THE BEACHBODY COMPANY, INC. The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Report") and the section entitled "Risk Factors." Unless otherwise indicated, the terms "Beachbody ," "we," "us," or "our" refer to TheBeachbody Company, Inc. , aDelaware corporation, together with its consolidated subsidiaries.
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended ("Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
including statements about and the financial condition, results of operations,
earnings outlook and prospects of the Company. Forward-looking statements are
typically identified by words such as "plan," "believe," "expect," "anticipate,"
"intend," "outlook," "estimate," "forecast," "project," "continue," "could,"
"may," "might," "possible," "potential," "predict," "should," "would" and other
similar words and expressions, but the absence of these words does not mean that
a statement is not forward-looking.
The forward-looking statements are based on our current expectations as
applicable and are inherently subject to uncertainties and changes in
circumstances and their potential effects and speak only as of the date of such
statement. There can be no assurance that future developments will be those that
have been anticipated. These forward-looking statements involve a number of
risks, uncertainties or other assumptions that may cause actual results or
performance to be materially different from those expressed or implied by these
forward-looking statements. These risks and uncertainties include, but are not
limited to the following:
•
our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, operating expenses including changes in selling and marketing, general and administrative, and enterprise technology and development expenses (including any components of the foregoing), Adjusted EBITDA (as defined below) and our ability to achieve and maintain future profitability;
•
our anticipated growth rate and market opportunity;
•
our liquidity and ability to raise financing;
•
our success in retaining or recruiting, or changes required in, officers, key employees or directors;
•
our warrants are accounted for as liabilities and changes in the value of such warrants could have a material effect on our financial results;
•
our ability to effectively compete in the fitness and nutrition industries;
•
our ability to successfully acquire and integrate new operations;
•
our reliance on a few key products;
•
market conditions and global and economic factors beyond our control;
•
intense competition and competitive pressures from other companies worldwide in the industries in which we will operate;
•
litigation and the ability to adequately protect our intellectual property rights;
•
other risk and uncertainties set forth in this Report under the heading "Risk Factors."
Should one or more of these risks or uncertainties materialize or should any of the assumptions made by management prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
24
--------------------------------------------------------------------------------Overview
Beachbody is a leading subscription health and wellness company. We focus primarily on digital content, supplements, connected fitness, and consumer health and wellness. Our goal is to continue to provide holistic health and wellness content and subscription-based solutions. We are the creator of some of the world's most popular fitness programs, including P90X, Insanity, and 21 Day Fix, which transformed the at-home fitness market and disrupted the global fitness industry by making it accessible for people to get results-anytime, anywhere. Our comprehensive nutrition-first programs, Portion Fix and 2B Mindset, teach healthy eating habits and promote healthy, sustainable weight loss. These fitness and nutrition programs are available through ourBeachbody On Demand and Beachbody On Demand Interactive streaming services. We offer nutritional products such as Shakeology nutrition shakes, BEACHBAR snack bars, and Ladder premium supplements as well as a professional-grade stationary cycle with a 360-degree touch screen tablet and connected fitness software. Leveraging our history of fitness content creation, nutrition innovation, and our network of micro-influencers, whom we call Coaches, we plan to continue market penetration into connected fitness to reach a wider health, wellness and fitness audience. Historically, our revenue has been generated primarily through our network of Coaches, social media marketing channels, and direct response advertising. Components of revenue include recurring digital subscription revenue, connected fitness revenue, and revenue from the sale of nutritional and other products. In addition to selling individual products on a one-time basis, we bundle digital and nutritional products together at discounted prices.
For the three months ended
•
Total revenue was
•
Digital revenue was
•
Nutrition and other revenue was
•
Connected fitness revenue was
•
Net loss was
•
Adjusted EBITDA was
For the nine months ended
•
Total revenue was
•
Digital revenue was
•
Nutrition and other revenue was
•
Connected fitness revenue was
•
Net loss was
•
Adjusted EBITDA was
See "Non-GAAP Information" below for information regarding our use of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.
Recent Developments
We believe post-pandemic consumer behavior, the general slowdown of the global
economy, and rising prices for consumer products and services have adversely
impacted demand for at-home fitness solutions. These adverse conditions,
combined with unprecedented supply chain surcharges and disruptions, have
contributed to declines in our gross margins. Given the uncertainty for how long
these macroeconomic factors will continue, we currently anticipate the negative
impact to our gross margins to continue at least through the remainder of fiscal
year 2022. We plan to mitigate these challenging macroeconomic factors with
strategies that we expect will drive our future success and growth.
25
--------------------------------------------------------------------------------Digital Gross Margin
We believe our "One Brand" strategy, which consolidated our streaming content into a singleBeachbody platform and was implemented during the third quarter of 2022, will simplify our product offerings for customers and lead to an increase in customer acquisition. We believe that strengthening our Coach network will generate additional digital revenue from our Coach business management online platform as well as drive growth in digital and nutritional subscriptions. Since the second quarter of 2022, we have been testing new incentives and training programs for our Coach network to improve Coach recruitment and retention and their ability to reach more customers.
Nutrition and Other Gross Margin
Our nutritional products are often bundled with digital content offerings, and we continue to develop enhancements to our upsell and cross-sell capabilities. We are also currently reviewing our nutritional product portfolio and will simplify our offerings with nutritional products that meet our profitability requirements and/or reflect market demand. We also intend to test price increases to counteract rising supply chain costs.
Connected Fitness Gross Margin
We anticipate that our connected fitness gross margin will remain negative until we sell through our current inventory on hand. As a result of supply chain constraints, we have adjusted our inventory to net realizable value based on the costs to manufacture, transport, fulfill, and ship a Beachbody Bike. Incremental costs of revenue excluded from this adjustment, such as customer service, personnel-related expenses, and amortization of acquired intangible assets, have led to an unprofitable margin. We have been limited in our ability to sufficiently increase pricing to mitigate costs due to the highly competitive nature of the connected fitness market. For the remainder of 2022, we will explore different strategies such as pricing and bundling to accelerate demand for our current inventory. Consumer response to these strategies is uncertain, and we may be required to continue to reduce the carrying value of connected fitness inventory through the remainder of the year. See "Risk Factors - Risks Related to Our Business and Industry - Our operating results could be adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory" in our Annual Report on Form 10-K.
Key Operational and Business Metrics
We use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.
As of September 30,
2022 2021
Digital subscriptions (millions) 2.10 2.64
Nutritional subscriptions (millions) 0.24 0.34
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Average digital retention 95.7 % 95.6 % 95.6 % 95.5 %
Total streams (millions) 27.5 35.9 96.7 136.4
DAU/MAU 29.5 % 29.6 % 30.4 % 32.1 %
Revenue (millions) $ 166.0 $ 208.1 $ 544.0 $ 657.4
Gross profit (millions) $ 104.7 $ 135.0 $ 285.0 $ 447.4
Gross margin 63 % 65 % 52 % 68 %
Net loss (millions) $ (33.9 ) $ (39.9 ) $ (149.3 ) $ (82.4 )
Adjusted EBITDA (millions) $ (6.2 ) $ (43.4 ) $ (26.8 ) $ (59.5 )
Please see "Non-GAAP Information" below for a reconciliation of net loss to Adjusted EBITDA and an explanation for why we consider Adjusted EBITDA to be a helpful metric for investors.
26
--------------------------------------------------------------------------------Digital Subscriptions
Our ability to expand the number of digital subscriptions is an indicator of our market penetration and growth. Digital subscriptions include BOD,BODi , and prior to Q3 2022, Openfit subscriptions. Digital subscriptions include paid and free-to-pay subscriptions, with free-to-pay subscriptions representing approximately 1% of total digital subscriptions on average. Digital subscriptions are inclusive of all billing plans, currently for annual, semi-annual, quarterly and monthly billing intervals.
Nutritional Subscriptions
Nutritional subscriptions include monthly subscriptions for nutritional products such as Shakeology, Beachbody Performance, BEACHBAR, Bevvy and Ladder Supplements. We also package and bundle the content experience of digital subscriptions with nutritional subscriptions to optimize customer results.
Average Digital Retention
We use month-over-month digital subscription retention, which we define as the average rate at which a subscription renews for a new billing cycle, to measure customer retention. Total Streams We use total streams to quantify the number of fitness or nutrition programs viewed per subscription, which is a leading indicator of customer engagement and retention. While the measure of a digital stream may vary across companies, to qualify as a stream on any of our digital platforms, a program must be viewed for a minimum of 25% of the total running time.
Daily Active Users to Monthly Active Users (DAU/MAU)
We use the ratio of daily active users to monthly active users to measure how frequently digital subscribers are utilizing our service in a given month. We define a daily active user as a unique user streaming content on our platform in a given day. We define a monthly active user as a unique user streaming content on our platform in that same month.
Non-GAAP Information
We use Adjusted EBITDA, which is a non-GAAP performance measure, to supplement our results presented in accordance with GAAP. We believe Adjusted EBITDA is useful in evaluating our operating performance, as it is similar to measures reported by our public competitors and is regularly used by security analysts, institutional investors, and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA is not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. We define and calculate Adjusted EBITDA as net income (loss) adjusted for impairment of goodwill and intangible assets, depreciation and amortization, amortization of capitalized cloud computing implementation costs, amortization of content assets, interest expense, income tax provision (benefit), equity-based compensation, inventory net realizable value adjustment, and other items that are not normal, recurring, operating expenses necessary to operate the Company's business as described in the reconciliation below. We include this non-GAAP financial measure because it is used by management to evaluateBeachbody's core operating performance and trends and to make strategic decisions regarding the allocation of capital and new investments. Adjusted EBITDA excludes certain expenses that are required in accordance with GAAP because they are non-cash (for example, in the case of depreciation and amortization, equity-based compensation, and net realizable value adjustment) or are not related to our underlying business performance (for example, in the case of interest income and expense). 27 --------------------------------------------------------------------------------
The table below presents our Adjusted EBITDA reconciled to our net loss, the closest GAAP measure, for the periods indicated:
Three months ended September 30, Nine months ended September 30,
(in thousands) 2022 2021 2022 2021
Net loss $ (33,859 ) $ (39,922 ) $ (149,259 ) $ (82,420 )
Adjusted for:
Impairment of intangible assets 1,000 - 1,000 -
Depreciation and amortization 17,306 14,616 58,858 40,557
Amortization of capitalized cloud
computing implementation costs 126 168 462 504
Amortization of content assets 5,493 3,889 18,673 10,008
Interest expense 1,152 62 1,174 490
Income tax benefit (549 ) (1,487 ) (1,536 ) (12,739 )
Equity-based compensation 5,601 5,744 13,166 10,839
Inventory net realizable value
adjustment (1) (1,867 ) - 23,569 -
Transaction costs - 677 2 2,819
Restructuring and platform
consolidation costs (2) 1,745 - 11,718 -
Change in fair value of warrant
liabilities (2,362 ) (30,274 ) (4,696 ) (35,664 )
Other adjustment items (3) - 3,044 - 9,082
Non-operating (4) (15 ) 71 61 (3,017 )
Adjusted EBITDA $ (6,229 ) $ (43,412 ) $ (26,808 ) $ (59,541 )
(1)
Represents a non-cash expense to reduce the carrying value of our connected
fitness inventory and related future commitments. This adjustment is included
because of its unusual magnitude due to disruptions in the connected fitness
market.
(2)
Includes restructuring expense and non-recurring personnel costs associated primarily with the consolidation of our digital platforms.
(3)
Incremental costs associated with COVID-19.
(4)
Includes interest income, and during the nine months ended
28
--------------------------------------------------------------------------------Results of Operations
Prior to the three months endedSeptember 30, 2022 , we operated and managed our business in two operating segments,Beachbody and Other, and one reportable segment,Beachbody . During the three months endedSeptember 30, 2022 , in connection with the consolidation of our Openfit streaming fitness offering onto a singleBeachbody digital platform and based on the information used by management to monitor performance and make operating decisions, we changed our segment reporting as it was determined that there is one consolidated operating segment. See Note 1, Description of Business and Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements included elsewhere in this Report for additional information regarding our segment.
The following discussion of our results and operations is on a consolidated basis.
(in thousands) Three months endedSeptember 30 ,
Nine months ended
2022 2021 2022 2021
Revenue:
Digital $ 72,228 $ 94,072 $ 231,988 $ 283,547
Nutrition and other 90,416 108,053 278,596 367,895
Connected fitness 3,331 5,927 33,449 5,937
Total revenue 165,975 208,052 544,033 657,379
Cost of revenue:
Digital 16,078 12,124 50,909 34,858
Nutrition and other 40,486 50,682 127,262 164,679
Connected fitness 4,745 10,261 80,910 10,417
Total cost of revenue 61,309 73,067 259,081 209,954
Gross profit 104,666 134,985 284,952 447,425
Operating expenses:
Selling and marketing 93,145 153,782 286,213 438,672
Enterprise technology and
development 25,686 29,680 83,516 83,718
General and administrative 19,532 23,346 59,189 58,523
Restructuring 1,492 - 10,047 -
Impairment of intangible assets 1,000 - 1,000 -
Total operating expenses 140,855 206,808 439,965 580,913
Operating loss (36,189 ) (71,823 ) (155,013 ) (133,488 )
Other income (expense)
Change in fair value of warrant
liabilities 2,362 30,274 4,696 35,664
Interest expense (1,152 ) (62 ) (1,174 ) (490 )
Other income, net 571 202 696 3,155
Loss before income taxes (34,408 ) (41,409 ) (150,795 ) (95,159 )
Income tax benefit 549 1,487 1,536 12,739
Net loss $ (33,859 ) $ (39,922 ) $ (149,259 ) $ (82,420 )
29--------------------------------------------------------------------------------
Revenue
Revenue includes digital subscriptions, nutritional supplement subscriptions,
one-time nutritional sales, connected fitness products, access to our online
Coach business management platform, preferred customer program memberships, and
other fitness-related products. Digital subscription revenue is recognized
ratably over the subscription period of up to 12 months. We often sell bundled
products that combine digital subscriptions, nutritional products, and/or other
fitness products. We consider these sales to be revenue arrangements with
multiple performance obligations and allocate the transaction price to each
performance obligation based on its relative stand-alone selling price. We defer
revenue when we receive payments in advance of delivery of products or the
performance of services.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenue
Digital $ 72,228 $ 94,072 $ (21,844 ) (23 %)
Nutrition and other 90,416 108,053 (17,637 ) (16 %)
Connected fitness 3,331 5,927 (2,596 ) (44 %)
Total revenue $ 165,975 $ 208,052 $ (42,077 ) (20 %)
The decrease in digital revenue for the three months ended September 30, 2022 ,
as compared to the three months ended September 30, 2021 , was primarily due to
an $11.9 million decrease in revenue generated from our online Coach business
management platform as a result of fewer Coaches. The decrease in Coaches was
primarily attributable to our preferred customer membership program, which
launched at the end of Q3 2021, as certain Coaches elected to become preferred
customers rather than remain in our Coach network. The change in digital revenue
was also due to a $9.2 million decrease in revenue from our digital streaming
services due to 20% fewer subscriptions.
The decrease in nutrition and other revenue for the three months ended September
30, 2022 , as compared to the three months ended September 30, 2021 , was
primarily due to a $23.4 million decrease in revenue from nutritional products
and a $1.8 million decrease in associated shipping revenue as we ended Q3 2022
with 29% fewer nutritional subscriptions compared to Q3 2021. These decreases
were partially offset by $8.1 million of revenue associated with our preferred
customer membership program, which launched at the end of Q3 2021.
The decrease in connected fitness revenue for the three months ended
Nine months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenue
Digital $ 231,988 $ 283,547 $ (51,559 ) (18 %)
Nutrition and other 278,596 367,895 (89,299 ) (24 %)
Connected fitness 33,449 5,937 27,512 NM
Total revenue $ 544,033 $ 657,379 $ (113,346 ) (17 %)
NM = not meaningful
The decrease in digital revenue for the nine months ended September 30, 2022 , as
compared to the nine months ended September 30, 2021 , was primarily due to a
$36.3 million decrease in revenue generated from our online Coach business
management platform as a result of fewer Coaches. The decrease in Coaches was
primarily attributable to our preferred customer membership program, which
launched at the end of Q3 2021, as certain Coaches elected to become preferred
customers rather than remain in our Coach network. The change in digital revenue
was also due to a $14.3 million decrease in revenue from our digital streaming
services which was due, in part, to 20% fewer digital subscriptions.
The decrease in nutrition and other revenue for the nine months ended September
30, 2022 , as compared to the nine months ended September 30, 2021 , was primarily
due to a $99.7 million decrease in revenue from nutritional products and a $9.4
million decrease in associated shipping revenue as we ended Q3 2022 with 29%
fewer nutritional subscriptions compared to Q3 2021. These decreases were
partially offset by $25.4 million of revenue associated with our preferred
customer membership program, which launched at the end of Q3 2021.
30
--------------------------------------------------------------------------------
The increase in connected fitness revenue for the nine months ended September
30, 2022 , as compared to the nine months ended September 30, 2021 was primarily
due to the acquisition of Myx on June 25, 2021 ; there was minimal connected
fitness revenue for the six months ended June 30, 2021 .
Cost of Revenue
Digital Cost of Revenue
Digital cost of revenue includes costs associated with digital content creation including amortization and revision of content assets, depreciation of streaming platforms, digital streaming costs, and amortization of acquired digital platform intangible assets. It also includes customer service costs, payment processing fees, depreciation of production equipment, live trainer costs, facilities, and related personnel expenses.
Nutrition and Other Cost of Revenue
Nutrition and other cost of revenue includes product costs, shipping and handling, fulfillment and warehousing, customer service, and payment processing fees. It also includes depreciation of nutrition-related e-commerce websites and social commerce platforms, amortization of acquired formulae intangible assets, facilities, and related personnel expenses.
Connected Fitness Cost of Revenue
Connected fitness cost of revenue consists of product costs, including bike and
tablet hardware costs, duties and other applicable importing costs, shipping and
handling costs, warehousing and logistics costs, costs associated with service
calls and repairs of products under warranty, payment processing and financing
fees, customer service expenses, and personnel-related expenses associated with
supply chain and logistics.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Cost of revenue
Digital $ 16,078 $ 12,124 $ 3,954 33 %
Nutrition and other 40,486 50,682 (10,196 ) (20 %)
Connected fitness 4,745 10,261 (5,516 ) (54 %)
Total cost of revenue $ 61,309 $ 73,067 $ (11,758 ) (16 %)
Gross profit
Digital $ 56,150 $ 81,948 $ (25,798 ) (31 %)
Nutrition and other 49,930 57,371 (7,441 ) (13 %)
Connected fitness (1,414 ) (4,334 ) 2,920 67 %
Total gross profit $ 104,666 $ 134,985 $ (30,319 ) (22 %)
Gross margin
Digital 78 % 87 %
Nutrition and other 55 % 53 %
Connected fitness (42 %) (73 %)
The increase in digital cost of revenue for the three months ended September 30,
2022 , as compared to the three months ended September 30, 2021 , was due to a
$2.5 million increase in personnel-related expenses as a result of a shift in
headcount focused on our digital streaming services and a $1.6 million increase
in the amortization of content assets primarily related to BODi which launched
in the fourth quarter of 2021. The decrease in digital gross margin for the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021 was primarily the result of the higher fixed expenses -
content assets amortization, depreciation, and personnel-related expenses - on
lower digital revenue.
The decrease in nutrition and other cost of revenue for the three months ended
September 30, 2022 , as compared to the three months ended September 30, 2021 ,
was primarily due to a $5.7 million decrease in product costs as the result of
the decrease in nutrition and other revenue and a $3.6 million decrease in
customer service due to a decrease in the volume of contacts related to
nutrition and other revenue. Nutrition and other gross margin increased
primarily as a result of the favorable shift in revenue from the preferred
customer
31
--------------------------------------------------------------------------------membership program and lower customer service expense, partially offset by higher fixed expenses such as depreciation and personnel-related expenses on lower nutrition and other revenue.
The decrease in connected fitness cost of revenue was driven by lower connected fitness revenue. The negative connected fitness gross margin improvement for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 was primarily due to lower product costs as a result of the reduced value of inventory compared to the prior year quarter, partially offset by higher fulfillment costs. Nine months ended September 30, 2022 2021 $ Change % Change (dollars in thousands) Cost of revenue Digital$ 50,909 $ 34,858 $ 16,051 46 % Nutrition and other 127,262 164,679 (37,417 ) (23 %) Connected fitness 80,910 10,417 70,493 NM Total cost of revenue$ 259,081 $ 209,954 $ 49,127 23 % Gross profit Digital$ 181,079 $ 248,689 $ (67,610 ) (27 %) Nutrition and other 151,334 203,216 (51,882 ) (26 %) Connected fitness (47,461 ) (4,480 ) (42,981 ) NM Total gross profit$ 284,952 $ 447,425 $ (162,473 ) (36 %) Gross margin Digital 78 % 88 % Nutrition and other 54 % 55 % Connected fitness (142 %) (75 %) The increase in digital cost of revenue for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , was primarily driven by an$8.7 million increase in the amortization of content assets primarily related toBODi , which launched in the fourth quarter of 2021, and content acquired from Myx inJune 2021 . The change in digital cost of revenue was also due to a$6.2 million increase in depreciation expense primarily related to theBODi platform and a change in useful life of certain assets in connection with our digital platform consolidation. The decrease in digital gross margin for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily the result of higher fixed content assets amortization and depreciation on lower digital revenue. 32 -------------------------------------------------------------------------------- The decrease in nutrition and other cost of revenue for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , was primarily due to a$36.5 million decrease in product, freight, fulfillment, and shipping expense as the result of the decrease in nutrition and other revenue. Nutrition and other gross margin slightly decreased primarily as a result of higher fixed depreciation and personnel-related expenses on lower nutrition and other revenue, partially offset by the favorable shift in revenue from the preferred customer membership program. The increase in connected fitness cost of revenue was primarily due to the acquisition of Myx onJune 25, 2021 ; there was no connected fitness cost of revenue for periods prior to the acquisition. The negative connected fitness gross margin for the nine months endedSeptember 30, 2022 was primarily due to$28.3 million in adjustments for excess and obsolete inventory and to reduce the carrying value of connected fitness inventory to its net realizable value in addition to higher product, freight, and shipping costs due to supply chain surcharges and constraints and lower pricing in line with a highly-competitive connected fitness market. The decline in the connected fitness gross margin was primarily related to the inventory adjustments as no such adjustments were made during the nine months endedSeptember 30, 2021 .
Operating Expenses
Selling and Marketing
Selling and marketing expenses primarily include the cost of Coach compensation,
advertising, royalties, promotions and events, and third-party sales commissions
as well as the personnel expenses for employees and consultants who support
these areas. Selling and marketing expense as a percentage of total revenue may
fluctuate from period to period based on total revenue, timing of new content
and nutritional product launches, and the timing of our media investments to
build awareness around launch activity.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Selling and marketing $ 93,145 $ 153,782 $ (60,637 ) (39 %)
As a percentage of total revenue 56.1 % 73.9 %
The decrease in selling and marketing expense for the three months ended
September 30, 2022 , as compared to the three months ended September 30, 2021 ,
was primarily due to a $45.5 million decrease in online and television media
expense and a $14.1 million decrease in Coach compensation, which was in line
with the decrease in commissionable revenue.
Selling and marketing expense as a percentage of total revenue decreased by
1,780 basis points primarily due to a decrease in our media investments compared
to the three months ended September 30, 2021 . We have reduced our media spend as
part of our strategic realignment and in an effort to invest in media that has
the highest probability of return on investment.
Nine months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Selling and marketing $ 286,213 $ 438,672 $ (152,459 ) (35 %)
As a percentage of total revenue 52.6 % 66.7 %
The decrease in selling and marketing expense for the nine months ended
September 30, 2022 , as compared to the nine months ended September 30, 2021 , was
primarily due to a $111.1 million decrease in television media and online
advertising expense and a $50.4 million decrease in Coach compensation, which
was in line with the decrease in commissionable revenue. These decreases were
partially offset by a $9.0 million increase in expenses from Coach events due to
the return to in-person events during the nine months ended September 30, 2022 .
Selling and marketing expense as a percentage of total revenue decreased by
1,410 basis points primarily due to the decrease in media investments compared
to the nine months ended September 30, 2021 . We have reduced our media spend as
part of our strategic realignment and in an effort to invest in media that has
the highest probability of return on investment.
33
--------------------------------------------------------------------------------Enterprise Technology and Development
Enterprise technology and development expenses primarily relate to enterprise
systems applications, hardware, and software that serve as the technology
infrastructure for the Company and are not directly related to services provided
or tangible goods sold. This includes maintenance and enhancements of the
Company's enterprise resource planning system, which is the core of our
accounting, procurement, supply chain and other business support systems.
Enterprise technology and development also includes reporting and business
analytics tools, security systems such as identity management and payment card
industry compliance, office productivity software, research and development
tracking tools, and other non-customer facing applications. Enterprise
technology and development expenses include personnel-related expenses for
employees and consultants who create improvements to and maintain technology
systems and are involved in the research and development of new and existing
nutritional products, depreciation of enterprise technology-related assets,
software licenses, hosting expenses, and technology equipment leases.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Enterprise technology and
development $ 25,686 $ 29,680 $ (3,994 ) (13 %)
As a percentage of total
revenue 15.5 % 14.3 %
The decrease in enterprise technology and development expense for the three
months ended September 30, 2022 , as compared to the three months ended September
30, 2021 , was primarily due to a $5.6 million decrease in personnel-related
expenses related to lower headcount. This decrease was partially offset by a
$1.6 million increase in depreciation expense related to the technology
initiatives that were completed in Q4 2021.
Enterprise technology and development expense as a percentage of total revenue increased by 120 basis points due to lower total revenue.
Nine months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Enterprise technology and
development $ 83,516 $ 83,718 $ (202 ) NM
As a percentage of total
revenue 15.4 % 12.7 %
The decrease in enterprise technology and development expense for the nine
months ended September 30, 2022 , as compared to the nine months ended September
30, 2021 , was primarily due to a $3.7 million decrease in personnel-related
expenses as the result of lower headcount and a $0.4 million decrease in
research and development expenses, partially offset by a $3.9 million increase
in depreciation expense related to technology initiatives that were completed in
Q4 2021.
Enterprise technology and development expense as a percentage of total revenue increased by 270 basis points due to lower total revenue.
34
--------------------------------------------------------------------------------General and Administrative
General and administrative expense includes personnel-related expenses and
facilities-related costs primarily for our executive, finance, accounting, legal
and human resources functions. General and administrative expense also includes
fees for professional services principally comprised of legal, audit, tax, and
insurance.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative
$ (3,814 ) (16 %) As a percentage of total revenue 11.8 % 11.2 % The decrease in general and administrative expense for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , was primarily due to a$1.6 million decrease in rent expense due to our Santa Monica office lease assignment, a$1.2 million decrease in recruiting expense due to fewer headcount additions, and a$0.7 million decrease in personnel-related expenses due to lower headcount.
General and administrative expense as a percentage of total revenue increased by 60 basis points due to lower total revenue.
Nine months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative
$ 666 1 % As a percentage of total revenue 10.9 % 8.9 % The increase in general and administrative expense for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , was primarily due to a$5.0 million increase in personnel-related expenses and a$2.7 million increase in accounting and other professional fees as a result of operating as a public company. These increases were partially offset by a$4.9 million decrease in rent expense due to our Santa Monica office lease assignment and a$2.2 million decrease in recruiting expenses due to fewer headcount additions.
General and administrative expense as a percentage of total revenue increased by 200 basis points due to higher fixed costs on lower total revenue.
Restructuring
Restructuring charges primarily relate to our 2022 strategic alignment
initiative to consolidate our streaming fitness and nutrition offerings into a
single
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Restructuring $ 1,492 $ - $ 1,492 NM
Nine months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Restructuring $ 10,047 $ - $ 10,047 NM
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Impairment of Intangible Assets
In testing for impairment of our indefinite-lived intangible asset, we compared
the carrying value of the trade name to its estimated fair value. Fair value was
estimated using an income approach, specifically the relief-from-royalty
approach, and included significant assumptions related to the royalty rate and
revenue growth. Based on this analysis, we recognized an impairment charge as
the fair value of the indefinite-lived trade name was determined to be less than
its carrying value primarily due to lower revenue in the current year and
long-term forecast.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Impairment of intangible assets $ 1,000 $ - $ 1,000 -
Nine months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Impairment of intangible assets $ 1,000 $ - $ 1,000 -
Other Income (Expense)
The change in fair value of warrant liabilities consists of the fair value
changes of the public, private placement, and Term Loan warrants. Interest
expense primarily consists of interest expense associated with our borrowings
and amortization of debt discount and issuance costs for our Financing Agreement
in 2022 and Credit Facility in 2021. Other income, net, consists of interest
income earned on investments and gains (losses) on foreign currency.
Three months ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Change in fair value of
warrant liabilities $ 2,362 $ 30,274 $(27,912 ) (92 %) Interest expense (1,152 ) (62 ) (1,090 ) 1,758 % Other income, net 571 202 369 183 % The decrease in change in fair value of warrant liabilities during the three months endedSeptember 30, 2022 , as compared to three months endedSeptember 30, 2021 , primarily resulted from a relatively lower decline in our stock price during the quarter. The increase in interest expense was due to borrowings under the Term Loan during the three months endedSeptember 30, 2022 compared to no borrowings outstanding during the three months endedSeptember 30, 2021 . The increase in other income was primarily due to higher interest income as a result of higher interest rates on our cash balances and increased foreign currency gains. Nine months ended September 30, 2022 2021 $ Change % Change (dollars in thousands) Change in fair value of warrant liabilities $ 4,696$ 35,664 $
(30,968 ) (87 %) Interest expense (1,174 ) (490 ) (684 ) 140 % Other income, net 696 3,155 (2,459 ) (78 %) The decrease in change in fair value of warrant liabilities during the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily resulted from a relatively lower decline in our stock price during 2022. The increase in interest expense was due to higher interest rates on borrowings outstanding during the nine months endedSeptember 30, 2022 compared 36 -------------------------------------------------------------------------------- to during the nine months endedSeptember 30, 2021 . The decrease in other income was primarily due to the gain on the investment in the convertible instrument from Myx prior toJune 25, 2021 ; there was no similar investment in 2022.
Income Tax Benefit
Income tax benefit consists of income taxes related toU.S. federal and state jurisdictions as well as those foreign jurisdictions where we have business operations. Three months ended September 30, 2022 2021 $ Change % Change (dollars in thousands) Income tax benefit$ 549 $ 1,487$ (938 ) (63 %) The income tax benefit decrease for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , was primarily due to the decrease in operating loss and a decrease in the net benefit from discrete events. Nine months ended September 30, 2022 2021 $ Change % Change (dollars in thousands) Income tax benefit $ 1,536 $ 12,739$ (11,203 ) (88 %) The income tax benefit decrease for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , was primarily driven by a decrease in the net benefit from discrete events. We recorded significant deferred tax liabilities in connection with the acquisition of Myx, which was a discrete Q2 2021 event, for which we will not incur future taxable income. This partially reduced our need for a valuation allowance, resulting in income tax benefit recorded during the nine months endedSeptember 30, 2021 ; there was no similar benefit recorded during the nine months endedSeptember 30, 2022 . 37 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Nine months ended September 30,
2022 2021
(dollars in thousands)
Net cash used in operating activities
(23,236 ) (108,345 )
Net cash provided by financing activities 48,283 390,448
As of
Net cash used in operating activities was$36.9 million for the nine months endedSeptember 30, 2022 compared to net cash used in operating activities of$139.3 million for the nine months endedSeptember 30, 2021 . The decrease in cash used in operating activities during the nine months endedSeptember 30, 2022 , compared to the prior year quarter, was primarily due to reduced purchases of inventory and media, in line with expectations. During the nine months endedSeptember 30, 2022 , we returned to a performance marketing model which drives in-quarter or next-quarter payback and which reduced media spend by approximately$98.3 million compared to the prior year period. Also, as ofSeptember 30, 2022 , we expect that our connected fitness inventory is sufficient to meet expected demand over the next year. Net cash used in investing activities was$23.2 million and$108.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in net cash used in investing activities was primarily due to a$37.8 million decrease in capital expenditures. As expected, capital expenditures are lower in 2022 compared to prior year due to the completion of significant projects at the end of 2021. The decrease in net cash used in investing activities was also due to$47.3 million related to the Myx acquisition, investment in the convertible instrument in Myx, and other investment during the nine months endedSeptember 30, 2021 , compared to no similar acquisition or investments during the nine months endedSeptember 30, 2022 . Net cash provided by financing activities was$48.3 million and$390.4 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in net cash provided by financing activities was primarily due to the completion of the Business Combination during the nine months endedSeptember 30, 2021 compared to the Term Loan borrowing, net of debt issuance costs during the nine months endedSeptember 30, 2022 . See below and Note 10, Debt, for additional discussion of the debt financing entered into during Q3 2022. We are using the proceeds for general corporate purposes and to pay transaction fees and expenses related to the Term Loan. OnAugust 8, 2022 (the "Effective Date"), we entered into a financing agreement with a third-party lender which provides for senior secured term loans in an aggregate principal amount of$50.0 million and permits borrowing up to an additional$25.0 million , subject to certain terms and conditions. The$50.0 million Term Loan was funded on the Effective Date and bears interest at our option of either (i) the reference rate as defined in the agreement or (ii) the Secured Overnight Financing Rate ("SOFR") as defined in the agreement. In addition, the Term Loan borrowings bear interest at 3.00% per annum, paid in kind by capitalizing such interest and adding such capitalized interest to the outstanding principal amount of the loans on each anniversary of the Effective Date. During the three months endedSeptember 30, 2022 , the Term Loan was a SOFR loan, with an effective interest rate of 19.40%. We paid$4.1 million of third-party debt issuance costs during the three months endedSeptember 30, 2022 , and are required to pay an annual fee of$0.25 million . The Term Loan requires annual amortization of 2.50% in the first two years and 5.00% in the final two years, paid quarterly, and certain mandatory repayments as defined in the agreement. As ofSeptember 30, 2022 , borrowings outstanding under the Term Loan were$49.7 million . The Term Loan matures onAugust 8, 2026 . The Term Loan provides customary restrictions and requires compliance with certain financial and other covenants, with which we are in compliance as ofSeptember 30, 2022 . In connection with the Term Loan, we issued warrants to certain holders affiliated with the lender for the purchase of 4,716,756 million shares of the Company's Class A Common Stock at an exercise price of$1.85 per share. The warrants vest on a monthly basis over four years, with 30%, 30%, 20% and 20% vesting in the first, second, third and fourth years, respectively. The warrants have a seven-year term from the Effective Date. As ofSeptember 30, 2022 , we have$39.9 million of lease obligations and purchase commitments associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. See Note 8, Commitments and Contingencies, for discussion of our contractual commitments that are primarily due within the next year. 38 -------------------------------------------------------------------------------- Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth and overall economic conditions. We continue to assess and efficiently manage our working capital, and expect to generate additional liquidity through continued cost control initiatives. We believe that existing cash and cash equivalents and cost control initiatives will provide the Company with sufficient liquidity to meet our anticipated cash needs, including debt service requirements, for the next twelve months. We may explore additional equity or debt financing to supplement our anticipated working capital balances and further strengthen our financial position, but do not at this time know which form it will take or what the terms will be. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. The sale of additional equity would result in additional dilution to our shareholders. There can be no assurances that we will be able to raise additional capital in amounts or on terms acceptable to us.
Critical Accounting Policies and Estimates
Goodwill and intangible assets deemed to have an indefinite life are not amortized, but instead are assessed for impairment annually atOctober 1 and between annual tests if an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value or indicate that it is more likely than not that an indefinite-lived intangible asset is impaired. We carry our definite-lived intangible assets at cost less accumulated amortization. If an event or change in circumstances occurs that indicates the carrying value may not be recoverable, we would evaluate our definite-lived intangible assets for impairment at that time. We test goodwill for impairment at a level within the Company referred to as the reporting unit. Prior to the three months endedSeptember 30, 2022 , we concluded we had two reporting units,Beachbody and Other, because none of the components of either operating segment constituted a business for which discrete financial information was available or had operating results which were regularly reviewed by segment management. There was no goodwill held by the Other reporting unit. Due to the sustained decline in our market capitalization and macroeconomic factors observed during the three months endedJune 30, 2022 , we performed an interim test for impairment of ourBeachbody reporting unit goodwill. In performing the interim impairment test for goodwill, we elected to bypass the qualitative assessment and proceed to performing the quantitative test. We compared the carrying value of the reporting unit to its estimated fair value. Fair value is estimated using a combination of a market approach and an income approach, with significant assumptions related to guideline company financial multiples used in the market approach and significant assumptions about revenue growth, long-term growth rates, and discount rates used in a discounted cash flow model in the income approach. As ofJune 30, 2022 , theBeachbody reporting unit's fair value exceeded the carrying value by approximately 60%. During the three months endedSeptember 30, 2022 , in connection with the consolidation of the Openfit streaming fitness offering onto a singleBeachbody digital platform, we changed our segment reporting as we determined that there is one consolidated operating segment. As a result of the change in segment reporting, we tested our goodwill by reporting unit for impairment both prior to and subsequent to the change. We assessed the carrying value of goodwill by reporting unit and determined, based on qualitative factors, that no impairment indicators existed for goodwill. Due to reduced revenue and margin forecasts for certain supplements, we performed an interim test for impairment of certain indefinite-lived intangible assets as ofSeptember 30, 2022 . The fair value of the indefinite-lived trade name was calculated using a relief-from-royalty approach and was determined to be lower than its carrying value, primarily due to the reduced revenue and margin forecasts for certain supplements. We recorded a$1.0 million non-cash impairment charge for these intangible assets during the three and nine months endedSeptember 30, 2022 . Due to reduced revenue and margin forecasts for certain supplements, we tested the related asset group for recoverability as ofSeptember 30, 2022 . In testing for recoverability, we compared the carrying value of the asset group to its forecasted undiscounted cash flows to determine whether it was recoverable. Because the carrying value of the asset group did not exceed its future undiscounted cash flows, we then calculated the fair value of the assets within the asset group. The fair value of the formulae intangible assets, which is the long-lived asset within the asset group, was calculated to be greater than its carrying value. As a result, no impairment was recognized. 39 -------------------------------------------------------------------------------- Management will continue to monitor its reporting unit for changes in the business environment that could impact its fair value. Examples of events or circumstances that could result in changes to the underlying key assumptions and judgments used in our goodwill impairment tests, and ultimately impact the estimated fair value of our reporting unit may include the duration of the COVID-19 global pandemic, its impact on the global economy, supply chain disruptions and demand for at-home fitness solutions; adverse macroeconomic conditions; volatility in the equity and debt markets which could result in higher weighted-average cost of capital and our subscriber growth rates. Changes in any of the assumptions used in the valuation of the reporting unit, or changes in the business environment could materially affect the expected cash flows, and such impacts could potentially result in a material non-cash impairment charge.
Recent Accounting Pronouncements
See Note 1, Description of Business and Summary of Significant Accounting Policies, of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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