees on a monthly basis for various services we provide, such as the use of intranet, email and the studio's website. Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement, generally for two additional five year terms, as well as the license for certain trademarks and systems to operate that studio. Monthly franchise fees generally become payable six to twelve months after we and a franchisee execute a franchise agreement, irrespective of whether the franchise has opened their studio. Monthly franchise fees are generally structured as the greater of i) fixed payments of$1,000-$3,000 per month per studio or ii) 7% of monthly gross sales per studio. •Equipment and Merchandise Revenue: Consist of fees paid to us in exchange for (i) World Packs for newF45 Training studios, which are comprehensive opening packs containing the standardized set of F45-branded fitness equipment and related technology required to operate anF45 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) six months from the effective date of the franchise agreement. The franchise agreement mandates all franchisees to order and update new equipment on an annual basis.
Expenses
We primarily incur the following expenses directly related to our cost of revenues:
•Cost of Franchise Revenue: Consists of direct costs associated with franchise sales, lead generation and the provision of marketing services to our franchisees. Our cost of franchise revenue changes primarily based on the number of Total Franchises Sold andTotal Studios . •Cost of Equipment and Merchandise Revenue: Primarily includes the direct costs associated with World Pack equipment as well as additional and replacement equipment and merchandise sales to new and existing franchisees. World Pack costs consist of the cost of the components included in opening packs sold to franchisees, including: (i) gym equipment; (ii) our tech pack (e.g., TVs, F45TV adapters / dongles, heart monitors); and (iii) uniforms and merchandise. Our cost of equipment and merchandise changes primarily based on the World Pack equipment sales, which is driven by the number of Franchises Sold. Cost of equipment revenue is reduced by consideration (i.e. rebates) payable by the equipment supplier, in which the amount is recognized in the condensed consolidated statements of operations and comprehensive loss generally upon delivery of the equipment. •Selling, General, and Administrative Expenses: Primarily consists of costs associated with wages and salaries, stock-based compensation expense, depreciation and amortization expenses, and ongoing administrative and franchisee support functions related to our existing franchisees. Wages and salaries and costs related to ongoing administrative and franchisee support functions are primarily associated with brand marketing, fitness programming development and testing, technology costs related to development and maintenance of our technology-enabled centralized 56 --------------------------------------------------------------------------------
delivery platform, marketing and promotional activities for the F45 Training brand, and professional expenses.
•Loss on derivative liability, net: Our loss on derivative liability, net, primarily relates to the change in the derivative liabilities' fair value based on the probability of the IPO event from when the Company entered into the subordinated convertible debt agreement to the consummation of the IPO onJuly 15, 2021 .
•Change in fair value - warrant liabilities: Our change in fair value - warrant liabilities, primarily relates to change in the fair value of outstanding warrant liabilities as a result of fluctuations in the Company's stock price .
•Other Income, Net: Our other income, net, primarily relates to realized and unrealized gains and losses on foreign currency transactions.
Provision for Income Taxes
Our effective income tax rate differed from theU.S. statutory tax rate of 21% primarily due to the effect of certain nondeductible expenses, permanent differences, foreign jurisdiction earnings taxed at different rates, withholding taxes, and a valuation allowance against certain domestic deferred tax assets that are not more likely than not to be realized.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Revenues:
Franchise (Related party: $2,188 and $ 18,565 $ 18,513 $ 57,534 $ 52,250
$2,724 for the three months ended
September 30, 2022 and 2021,
respectively, and $7,164 and $3,329 for
the nine months ended September 30,
2022 and 2021, respectively)
Equipment and merchandise (Related 10,762 8,664 51,834 19,950
party: $4,020 and $0 for the three
months ended September 30, 2022 and
2021, respectively, and $14,652 and $0
for the nine months ended September 30,
2022 and 2021, respectively)
Total revenues 29,327 27,177 109,368 72,200
Costs and operating expenses:
Cost of franchise revenue 1,469 1,486 4,390 4,162
Cost of equipment and merchandise 7,950 5,752 27,572 12,672
(Related party: $4,607 and $1,561 for
the three months ended September 30,
2022 and 2021, respectively, and $8,932
and $3,678 for the nine months ended
September 30, 2022 and 2021,
respectively)
Selling, general and administrative 53,913 110,492 138,831 145,882
expenses
Total costs and operating expenses 63,332 117,730 170,793 162,716 Loss from operations (34,005) (90,553) (61,425) (90,516) Loss on derivative liabilities, net - - - 48,603 Change in fair value - warrant (3,192) - (4,457) -
liabilities
Interest expense, net 12,620 41,897 13,442 59,165 Other expense (income), net 2,567 (2,035) 1,953 (1,415) Loss before income taxes (46,000) (130,415) (72,363) (196,869) Provision (benefit) for income taxes 14,010 (222) 20,061 693 Net loss$ (60,010) $ (130,193) $ (92,424) $ (197,562) 57
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Comparison of the three and nine months ended
Revenue
Franchise Revenue
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Franchise
USA $ 11,722 $ 11,856 $ (134) (1) %
Australia 3,302 3,328 (26) (1) %
ROW 3,541 3,329 212 6 %
Total franchise revenue $ 18,565 $ 18,513 $ 52 - %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Franchise
USA $ 36,268 $ 31,823 $ 4,445 14 %
Australia 10,242 9,319 923 10 %
ROW 11,024 11,108 (84) (1) %
Total franchise revenue $ 57,534 $ 52,250 $ 5,284 10 %
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
U.S. Australia ROW Total U.S. Australia ROW Total
Total Franchises Sold,
beginning of period 2,227 803 804 3,834 1,379 785 637 2,801
New Franchises Sold, net(a) (167) (5) 20 (152) 87 15 108 210
Total Franchises Sold, end of
period 2,060 798 824 3,682 1,466 800 745 3,011
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 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) 350 (5) 36 381 535 121 111 767
Total Franchises Sold, end of
period 2,060 798 824 3,682 1,466 800 745 3,011
(a) New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to the initial studio opening.
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
U.S. Australia ROW Total U.S. Australia ROW Total
Total Studios , beginning of
period 783 674 501 1,958 556 628 371 1,555
Initial Studio Openings,
net(a) 61 5 18 84 30 5 28 63
Total Studios , end of period 844 679 519 2,042 586 633 399 1,618
58--------------------------------------------------------------------------------
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 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) 190 26 77 293 100 17 64 181
Total Studios , end of period 844 679 519 2,042 586 633 399 1,618
(a) Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.
The$0.1 million , or 1%, decrease in franchise revenue inthe United States for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 was primarily attributable to the$0.5 million decrease as a result of the termination of the Asset Transfer and Licensing Agreement withLIIT LLC and the acceleration of recognition of billing credits previously provided during COVID shutdowns for studios for which collection was no longer considered probable of approximately$0.7 million , partially offset by the increase in total studios inthe United States driven by the increase in the number of franchise sales as well as the increase in studios openings inthe United States during the second half of 2021. The amount of Total Franchises Sold inthe United States increased by 594, or 41%, from 1,466 Franchises Sold during the three months endedSeptember 30, 2021 to 2,060 Franchises Sold during the three months endedSeptember 30, 2022 . In addition, the number ofTotal Studios inthe United States increased by 258, or 44%, from 586 studios during the three months endedSeptember 30, 2021 to 844 studios during the three months endedSeptember 30, 2022 . The$4.4 million , or 14%, increase in franchise revenue inthe United States for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily attributable to the increase in the number of franchises sold as well as an increase in studio openings inthe United States driven by the increase in the number of franchise sales as well as the increase in studios openings inthe United States , partially offset by one-time adjustments of$1.3 million and$0.9 million during the nine months endedSeptember 30, 2021 related to deferred state agreements and limited time promotional deals as described in Note 2 of the condensed consolidated financial statements and a$0.5 million decrease as a result of the termination of the Asset Transfer and Licensing Agreement withLIIT LLC . The amount of total Franchises Sold inthe United States increased by 594, or 41%, from 1,466 during the nine months endedSeptember 30, 2021 to 2,060 during the nine months endedSeptember 30, 2022 . In addition, the number ofTotal Studios inthe United States increased by 258, or 44%, from 586 studios during the nine months endedSeptember 30, 2021 to 844 studios during the nine months endedSeptember 30, 2022 . The less than$0.1 million , or 1%, decrease in franchise revenue inAustralia for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 was primarily attributable to primarily attributable to$0.2 million of unfavorable foreign currency translation adjustments as a result of weakening of the Australian dollar against theU.S. dollar and the acceleration of recognition of billing credits previously provided during COVID shutdowns for studios for which collection was no longer considered probable of approximately$0.1 million and a decrease in the total amount of Franchises Sold inAustralia which decreased by 2, or less than 1%, as a result of non-renewals, from 800 Franchises Sold during the three months endedSeptember 30, 2021 to 798 Franchises Sold during the three months endedSeptember 30, 2022 . This was partially offset by an increase in the number ofTotal Studios inAustralia which increased by 46, or 7%, from 633 studios during the three months endedSeptember 30, 2021 to 679 studios during the three months endedSeptember 30, 2022 . The$0.9 million , or 10%, increase in franchise revenue inAustralia for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily attributable to an increase in studio openings. The total amount of Franchises Sold inAustralia decreased by 2, or less than 1%, as a result of non-renewals, from 800 Franchises Sold during the nine months endedSeptember 30, 2021 to 798 Franchises Sold during the nine months endedSeptember 30, 2022 . In addition, the number 59 -------------------------------------------------------------------------------- ofTotal Studios inAustralia increased by 46, or 7%, from 633 studios during the nine months endedSeptember 30, 2021 to 679 studios during the nine months endedSeptember 30, 2022 . The$0.2 million , or 6%, increase in franchise revenue in ROW for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 was primarily attributable to the increase in the number of franchise sales as well as increase in studio openings in ROW, partially offset by a$0.3 million unfavorable foreign currency translation adjustments as a result of weakening of the Euro, British Pound, and Canadian Dollar against theU.S. Dollar. The total number of Franchises Sold in ROW increased by 79, or 11%, from 745 Franchises Sold during the three months endedSeptember 30, 2021 to 824 Franchises Sold during the three months endedSeptember 30, 2022 . In addition, the number ofTotal Studios in ROW increased by 120, or 30%, from 399 studios during the three months endedSeptember 30, 2021 to 519 studios during the three months endedSeptember 30, 2022 . The$0.1 million , or 1%, decrease in franchise revenue in ROW for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily attributable to the impact of one-time adjustments related to limited time promotional deals of$1.2 million described in Note 2 of the condensed consolidated financial statements during the nine months endedSeptember 30, 2021 as well as a$0.6 million decrease in franchise revenue as a result of unfavorable foreign currency translation adjustments as a result of weakening of the Euro, British Pound, and Canadian Dollar against theU.S. Dollar, partially offset by an increase in total number of Franchises Sold of 79, or 11%, from 745 Franchises Sold during the nine months endedSeptember 30, 2021 to 824 Franchises Sold during the nine months endedSeptember 30, 2022 . In addition, the number ofTotal Studios in ROW increased by 120, or 30%, from 399 studios during the nine months endedSeptember 30, 2021 to 519 studios during the nine months endedSeptember 30, 2022 .
Equipment and Merchandise Revenue
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Equipment and merchandise
USA $ 4,805 $ 4,162 $ 643 15 %
Australia 664 2,234 (1,570) (70) %
ROW 5,293 2,268 3,025 133 %
Total equipment and merchandise revenue $ 10,762 $ 8,664 $ 2,098 24 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Equipment and merchandise
USA $ 34,206 $ 11,166 $ 23,040 206 %
Australia 3,893 3,762 131 3 %
ROW 13,735 5,022 8,713 173 %
Total equipment and merchandise revenue $ 51,834 $ 19,950 The$0.6 million , or 15%, increase in equipment and merchandise revenue inthe United States for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 was primarily attributable to the increase in equipment and merchandise deliveries that was driven by purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment. The total deliveries of equipment and merchandise increased by 5, or 16%, from 31 60 --------------------------------------------------------------------------------
studios during the three months ended
The$23.0 million , or 206%, increase in equipment and merchandise revenue inthe United States for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily attributable to the increase in equipment and merchandise deliveries that was driven by purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment. The total deliveries of equipment and merchandise increased by 174, or 191%, from 91 studios during the nine months endedSeptember 30, 2021 to 265 studios during the nine months endedSeptember 30, 2022 The$1.6 million , or 70%, decrease in equipment and merchandise revenue inAustralia for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 inAustralia was largely attributable to the decrease in equipment deliveries, largely as it relates to the launch of FS8, the Company's fitness concept remixing of Pilates, yoga and tone which initially launched inAustralia inMarch 2021 , during the prior year and its associated equipment deliveries for FS8 studios and a decrease in orders of required top-up equipment. The total deliveries of equipment decreased by 4, or 44%, from 9 studios during the three months endedSeptember 30, 2021 to 5 studios during the three months endedSeptember 30, 2022 . The$0.1 million , or 3%, increase in equipment and merchandise revenue inAustralia for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 inAustralia was largely attributable to the increase in equipment deliveries, including the launch of FS8 and its associated equipment deliveries for the FS8 studios. The total deliveries of equipment increased by 5, or 26%, from 19 studios during the nine months endedSeptember 30, 2021 to 24 studios during the nine months endedSeptember 30, 2022 . The$3.0 million , or 133%, increase in equipment and merchandise revenue for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 in ROW was primarily attributable to the increase in equipment and merchandise deliveries, the majority of which related to purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment, partially offset by$1.0 million decrease in equipment and merchandise revenue as a result of unfavorable foreign currency translation adjustments as a result of weakening of the Euro, British Pound, and Canadian Dollar against theU.S. Dollar. The total deliveries of equipment and merchandise increased by 40, or 250%, from 16 studios during the three months endedSeptember 30, 2021 to 56 studios during the three months endedSeptember 30, 2022 . The$8.7 million , or 173%, increase in equipment and merchandise revenue for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 in ROW was primarily attributable to the increase in equipment and merchandise deliveries, the majority of which related to purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment, partially offset by$1.3 million of unfavorable foreign currency translation adjustments as a result of weakening of the Euro, British Pound, and Canadian Dollar against theU.S. Dollar. The total deliveries of equipment and merchandise increased by 100, or 200%, from 50 studios during the nine months endedSeptember 30, 2021 to 150 studios during the nine months endedSeptember 30, 2022 . 61 --------------------------------------------------------------------------------
Cost of revenue
Cost of franchise revenue
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Franchise
USA $ 1,158 $ 1,047 $ 111 11 %
Australia 168 158 10 6 %
ROW 143 281 (138) (49) %
Total cost of franchise revenue $ 1,469 $ 1,486 $ (17) (1) %
Percentage of franchise revenue 8 % 8 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Franchise
USA $ 3,565 $ 3,377 $ 188 6 %
Australia 473 430 43 10 %
ROW 352 355 (3) (1) %
Total cost of franchise revenue $ 4,390 $ 4,162 $ 228 5 %
Percentage of franchise revenue 8 % 8 %
The $0.1 million , or 11%, increase in cost of franchise revenue in the United
States for the three months ended September 30, 2022 as compared to the same
period in 2021 was primarily attributable to the increase in marketing expenses
reflective of an increase in initial studio openings, net, during the three
months ended September 30, 2022 of 61 compared to 30 initial studio openings
during the three months ended September 30, 2021 .
The $0.2 million , or 6%, increase in cost of franchise revenue in the United
States for the nine months ended September 30, 2022 as compared to the same
period in 2021 was primarily attributable to an increase in marketing expenses
reflective of an increase in initial studio openings, net, during the nine
months ended September 30, 2022 of 190 compared to 100 initial studio openings
during the nine months ended September 30, 2021 .
The less than $0.1 million , or 6%, increase in cost of franchise revenue in
Australia during the three months ended September 30, 2022 as compared to the
same period in 2021 was attributable to an increase in expenses related to the
membership marketing programs as studios re-started and re-initiated campaigns
previously paused during the COVID-19 pandemic.
The less than $0.1 million , or 10%, increase in cost of franchise revenue in
Australia during the nine months ended September 30, 2022 as compared to the
same period in 2021 was attributable to an increase in expenses related to the
membership marketing programs as studios re-started and re-initiated campaigns
previously paused during the COVID-19 pandemic.
The $0.1 million , or 49%, decrease in cost of franchise revenue in ROW during
the three months ended September 30, 2022 as compared to the same period in 2021
was primarily attributable to a year-over-year decline in the number of
Franchises Opened with 18 Franchises Opened in the three months ended
62
--------------------------------------------------------------------------------The less than$0.1 million , or 1%, decrease in cost of franchise revenue in ROW during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily attributable to the decrease in marketing expense in the nine months endedSeptember 30, 2022 .
Cost of equipment and merchandise revenue
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Equipment and merchandise
USA $ 3,796 $ 2,239 $ 1,557 70 %
Australia 606 1,992 (1,386) (70) %
ROW 3,548 1,521 2,027 133 %
Total cost of equipment and merchandise
revenue $ 7,950 $ 5,752 $ 2,198 38 %
Percentage of equipment and merchandise
revenue 74 % 66 %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Equipment and merchandise
USA $ 16,794 $ 6,154 $ 10,640 173 %
Australia 3,394 3,313 81 2 %
ROW 7,384 3,205 4,179 130 %
Total cost of equipment and merchandise
revenue $ 27,572 $ 12,672 $ 14,900 118 %
Percentage of equipment and merchandise
revenue 53 % 64 %
The $1.6 million , or 70%, increase in cost of equipment and merchandise revenue
for the United States for the three months ended September 30, 2022 as compared
to the same period in 2021 was primarily attributable to the increase in
equipment and merchandise deliveries accompanied by an increase in materials
input cost from our primary vendor and higher logistics costs, partially offset
by $0.5 million of rebates that was recorded as a reduction to the cost of
equipment delivered to franchisees in the quarter ended September 30, 2022 .
The $10.6 million , or 173%, increase in cost of equipment and merchandise
revenue for the United States for the nine months ended September 30, 2022 as
compared to the same period in 2021 was primarily attributable to the increase
in equipment and merchandise deliveries, partially offset by $3.5 million of
rebates that was recorded as a reduction to the cost of equipment delivered to
franchisees during the nine months ended September 30, 2022 .
The $1.4 million , or 70%, decrease in cost of equipment and merchandise for
Australia for the three months ended September 30, 2022 as compared to the same
period in 2021 was primarily attributable to the increase in equipment and
merchandise deliveries accompanied by an increase in materials input cost from
our primary vendor and higher logistics costs, offset by less than $0.0 million
of rebates that was recorded as a reduction to the cost of equipment delivered
to franchisees in the quarter ended September 30, 2022 .
The less than $0.1 million , or 2%, increase in cost of equipment and merchandise
for Australia for the nine months ended September 30, 2022 as compared to the
same period in 2021 was primarily due to an
63
--------------------------------------------------------------------------------
increase in equipment and merchandise deliveries, partially offset by
The$2.0 million , or 133%, increase in cost of equipment and merchandise for ROW for the three months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily attributable to the increase in equipment and merchandise deliveries accompanied by an increase in materials input cost from our primary vendor and higher logistics costs, partially offset by$0.8 million of rebates that was recorded as a reduction to the cost of equipment delivered to franchisees in the quarter endedSeptember 30, 2022 . The$4.2 million , or 130%, increase in cost of equipment and merchandise for ROW for the nine months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily attributable to an increase in equipment and merchandise deliveries, partially offset by$2.0 million of rebates that was recorded as a reduction to the cost of equipment delivered to franchisees during the nine months endedSeptember 30, 2022 .
Selling, general, and administrative expenses
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Selling, general and administrative expenses
$ (56,579) (51) % Percentage of revenue 184 % 407 % Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands)
Selling, general and administrative expenses
$ (7,051) (5) % Percentage of revenue 127 % 202 % The$56.6 million , or 51%, decrease in selling, general, and administrative expenses during the three months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily attributable to a$47.4 million decrease in promoter related expenses related to stock awards from existing promotional agreements granted by the Company's IPO which resulted in cumulative expenses recognized at time of our IPO, a$28.8 million decrease in stock based compensation granted to certain employees and directors which partially vested at grant date related to the Company's IPO, partially offset a$11.7 million increase of payroll related to an increase in headcount prior to the restructuring performed by the Company duringJuly 2022 and associated severance costs incurred for employees impacted by the restructuring performed, a$11.3 million increase in legal and professional fees associated with ongoing legal proceedings, litigation accruals, and fees incurred with third party advisors for general corporate services, a$2.7 million increase in bad debt expense associated with write-off of balances incurred during periods impacted by COVID, a$0.9 million increase in rent expense primarily driven by our new office space inAustin, Texas and additional corporate facilities inFlorida , and a$0.5 million increase in depreciation and amortization expense mainly related to the amortization of intangible assets associated with our acquisition of Vive.
The
64
--------------------------------------------------------------------------------
million decrease in promoter related expenses related to stock awards from
existing promotional agreements granted by the Company's IPO which resulted in
cumulative expenses recognized at time of our IPO, a $29.9 million decrease in
stock based compensation granted to certain employees and directors which
partially vested at grant date related to the Company's IPO, partially offset a
$26.5 million increase of payroll related to an increase in headcount prior to
the restructuring performed by the Company during July 2022 and associated
severance costs incurred for employees impacted by the restructuring performed,
a $15.5 million increase in legal and professional fees associated with ongoing
legal proceedings, litigation accruals, and fees incurred with third party
advisors for general corporate services, a $4.4 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 nine months
ended September 30, 2021 , a $5.9 million increase in bad debt expense associated
with write-off of balances incurred during periods impacted by COVID, a $3.1
million increase in rent expense primarily driven by our new office space in
Austin, Texas and additional corporate facilities in Florida , and a $1.8 million
increase in depreciation and amortization expense mainly related to the
amortization of Flywheel intangible and amortization of intangible assets
associated with our acquisition of Vive.
Loss on derivative liabilities
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Loss on derivative liabilities, net $ - $ - $ - - %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Loss on derivative liabilities, net $ - $ 48,603 $ (48,603) (100) %
OnOctober 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 onSeptember 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 were measured at fair value as ofOctober 6, 2020 , and the subsequent change in the estimated fair value was recorded as a loss during the three and nine months endedSeptember 30, 2021 . The$48.6 million loss on derivative liabilities during the nine months endedSeptember 30, 2021 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 inOctober 2020 to the consummation of the IPO onJuly 15, 2021 . The embedded derivatives were extinguished in connection with the repayment of the debt upon the IPO. 65 --------------------------------------------------------------------------------
Change in valuation - warrant liabilities
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Change in fair value - warrant liabilities $ (3,192) $ - $ (3,192) (100) %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Change in fair value - warrant liabilities (4,457) $ - The$3.2 million and$4.5 million decrease in change in fair value of Warrant liabilities during three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021 was attributable to the change in the Warrant liabilities' fair value resulting from the decrease in the Company's share price subsequent to the issuance of the Warrants onMay 13, 2022 and subsequent termination of the New Credit Agreement onAugust 14, 2022 . As a result of the termination of the New Credit Agreement, the outstanding warrants were considered terminated as ofSeptember 30, 2022 Interest expense, net Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Interest expense, net$ 12,620 $ 41,897 $ (29,277) (70) % Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Interest expense, net$ 13,442 $ 59,165 $ (45,723) (77) % The$29.3 million and$45.7 million decrease in interest expense, net for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021 was primarily attributable write off of debt discounts and penalties as a result of the early repayments of indebtedness in connection with the IPO, offset by the write off of debt issuance costs associated with the New Credit Facility which terminated onAugust 14, 2022 . The following table reflects the write off of debt discounts and penalties incurred during the three and nine months endedSeptember 30, 2022 endedSeptember 30, 2022 and 2021 that are included in the interest expense (in thousands): 66 --------------------------------------------------------------------------------
Three and Nine Months Ended September 30,
2022 2021
New Credit Agreement $ 8,758 $ -
Subordinated Convertible Debt - 23,740
Subordinated Second Lien Loan - 17,497
First Lien Loan - 241
$ 8,758 $ 41,478
Other expense (income), net
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Other expense (income), net $ 2,567 $ (2,035) $ 4,602 (226) %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Other expense (income), net $ 1,953 $ (1,415) $ 3,368 (238) %
The $4.6 million and $3.4 million increase in other expense, net represents
realized and unrealized gains and losses on foreign currency transactions during
the three and nine months ended September 30, 2022 , respectively. This increase
during the during the three and nine months ended September 30, 2022 was mostly
due to the volatility of foreign exchange rates during the three and nine months
ended September 30, 2022 as a result of the strengthening of the U.S. dollar
relative to the Australian dollar during the same period in 2021.
Provision (benefit) for income taxes
Three Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Provision (benefit) for income taxes $ 14,010 $ (222) $ 14,232 (6,411) %
Nine Months Ended
September 30, Change
2022 2021 $ %
(dollars in thousands)
Provision (benefit) for income taxes $ 20,061 $ 693 The$14.2 million and$19.4 million increase in the provision for income taxes was primarily driven by an the implementation of a valuation allowance at our US segment during the three and nine months endedSeptember 30, 2022 . 67 -------------------------------------------------------------------------------- Liquidity and Capital Resources
Overview
As ofSeptember 30, 2022 , we held$16.7 million of cash, cash equivalents, and restricted cash, of which$5.3 million was held by our foreign subsidiaries outside ofthe United States . Restricted cash relates to cash held in term deposits. 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 ofSeptember 30, 2022 , our intent was to permanently reinvest these funds outside ofthe United States . Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately$30.9 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 tothe 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 inthe United States , to the extent applicable and material, we will revise future filings to address the potential tax implications.
As of
We believe that our operating cash flows and cash on hand as well as the reduction in expenditures resulting from the reduction in force implemented during the quarter endedSeptember 30, 2022 , will be adequate to meet our operating, investing and financing needs for the next 12 months. However, changes in forecasted growth and available funds could have a further negative impact on our future liquidity. 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 through the incurrence of additional indebtedness, additional equity financings, the sale of excess inventory, reduction of promotional and professional advisory contracts, or a combination of these potential sources of funds and reductions of expenses; however, such financing or reductions 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 this 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 Nine Months Ended September 30, 2022 2021 (dollars in thousands) Net cash used in operating activities$ (88,977) $ (34,758) Net cash used in investing activities (9,074) (27,370) Net cash provided by financing activities 73,347 85,576
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(558) 203
Net change in cash, cash equivalents, and restricted cash
$ 23,651
Net cash used in operating activities
Net cash used in operating activities during the nine months ended
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net cash outflow of $46.9 million from changes in operating assets and
liabilities. Non-cash charges primarily consisted of $14.0 million loss on the
Fortress Financing Facility, $11.7 million for deferred income taxes,
$11.5 million for stock-based compensation expense and $11.3 million provision
for bad debt, slightly offset by a $4.5 million of gain on the change in fair
value related to the Company's warrant liability. The net cash outflow from
changes in operating assets and liabilities were primarily the result of a
$2.9 million increase in prepaid expenses, which increased due to our deposits
placed on equipment and merchandise, an $16.4 million increase in accounts
receivable, which increased primarily due to orders on equipment and
merchandise, a $12.9 million increase in other current assets and a $6.5 million
increase in other assets due to an increase in unbilled receivables, a $41.8
million increase in inventory, partially offset by a $24.5 million increase in
accounts payable and accrued expenses.
Net cash used in operating activities during the nine months ended September 30,
2021 , was $34.8 million , which resulted from a net loss of $197.6 million ,
adjusted for non-cash charges of $199.1 million and net cash inflow of $36.3
million from changes in operating assets and liabilities. Non-cash charges
primarily consisted of $85.7 million of stock based compensation, $48.6 million
for loss on derivative liability, $31.6 million accretion and write-off of debt
discount, $12.9 million of paid-in-kind interest, and $5.4 million provision for
bad debt. The net cash outflow from changes in operating assets and liabilities
were primarily the result of a $5.4 million increase in accounts payable and
accrued expenses, a $1.0 million increase in deferred revenue, a $0.2 million
increase in other liabilities, partially offset by a $11.4 million increase in
accounts receivable, a $7.1 million increase in inventory, and a $9.3 million
increase in other assets.
Net cash used in investing activities
Net cash used in investing activities during the nine months ended
Net cash used in investing activities during the nine months endedSeptember 30, 2021 of$27.4 million resulted primarily from the asset acquisition of Flywheel CRM software and Flywheel brand names of$25.0 million , purchases of property and equipment of$1.5 million and capitalization of internal-use software development costs, trademarks, and patents of$0.9 million .
Net cash provided by financing activities
Net cash provided by financing activities of$73.3 million during the nine months endedSeptember 30, 2022 , was primarily due to borrowings under our Revolving Facility of$87.9 million during the nine months endedSeptember 30, 2022 to provide cash to fund purchases and deposits placed on equipment. The net change in cash provided by financing activities was partially offset by$11.4 million of taxes paid related to net share settlement of equity awards.
Net cash used in financing activities of
Contractual Obligations and Commitments
Contractual obligations and commitments as ofSeptember 30, 2022 , consisted of$30.5 million in operating leases, of which all of which is due within the next four years and thereafter. Please see Note 11-Debt and Note 17-Commitments and contingencies to the interim unaudited condensed consolidated financial statements for discussion of the contractual obligations related to our debt and operating leases, respectively. 69 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , our off-balance sheet arrangements consisted of guaranties provided by the Company for leases for office space by unconsolidated organizations and standby letters of credit. See Note 17-Commitments and contingencies and Note 11-Debt to the interim unaudited condensed consolidated financial statements included elsewhere in this filing for more information regarding these guaranties.
Critical Accounting Policies and Use of Estimates
Our condensed consolidated financial statements included elsewhere in this filing have been prepared in accordance withU.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, 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. Our actual results could differ materially from these estimates under different assumptions or conditions. 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. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those described in Note 2-Summary of significant accounting policies in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K datedMarch 23, 2022 .
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. The Company recorded impairment charges of$0.1 million during the three and nine months endedSeptember 30, 2022 . There were no impairment charges recorded on long-lived assets during the three and nine months ended 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
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value of such indefinite-lived intangible asset has been impaired. No impairment
of our indefinite-lived intangible asset was recorded during the three and nine
months ended September 30, 2022 and 2021.
Recent accounting pronouncements
See Note 2-Summary of significant accounting 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 statements 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.
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