Item 1. Condensed Consolidated Financial Statements (Unaudited)
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts and share data)
(unaudited) | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 13,992 | | | $ | 42,004 | |
| Accounts receivable, net | 45,200 | | | 27,788 | |
| Due from related parties | 2,739 | | | 2,442 | |
| Inventories | 16,622 | | | 12,300 | |
| Deferred costs | 2,021 | | | 1,887 | |
| Prepaid expenses | 32,724 | | | 12,706 | |
| Other current assets | 18,442 | | | 9,515 | |
| Total current assets | 131,740 | | | 108,642 | |
| Property and equipment, net | 8,870 | | | 5,645 | |
| Deferred tax assets, net | 22,755 | | | 22,716 | |
| Goodwill | 4,614 | | | 4,614 | |
| Intangible assets, net | 28,921 | | | 28,446 | |
| Deferred costs, net of current | 12,476 | | | 11,871 | |
| Other long-term assets | 27,246 | | | 21,960 | |
| Total assets | $ | 236,622 | | | $ | 203,894 | |
| | | |
| Liabilities and stockholders' equity | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 38,519 | | | $ | 36,594 | |
| Deferred revenue | 10,452 | | | 7,137 | |
| Interest payable | 174 | | | 276 | |
| | | |
| Income taxes payable | 12,144 | | | 9,624 | |
| Total current liabilities | 61,289 | | | 53,631 | |
| Deferred revenue, net of current | 3,865 | | | 7,385 | |
| | | |
| Long-term debt, net of current | 31,600 | | | — | |
| Other long-term liabilities | 13,717 | | | 12,605 | |
| Total liabilities | 110,471 | | | 73,621 | |
| Commitments and contingencies (Note 13) | | | |
| | | |
| Stockholders’ equity | | | |
Common stock, $0.00005 par value; 95,682,833 and 95,806,063 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 6 | | | 5 | |
| Additional paid-in capital | 655,405 | | | 662,946 | |
| Accumulated other comprehensive income | 1,509 | | | 603 | |
| Accumulated deficit | (356,049) | | | (358,561) | |
| Less: Treasury stock | (174,720) | | | (174,720) | |
| Total stockholders' equity | 126,151 | | | 130,273 | |
| Total liabilities and stockholders' equity | $ | 236,622 | | | $ | 203,894 | |
| | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F45 Training Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts and share data)
(unaudited)
| | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | |
| Revenues: | | | | | |
Franchise (Related party: $2,616 and $45 for the three months ended March 31, 2022 and 2021, respectively) | $ | 19,860 | | | $ | 13,156 | | | |
Equipment and merchandise (Related party: $7 and $0 for the three months ended March 31, 2022 and 2021, respectively) | 30,148 | | | 5,035 | | | |
| Total revenues | 50,008 | | | 18,191 | | | |
| Costs and operating expenses: | | | | | |
| Cost of franchise revenue | 1,231 | | | 1,214 | | | |
Cost of equipment and merchandise (Related party: $3,286 and $941 for the three months ended March 31, 2022 and 2021, respectively) | 10,943 | | | 3,181 | | | |
| Selling, general and administrative expenses | 32,090 | | | 16,828 | | | |
| | | | | |
| Total costs and operating expenses | 44,264 | | | 21,223 | | | |
| Income (loss) from operations | 5,744 | | | (3,032) | | | |
| Loss on derivative liabilities, net | — | | | 25,505 | | | |
| Interest expense, net | 126 | | | 8,415 | | | |
| Other expense, net | 570 | | | 291 | | | |
| Income (loss) before income taxes | 5,048 | | | (37,243) | | | |
| Provision (benefit) for income taxes | 2,536 | | | (398) | | | |
| Net income (loss) | $ | 2,512 | | | $ | (36,845) | | | |
| | | | | |
| Other comprehensive income (loss) | | | | | |
| Unrealized gain on interest rate swap, net of tax | — | | | 71 | | | |
| | | | | |
| Foreign currency translation adjustment, net of tax | 906 | | | (32) | | | |
| Comprehensive income (loss) | $ | 3,418 | | | $ | (36,806) | | | |
| | | | | |
| | | | | |
| Earnings (loss) per share | | | | | |
| Basic | $ | 0.03 | | | $ | (1.26) | | | |
| Diluted | $ | 0.03 | | | $ | (1.26) | | | |
| | | | | |
| Shares used in computing earnings per share | | | | | |
| Basic | 95,709,671 | | | 29,281,514 | | | |
| Diluted | 96,687,283 | | | 29,281,514 | | | |
| | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Convertible Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders'
Equity |
| Shares | | Amount | | Shares | | Amount | | | | | |
| Balances as of December 31, 2021 | — | | | $ | — | | | 95,806,063 | | | $ | 5 | | | $ | 662,946 | | | $ | (174,720) | | | $ | 603 | | | $ | (358,561) | | | $ | 130,273 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 487 | | | — | | | — | | | — | | | 487 | |
| Vested restricted stock awards | — | | | — | | | 7,739 | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units to be issued in association with promotional agreement | — | | | — | | | 914,692 | | | 1 | | | 2,963 | | | — | | | — | | | — | | | 2,964 | |
| Shares withheld related to net share settlement of equity awards | — | | | — | | | (1,045,661) | | | — | | | (10,991) | | | — | | | — | | | — | | | (10,991) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,512 | | | 2,512 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Cumulative translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 906 | | | — | | | 906 | |
| Balances as of March 31, 2022 | — | | | $ | — | | | 95,682,833 | | | $ | 6 | | | $ | 655,405 | | | $ | (174,720) | | | $ | 1,509 | | | $ | (356,049) | | | $ | 126,151 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Convertible Preferred Stock | | Common Stock | | Additional Paid- In Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Deficit |
| Shares | | Amount | | Shares | | Amount | | | | | |
| Balances as of December 31, 2020 | 9,854,432 | | | $ | 98,544 | | | 29,281,514 | | | $ | 1 | | | $ | 11,456 | | | $ | (174,720) | | | $ | (982) | | | $ | (175,846) | | | $ | (340,091) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (36,845) | | | (36,845) | |
| Unrealized loss on interest rate swap, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 71 | | | — | | | 71 | |
| Cumulative translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (32) | | | — | | | (32) | |
| Balances as of March 31, 2021 | 9,854,432 | | | $ | 98,544 | | | 29,281,514 | | | $ | 1 | | | $ | 11,456 | | | $ | (174,720) | | | $ | (943) | | | $ | (212,691) | | | $ | (376,897) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | |
| Cash flows from operating activities | | | | |
| Net income (loss) | $ | 2,512 | | | $ | (36,845) | | | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | |
| Depreciation | 286 | | | 71 | | | |
| Amortization of intangible assets | 888 | | | 133 | | | |
| Amortization of deferred costs | 626 | | | 448 | | | |
| Accretion and write-off of debt discount | — | | | 1,376 | | | |
| | | | | |
| Bad debt expense | 1,464 | | | 1,666 | | | |
| Stock-based compensation | 2,073 | | | — | | | |
| Deferred income taxes | — | | | 361 | | | |
| | | | | |
| | | | | |
| In-kind marketing | 57 | | | — | | | |
| Loss on derivative liabilities, net | — | | | 25,505 | | | |
| Provision for inventories | (52) | | | — | | | |
| Paid-in-kind interest accrual | — | | | 6,300 | | | |
| | | | | |
| Unrealized foreign currency transaction gains | 381 | | | 151 | | | |
| | | | | |
| Changes in operating assets and liabilities: | | | | | |
| Due from related parties | (294) | | | 1,084 | | | |
| Accounts receivable, net | (16,413) | | | (5,306) | | | |
| Inventories | (4,160) | | | (3,495) | | | |
| Prepaid expenses | (20,085) | | | 292 | | | |
| Other current assets | (12,498) | | | (1,021) | | | |
| Deferred costs | (1,194) | | | (668) | | | |
| Other long-term assets | (8,068) | | | (1,594) | | | |
| Accounts payable and accrued expenses | 1,963 | | | 6,891 | | | |
| | | | | |
| Deferred revenue | 3,527 | | | 3,654 | | | |
| Interest payable | (104) | | | (39) | | | |
| Income taxes payable | 3,149 | | | (432) | | | |
| Other long-term liabilities | 952 | | | 1,267 | | | |
| Net cash used in operating activities | (44,990) | | | (201) | | | |
| Cash flows from investing activities | | | | | |
| Purchases of property and equipment | (2,117) | | | (67) | | | |
| | | | | |
| Purchases of intangible assets | (1,296) | | | (112) | | | |
| Net cash used in investing activities | (3,413) | | | (179) | | | |
| Cash flows from financing activities | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Borrowings under revolving facility | 31,600 | | | — | | | |
| Repayments under term facility | — | | | (1,313) | | | |
| Taxes paid related to net share settlement of equity awards | (10,991) | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | $ | 20,609 | | | $ | (1,313) | | | |
| Effect of exchange rate changes on cash and cash equivalents | (218) | | | (384) | | | |
| Net decrease in cash and cash equivalents | (28,012) | | | (2,077) | | | |
| Cash and cash equivalents at beginning of period | 42,004 | | | 28,967 | | | |
| Cash and cash equivalents at end of period | $ | 13,992 | | | $ | 26,890 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Income taxes paid | $ | 222 | | | $ | — | | | |
| Interest paid | 68 | | | 601 | | | |
| | | | | |
| Supplemental disclosure of noncash financing and investing activities: | | | | | |
| Property and equipment included in accounts payable and accrued expenses | $ | 1,008 | | | $ | — | | | |
| Intangible assets included in accounts payable and accrued expenses | 184 | | | — | | | |
| | | | | |
| | | | | |
| Deferred offering costs included in accounts payable and accrued expenses | — | | | 194 | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F45 Training Holdings Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1—Nature of the business and basis of presentation
Organization
F45 Training Holdings Inc. (“F45 Training Holdings,” the “Company,” or “F45”) was incorporated in the State of Delaware on March 12, 2019 as a C-Corp. The Company and its subsidiaries are engaged in franchising and licensing the F45 Training brand to fitness facilities in multiple countries across the globe.
Transaction with MWIG LLC (“MWIG”)
On March 15, 2019, MWIG, a special purpose private investment fund vehicle led by FOD Capital LLC, a family office investment fund, and Mark Wahlberg, made a minority preferred investment in the Company. On March 15, 2019, F45 Training Holdings, MWIG and Flyhalf Acquisition Company Pty Ltd, a newly incorporated wholly-owned, indirect subsidiary of F45 Training Holdings, entered into a Share Purchase Agreement (“SPA”) with F45 Aus Hold Co Pty Ltd (“F45 Aus Hold Co”) and its existing stockholders pursuant to which F45 Training Holdings became the ultimate parent of F45 Aus Hold Co and its subsidiaries. Upon the consummation of the transaction with MWIG, the existing stockholders and MWIG held 72.5% and 27.5% ownership interests, respectively, in the Company and, its wholly-owned subsidiaries. On December 30, 2020, MWIG converted 1,145,568 shares of preferred stock of the Company into 3,181,514 shares of common stock of the Company and sold those shares of common stock to affiliates of L1 Capital Fund, an Australian based global fund manager. See Note 14—Convertible preferred stock and stockholders’ equity (deficit) for further discussion.
Pursuant to the SPA and in return for acquiring 100% of the shares in F45 Aus Hold Co, F45 Training Holdings issued 29,000,000 shares of common stock to the existing stockholders of F45 Aus Hold Co proportionate to their relative ownership of the common stock of F45 Aus Hold Co and its wholly-owned subsidiaries. As a result of this transaction, there was no change in control. All references to shares in the condensed consolidated financial statements and the notes to the condensed consolidated financial statements presented herein, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the effects of the transaction retrospectively as of the earliest period presented in the condensed consolidated financial statements.
Initial public offering
The Company’s registration statement on Form S-1 (“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on July 14, 2021, and the Company’s common stock began trading on the New York Stock Exchange on July 15, 2021. On July 15, 2021, the Company completed its IPO of 20,312,500 shares of the Company’s common stock, $0.00005 par value per share at an offering price of $16.00 per share. The Company sold 18,750,000 shares and one of the Company’s existing stockholders sold an aggregate of 1,562,500 shares. The Company received aggregate net proceeds of approximately $277.8 million after deducting underwriting discounts, commissions and other offering costs. Immediately prior to the closing of the IPO, the Company amended and restated its articles of incorporation and its bylaws authorizing an increase of capital stock to 215,000,000 shares with a par value of $0.00005 per share.
Upon completion of the IPO, 9,854,432 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $98.5 million were automatically converted into an aggregate of 27,368,102 shares of the Company’s common stock and the Company’s outstanding convertible notes were converted into an aggregate of 14,847,066 shares of common stock. Following the completion of the IPO, the Company only has outstanding common stock.
On August 13, 2021, the underwriters in the Company’s IPO exercised in part their over allotment option to purchase an additional 307,889 shares of the Company’s common stock from the Company and to purchase an additional 1,231,555 shares of the Company’s common stock from the selling stockholder at a public offering price of $16.00 per share. The over-allotment sale was consummated on August 17,
2021 and the Company received $4.6 million in net proceeds from the purchase of the additional 307,889 shares after deducting underwriting discounts and commissions and utilized the net proceeds for continuing operations and to pay expenses related to the offering.
Basis of presentation
The accompanying interim condensed consolidated financial statements and accompanying notes have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) and applicable regulations of the Securities and Exchange Commission (“the SEC”) regarding interim financial reporting, and include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Note 2—Summary of significant accounting policies
There were no changes to the significant accounting policies or recent accounting pronouncements that were disclosed in Note 2—Summary of significant accounting policies to the audited consolidated financial statements of the Company as of and for the years ended December 31, 2021 and 2020, other than as discussed below.
Stock split
In July 2021, the Company effected a 2-for-1 forward stock split of its common stock. In connection with the forward stock split, each issued and outstanding share of common stock, automatically and without action on the part of the holders, became two shares of common stock. The par value per share of common stock was adjusted from $0.0001 to $0.00005. All share, per share and related information presented in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the stock split.
Use of estimates
The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Key estimates and judgments relied upon in preparing these interim condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, depreciation of long-lived assets, internally developed software, amortization of intangible assets, valuation of inventory, fair value of derivative instruments, fair value of stock-based awards, and accounting for income taxes. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable. Actual results could differ from these estimates.
Cash and cash equivalents
Cash and cash equivalents consist of bank deposits. The Company holds cash and cash equivalents at major financial institutions, which often exceed insured limits. Historically, the Company has not experienced any losses due to such bank depository concentration.
Accounts receivable and allowance for doubtful accounts
Accounts receivable is primarily comprised of amounts owed to the Company resulting from fees due from franchisees. The Company evaluates its accounts receivable on an ongoing basis and establishes an allowance for doubtful accounts based on historical collections and specific review of outstanding accounts receivable. Accounts receivable are written off as uncollectible when it is determined that further collection efforts will be unsuccessful.
The change in allowance for doubtful accounts is as follows (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2022 | | 2021 |
| Balance at beginning of period | $ | 8,132 | | | $ | 5,746 | |
| Provisions for bad debts, included in selling, general and administrative | 1,464 | | | 1,666 | |
| Uncollectible receivables written off | (4,230) | | | (2,659) | |
| Balance at end of period | $ | 5,366 | | | $ | 4,753 | |
One of the Company’s customers accounted for approximately 19% of the Company’s accounts receivable as of March 31, 2022. None of the Company’s customers accounted for more than 10% of the Company’s accounts receivable as of December 31, 2021. Two of the Company’s customers accounted for approximately 39% of the Company’s revenues for the three months ended March 31, 2022. No customers accounted for over 10% of the Company’s revenues for the three months ended March 31, 2021.
Inventories
Inventory is carried at the lower of cost or net realizable value. Inventory primarily consists of finished goods such as merchandise and equipment. The first-in, first-out method is used to determine the cost of inventories held for sale to franchisees. If the Company determines that the estimated net realizable value of its inventory is less than the carrying value of such inventory, it records a charge to reflect the lower of cost or net realizable value. If actual market conditions are less favorable than those projected by the Company, further charges may be required. The Company wrote off $0.1 million in inventories during the three months ended March 31, 2022 related to obsolete inventory. During the three months ended March 31, 2021, the Company had no write-offs in inventories related to obsolete inventory.
Property and equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over its related estimated useful life. Refer to Note 3—Property and equipment, net for useful lives of property and equipment. Leasehold improvements depreciate over the shorter of the lease term or the estimated useful life of the related asset. Maintenance and repair costs are expensed in the period incurred. Expenditures for purchases and improvements that extend the useful lives of property and equipment are capitalized and depreciated over the term of the lease or useful life of the equipment. Upon sale or retirement, the asset cost and related accumulated depreciation are removed from the respective accounts, and any related gain or loss is reflected in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Construction in progress
Construction in progress (“CIP”) consists of costs associated with the leasehold improvement activities of the Company’s new headquarters in Austin, Texas. Capitalization of these costs ceases and CIP is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is recognized until the assets are completed and ready for their intended use. During the three months ended March 31, 2022, the Company moved into the headquarters and placed the assets into service.
Business combination
The Company includes the results of operations of the businesses that the Company acquires as of the acquisition date. The Company allocates the consideration transferred of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions, including projections of future events and operating performance. The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Goodwill and intangible assets
Goodwill and intangible assets that arise from acquisitions are recorded in accordance with Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other. In accordance with this guidance, specifically identified intangible assets must be recorded as a separate asset from goodwill if either of the following two criteria is met: (1) the intangible asset acquired arises from contractual or other legal rights; or (2) the intangible asset is separable. Intangibles are typically trade and brand names, customer relationships, and reacquired franchise rights. Transactions are evaluated to determine whether any gain or loss on reacquired franchise rights, based on their fair value, should be recognized separately from identified intangibles. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The Company allocates goodwill to reporting units based on the expected benefit from the business combination. The Company evaluates the reporting units periodically, as well as when changes in the operating segments occur.
The Company capitalizes costs associated with software developed or obtained for internal use when the preliminary project stage is completed. These capitalized costs are included in intangible assets and include third-party cost of services procured in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Software development costs are amortized to selling, general and administrative expenses using the straight-line method over an estimated useful life of three years commencing when the software development project is ready for its intended use. Amounts related to software development that are not capitalized are charged immediately to selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
The recoverability of software development costs capitalized under ASC 350-40 is evaluated in accordance with the methodology noted within the “Impairment of long-lived assets, goodwill, and intangible assets” section below. When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, the Company expenses these capitalized costs to selling, general and administrative expenses in the period such a determination is made.
Goodwill, trade names and trademarks have an indefinite life and are not amortized, but are tested annually for impairment or more frequently if impairment indicators arise, as described below.
Impairment of long-lived assets, goodwill, and intangible assets
The Company assesses potential impairment of its long-lived assets, which include property and equipment and amortizable intangible assets, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the 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.
Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired. Generally, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If factors indicate that this is the case, the Company then estimates the fair value of the related reporting unit. If the fair value is less than the carrying value, the goodwill of the reporting unit is determined to be impaired and the Company will record an impairment equal to the excess of the carrying value over its fair value.
The indefinite-lived intangible asset impairment test consists of a comparison of the fair value of each asset with its carrying value, with any excess of carrying value over fair value being recognized as an impairment loss. The Company is also permitted to make a qualitative assessment of whether it is more likely than not an indefinite-lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If based on the Company’s qualitative assessment it is more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment may be required. The Company also tests for impairment whenever events or circumstances indicate that the fair value of such indefinite-lived intangible asset has been impaired.
If impairment indicators arise with respect to finite-lived intangible assets, the Company evaluates impairment by comparing the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, then the Company estimates the fair value of the asset and compare the estimated fair value to the intangible asset’s carrying value. The Company recognizes any shortfall from carrying value as an impairment loss in the current period.
The Company completes the required annual impairment test of goodwill and indefinite-lived intangible assets annually on October 1. There were no impairment charges recorded on the Company’s long-lived assets, goodwill and indefinite-lived and finite-lived intangible assets during the three months ended March 31, 2022 and 2021.
Revenue from contracts with customers
The Company’s contracts with customers are typically comprised of multiple performance obligations, including exclusive franchise rights to access the Company’s intellectual property to operate an F45 Training-branded fitness facility in a specific territory (franchise agreements), a material right related to discounted renewals of the franchise agreements (both reflected in franchise revenue in the condensed consolidated statements of operations and comprehensive income (loss) and equipment and merchandise. Taxes collected from customers and remitted to government authorities are recorded on a net basis.
Franchise revenue
The Company’s primary performance obligation under the franchise agreement is granting certain exclusive rights to access the Company’s intellectual property to operate an F45 Training-branded fitness facility in a defined territory. This performance obligation is a right to access the Company’s intellectual property, which is satisfied ratably over the term of the franchise agreement. Renewal fees are generally recognized over the renewal term for the respective agreement from the start of the renewal period. Transfer fees are recognized over the remaining term of the franchise agreement beginning at the time of transfer.
Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement. Earlier franchise agreements had an initial term of three years while more recent agreements have an initial term of five years. With the Company’s approval, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is paid. The Company’s arrangements have no financing elements as there is no difference
between the promised consideration and the cash selling price. Additionally, the Company has assessed that a significant amount of the costs incurred under the contract to perform are incurred up-front.
Franchise revenue consists primarily of upfront establishment fees, monthly franchise fees and other franchise-related fees. The upfront establishment fee is payable by the franchisee upon signing a new franchise agreement and monthly franchise and related fees are payable throughout the term of the franchise license. Historically, franchisees have paid a fixed monthly franchise fee. For new franchisees the franchise fee is based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue.
Discounted franchise agreement renewal fees
The Company’s franchise agreements may include discounted renewal options allowing franchisees to renew at no cost or at a reduction of the initial upfront establishment fee. The resulting discount in fees at renewal provides a material right to franchisees. The Company’s obligation to provide future discounted renewals to franchisees are accounted for as separate performance obligations. The value of these material rights related to the future discount was determined by reference to the estimated franchise agreement term, which has been estimated to be 10 years, and related estimated transaction price. The estimated transaction price allocated to the franchise agreements, including the upfront establishment fee, is recognized as revenue over the estimated contract term of 10 years, which gives recognition to the renewal option containing a material right. At the end of the initial contract term, any unrecognized transaction price would be recognized during the renewal term, if exercised, or when the renewal option expires, if unexercised.
Equipment and merchandise revenue
The Company requires its franchisees to purchase fitness and technology equipment directly from the Company and payment is required to be made prior to the placement of the franchisees’ orders. Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the franchisee, which is when the franchisee obtains physical possession of the goods, legal title has transferred, and the franchisee has all risks and rewards of ownership. The franchisees are charged for all freight costs incurred for the delivery of equipment. Freight revenue is recorded within equipment and merchandise revenue and freight costs are recorded within cost of equipment and merchandise revenue.
The Company is the principal in a majority of its equipment revenue transactions as the Company controls its proprietary equipment prior to delivery to the franchisee, has pricing discretion over the goods, and has primary responsibility to fulfill the franchisee order through its direct third-party vendor.
The Company is the agent in a limited number of equipment and merchandise revenue transactions where the franchisee interacts directly with third-party vendors for which the Company receives a rebate on sales directly from the vendor.
Allocation of transaction price
The Company’s contracts include multiple performance obligations—typically the franchise license, equipment and material rights for discounted renewal fees. Judgment is required to determine the standalone selling price for these performance obligations. The Company does not sell the franchise license or World Pack equipment on a stand-alone basis (the Company’s contracts with customers almost always include both performance obligations), as such the standalone selling price of the performance obligations are not directly observable on a stand-alone basis. Accordingly, the Company estimates the standalone selling prices using available information including the prices charged for each performance obligation within its contracts with customers in the relevant geographies and market conditions. Individual standalone selling prices are estimated for each geographic location, primarily the United States, Australia and ROW, due to the unique market conditions of those performance obligations in each region.
Contract assets
Contract assets primarily consist of unbilled revenue where the Company is utilizing the costs incurred as the measure of progress of satisfying the performance obligation. When the contract price is invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. The unbilled receivable represents the amount expected to be billed and collected for services performed through period end in accordance with contract terms. The unbilled contract assets are principally the result of a number of multi-unit franchise agreements executed during 2021. As of March 31, 2022 and December 31, 2021, the Company had contract assets of $15.0 million and $4.3 million, respectively, in other current assets, and $22.6 million and $18.4 million, respectively, in other long-term assets. These contract assets are subject to impairment assessment. During the three months ended March 31, 2022, the Company recognized $0.1 million of impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). During the three months ended March 31, 2021, the Company recognized no impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Deferred costs
Deferred costs consist of incremental costs to obtain (e.g., commissions) and fulfill (e.g., payroll costs) a contract with a franchisee. Both the incremental costs to obtain and fulfill a contract with a franchisee are capitalized and amortized on a straight-line basis over the expected period if the Company expects to recover those costs. The Company reviews existing franchisee contract terminations and where terminations are identified associated contract and fulfillment costs are fully impaired. As of March 31, 2022 and December 31, 2021, the Company had $14.5 million and $13.8 million, respectively, of deferred costs to obtain and fulfill contracts with franchisees. During the three months ended March 31, 2022 and March 31, 2021, the Company recognized $0.6 million and $0.4 million amortization of these deferred costs. The amortization of these costs is included in selling, general and administrative expenses for costs to obtain a contract and cost of franchise revenue for costs to fulfill a contract in the condensed consolidated statements of operations and comprehensive income (loss). During the three months ended March 31, 2022 and March 31, 2021, the Company recognized no impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Consideration from a vendor
Consideration from a vendor includes rebates that the Company can apply against the purchase price of the equipment acquired from the Company’s suppliers. Such consideration is accounted for by the Company as a reduction to the cost of sales of the related acquired equipment upon delivery to the franchisee. For the three months ended March 31, 2022, the Company recognized $3.2 million of consideration from its suppliers as a reduction to the cost of sales of equipment and merchandise in the condensed consolidated statements of operations and comprehensive income (loss). Additionally, $2.8 million of consideration from its suppliers is included as a reduction to inventory in the condensed consolidated balance sheets as of March 31, 2022. For the three months ended March 31, 2021, the Company recognized no consideration from its suppliers as a reduction to the cost of sales of equipment and merchandise in the condensed consolidated statements of operations and comprehensive income (loss).
Leases
The Company recognizes rent expense related to leased office and operating space on a straight-line basis over the term of the lease. During the three months ended March 31, 2022 and March 31, 2021, the rent expense was $1.3 million and $0.2 million, respectively, and recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Advertising
Advertising and marketing costs are expensed as incurred. For the three months ended March 31, 2022 and March 31, 2021, advertising expenses included in selling, general and administrative expenses totaled $6.5 million and $3.5 million, respectively.
Income taxes
The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax (benefit) expense is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The factors used to assess the Company’s ability to realize its deferred tax assets are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented. Under ASC 740, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized due to the inability to generate sufficient future taxable income of the correct character. Failure to achieve previous forecasted taxable income could affect the ultimate realization of deferred tax assets and could negatively impact the Company’s effective tax rate on future earnings.
Tax benefits from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits, which to date have not been material, are recognized within the provision (benefit) for income taxes.
Foreign currency
The functional currency for the Company is the United States dollar. The Company has determined all other international subsidiaries’ functional currencies are the local currency. The assets and liabilities of the international subsidiaries are translated at exchange rates in effect at the balance sheet date while income and expense amounts are translated at average exchange rates during the period. The resulting foreign currency translation adjustments are disclosed as a separate component of other comprehensive income (loss). Transaction gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other income, net in the condensed consolidated statements of operations and comprehensive income (loss).
Stock-based compensation
Stock-based compensation cost is measured at the grant date, based on the fair value of the award. The Company estimates the fair value of stock-based payment awards subject to both performance and market conditions on the date of grant using a Monte Carlo simulation model. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation cost for awards whose vesting is subject to the occurrence of both a performance condition and market condition is recognized immediately at the time the performance condition is achieved. Liability-classified awards are accounted at fair value at the grant date and remeasured at each reporting period until the awards are settled, with all changes in fair value recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Basic and diluted loss per share
The Company computes loss per share using the two-class method required for participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s convertible preferred stock are participating securities, as preferred stockholders have rights to participate in dividends with the common stockholders on a pro-rata, as converted basis. These participating securities do not contractually require the holders of such shares to participate in the Company’s losses.
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of outstanding shares of common stock and, when dilutive, potential shares of common stock outstanding during the period.
Fair value measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are based on a fair value hierarchy, based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:
•Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted market prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amount of cash and cash equivalents, accounts receivable, inventory, and accounts payable and accrued expenses, as reflected on the condensed consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments. These estimated fair values may not be representative of actual values of the financial instruments that could have been realized or that will be realized in the future.
The valuation techniques used to measure the fair value of the Company’s debt instruments and stock-based compensation are based on level 2 or 3 inputs.
Derivative instruments
Interest rate swap
The Company was subject to interest rate volatility on its floating-rate debt. The Company entered into an interest rate swap agreement to manage its exposure to interest rate fluctuations, which terminated in July 2021 in connection with the IPO. The principal objective of these agreements was to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company elected to apply the hedge accounting rules in accordance with authoritative guidance for the agreement. The agreement was carried at fair value as a liability on the consolidated balance sheets.
Changes in the fair value of the agreement designated as a cash flow hedge was recorded as a component of accumulated and was amortized to interest expense over the term of the related debt.
Embedded derivatives
When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative liabilities. The estimated fair value of the derivative feature is recorded as a liability in the consolidated balance sheets, separate from the carrying value of the host contract. Subsequent changes in the estimated fair value of the embedded derivatives are recorded as a gain or loss in within loss on derivative liabilities in the Company’s condensed consolidated statements of operations and comprehensive income (loss).
The Company fair values the embedded derivatives using the Bond plus Black-Scholes option pricing model. Valuations derived from this model are subject to ongoing internal and external verification review. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.
The embedded derivatives were extinguished in connection with the repayment of the debt upon the IPO.
Recently issued accounting pronouncements
Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company (“EGC”). The Company has elected to take advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases (“Topic 842”), by issuing Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition, ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, ASU No. 2019-01, Codification Improvements, ASU No. 2019-10, Effective Dates, and ASU No. 2020-02, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to ASU 2016-02. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance requires lessees to recognize the assets and liabilities on the balance sheet for the rights and obligations created by leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Leases will be classified as finance or operating, with the classification affecting the pattern and classification of expense recognition within the income statement. Topic 842 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. While the Company is currently evaluating the impact of adopting Topic 842, the Company expects to recognize right-of-use assets and lease liabilities on its consolidated balance sheets upon adoption. The standard is not expected to have a material impact to the consolidated statements of operations and comprehensive income (loss) and statements of cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Topic 326 was subsequently amended by ASU No. 2018-19, Codification Improvements, ASU No. 2019-04, Codification Improvements, ASU No. 2019-05, Targeted Transition Relief; ASU No. 2019-10, Effective Dates, ASU No. 2019-11, Codification Improvements, ASU No. 2020-02, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC section on Effective Date Related to ASU 2016-02, and ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. The guidance changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current ‘incurred loss’ model with an ‘expected loss’ approach. The guidance will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact that the guidance will have on the consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which amends ASC 740. This ASU simplifies the accounting for income taxes by modifying the treatment of intraperiod tax allocation in certain circumstances, eliminating an exception to recognizing deferred tax liabilities for outside basis differences for foreign equity method investments and foreign subsidiaries when ownership or control changes, and modifying interim period tax calculations when a loss is forecast. In addition, this ASU also requires that enacted changes in tax laws or rates be included in the annual effective rate determination in the period that includes the enactment date and clarifies the tax accounting of a step up in tax basis of goodwill. ASU 2019-12 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact that the guidance will have on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (“ASU 2020-04”), which provides companies with optional guidance, including expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). ASU 2020-04 is effective for the Company upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 on its consolidated financial statements; however, the Company does not believe that adoption of ASU 2020-04 will materially impact its consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity's Own Entity (Subtopic 815-40), to clarify the accounting for modifications or exchanges of equity-classified warrants (“ASU 2021-04”). In accordance with the ASU, if there is a modification and the option is still determined to be classified as equity, the modification should be accounted for as an exchange of the original option for a new option. This guidance will be effective for the Company beginning with the year ending December 31, 2022, with early adoption permitted. The Company is currently evaluating the impact of this update and will monitor for modifications or exchanges of the issued freestanding stock options, but at this time does not anticipate the adoption of ASU 2021-04 to have a material impact on the consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. This guidance will be effective for the Company beginning with the year ended December 31, 2023, with early adoption permitted. The Company is currently evaluating the impact that the guidance will have on the consolidated financial statements.
Note 3—Property and equipment, net
Property and equipment, net, consists of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Estimated Useful Life | | March 31, 2022 | | December 31, 2021 |
| (years) | | | | |
| Vehicles | 5 | | $ | 263 | | | $ | 177 | |
| Furniture and fixtures | 7 | | 1,067 | | | 542 | |
| Office and other equipment | 5 | | 1,181 | | | 945 | |
| Leasehold improvements | Lesser of lease term or useful life | | 7,387 | | | 2,825 | |
| Construction in progress | n/a | | 57 | | | 2,241 | |
| | | 9,955 | | | 6,730 | |
| Less: accumulated depreciation | | | (1,085) | | | (1,085) | |
| Total property and equipment, net | | | $ | 8,870 | | | $ | 5,645 | |
Depreciation expense related to property and equipment was approximately $0.3 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. Depreciation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Note 4—Acquisitions
Acquisition of Surf & Turf Holdings Pty Ltd (“Vive Active” or “Vive”)
On October 29, 2021, Company entered into a share purchase agreement to acquire 100% of the outstanding stock of Vive Active. Vive Active, located in Australia, provides Pilates classes through its online platform and its studios. The consideration exchanged for the acquisition amounts to $7.5 million (50% cash up front and 50% deferred cash paid no later than 6 months after completion and which is not subject to any other conditions). The stock acquisition was a strategic transaction to leverage Vive’s intellectual property, content, and expertise to supplement the Company’s brands, to expand the Company’s corporate footprint across Australia and key global markets, and to leverage Vive management team’s experience in developing corporate-owned studios,
As of December 31, 2021 and March 31, 2022, the estimated fair values of the acquired assets and assumed liabilities were provisional estimates, based on the Company’s best estimates of fair value. The Company has not been able to obtain all of the necessary information to complete the valuation of each of the assets acquired and liabilities assumed since the acquisition closed late in the year. Consequently, more time is needed to obtain market data information, and adequately review and evaluate the information. These provisional estimates are subject to change as the Company completes all remaining steps in finalizing the purchase price allocation, but the Company does not expect material changes to the preliminary estimates below.
The following table summarizes the fair value of the consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired (in thousands):
| | | | | |
| Fair value of consideration transferred: | |
| Cash paid to shareholders | $ | 7,521 | |
| Less: cash acquired | (19) | |
| Fair value of consideration transferred, net of cash acquired: | $ | 7,502 | |
| Less: net assets acquired: | |
| Assets acquired: | |
| Accounts receivable | $ | 7 | |
| Inventory | 53 | |
| Prepaid expenses | 31 | |
| Other assets | 30 | |
| Property and equipment, net | 1,292 | |
| Intangible assets | 2,141 | |
| $ | 3,554 | |
| Liabilities assumed: | |
| Accounts payable and accrued expenses | $ | (161) | |
| Deferred tax liability | (497) | |
| Short-term debt | (170) | |
| $ | (828) | |
| Net assets acquired | 2,726 | |
| Goodwill | $ | 4,776 | |
The creation of goodwill in this transaction was the result of the expected growth in future cash flows and cost savings to be derived from economies of scale of combining Vive’s assets and workforce to the Company’s business operations. None of the goodwill is expected to be deductible for income tax purposes.
The acquired intangible assets consist of the following:
| | | | | | | | | | | |
| Useful Life (in years) | | Fair Value as of October 29, 2021 |
| Brand name | Indefinite | | $ | 418 | |
| Software | 6 | | 485 | |
| Customer contracts | 7 | | 1,238 | |
| Total | | | $ | 2,141 | |
The fair values of the customer contracts and brand name were based on multi-period excess earnings and relief from royalty methods, respectively. The fair value of the software was based on replacement cost method. Such methods are widely-accepted valuation techniques, which inherently use critical assumptions such as future revenue growth rates, royalty rates, and discount rates.
Vive was consolidated into the condensed consolidated financial statements starting on the acquisition date of October 29, 2021. For the three months ended March 31, 2022, $0.7 million and less than $0.1 million of the Company’s consolidated revenue and consolidated net loss, respectively, was attributable to Vive.
The Company has not disclosed pro forma information of the combined business as the transaction is not material to the Company’s consolidated revenue or consolidated net loss.
Acquisition of Flywheel Sports, Inc. (“Flywheel”)
In April 2021, the Company entered into an intellectual property license agreement with FW SPV II LLC (“FW SPV”), a Delaware limited liability company, regarding certain intellectual property previously owned by Flywheel Sports, Inc. (“Flywheel IP”). The license agreement is for a period of five years at a rate of $5.0 million per year. The Company initially recorded $20.8 million of intangible assets when the
license agreement became effective in April 2021 based on the present value of the annual payments throughout the term of the license agreement.
On July 19, 2021, after the consummation of the IPO, the Company acquired certain assets of the Flywheel indoor cycling studio business for $25.0 million in cash consideration, effectively transferring control of the assets to the Company and terminating the license agreement entered into in April 2021. The acquisition was accounted as an asset acquisition. On the acquisition date, the Company reversed the net carrying amount of $19.8 million of intangible assets, net of accumulated amortization of $0.8 million, and $20.6 million of the related liability that was initially recorded under the license agreement, resulting in a decrease to the cash consideration transferred by $0.8 million. The net purchase consideration of $24.2 million was allocated to the assets acquired on a relative fair value basis, which primarily consisted of the client relationship management (“CRM”) software and trade names. The CRM software is amortized on a straight-line basis over 9 years, while the trade names have an indefinite life.
Note 5—Goodwill and intangible assets
The following table summarizes the useful lives and carrying values of intangible assets, including internal-use software (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2022 | | As of December 31, 2021 |
| Useful Life | | Gross Value | | Accumulated Amortization | | Net Value | | Gross Value | | Accumulated Amortization | | Net Value |
| (in years) | | | | | | | | | | | | |
| Goodwill | n/a | | $ | 4,614 | | | $ | — | | | $ | 4,614 | | | $ | 4,614 | | | $ | — | | | $ | 4,614 | |
| | | | | | | | | | | | | |
| Internal-use software | 3 | | $ | 4,627 | | | $ | 2,352 | | | $ | 2,275 | | | $ | 3,862 | | | $ | 2,077 | | | $ | 1,785 | |
| Trade names & trademarks | n/a | | 4,058 | | | — | | | 4,058 | | | 3,329 | | | — | | | 3,329 | |
| Customer contracts | 7 | | 1,194 | | | 75 | | | 1,119 | | | 1,194 | | | 30 | | | 1,164 | |
| Acquired software | 6 - 9 | | 23,324 | | | 1,855 | | | 21,469 | | | 23,324 | | | 1,156 | | | 22,168 | |
| Total intangible assets, net | | | $ | 33,203 | | | $ | 4,282 | | | $ | 28,921 | | | $ | 31,709 | | | $ | 3,263 | | | $ | 28,446 | |
The amortization expense of intangible assets was approximately $0.9 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively, and was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). The weighted average remaining life of internal-use software was 1.8 years and 1.6 years as of March 31, 2022 and December 31, 2021, respectively. The weighted average remaining life of acquired software was 4.6 years and 4.8 years as of March 31, 2022 and December 31, 2021, respectively.
As of March 31, 2022, the expected amortization of intangible assets for future periods, excluding those assets not yet placed in service as of March 31, 2022, is as follows (in thousands):
| | | | | |
| Future Amortization |
| Remainder of 2022 | $ | 2,895 | |
| 2023 | 3,537 | |
| 2024 | 3,180 | |
| 2025 | 2,812 | |
| 2026 | 2,787 | |
| Thereafter | 9,652 | |
| Total | $ | 24,863 | |
Note 6—Accounts payable and accrued expenses
Accounts payable and accrued expenses were comprised of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Accounts payable | $ | 10,256 | | | $ | 4,777 | |
| Accrued sales tax | 6,519 | | | 5,944 | |
| Accrued payroll and benefits | 1,707 | | | 1,677 | |
| Stock-based compensation liability | 2,678 | | | 4,221 | |
| Accrued inventory purchases | 15,981 | | | 19,862 | |
| Other payables | 1,378 | | | 113 | |
| Total | $ | 38,519 | | | $ | 36,594 | |
Note 7—Deferred revenue
Deferred revenue results from establishment fees paid by franchisees at the outset of the contract term and the value of material rights related to discounted renewal options as well as equipment fees paid by franchisees prior to the transfer of the equipment. The following table reflects the change in deferred revenue during the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | |
| Deferred Revenue |
| Balance at December 31, 2021 | $ | 14,522 | |
| Revenue recognized | (12,008) | |
| Increase | 11,803 | |
| Balance at March 31, 2022 | $ | 14,317 | |
| |
| |
| |
| |
| |
| |
| | | | | |
| Deferred Revenue |
| Balance at December 31, 2020 | $ | 14,095 | |
| Revenue recognized | (7,016) | |
| Increase | 10,571 | |
| Balance at March 31, 2021 | $ | 17,650 | |
Deferred revenue expected to be recognized within one year from the balance sheet date is classified as current, and the remaining balance is classified as non-current. Transaction price allocated to remaining performance obligations represents contracted franchise and equipment revenue that has not yet been recognized, which includes deferred revenue recognized as revenue in future periods. Total contract revenues from franchisees yet to be recognized as revenue was $198.1 million as of March 31, 2022, of which the Company expects to recognize approximately 23% of the revenue over the next 12 months and the remainder thereafter.
Note 8—Debt
Subordinated Convertible Debt Agreement
On October 6, 2020, the Company entered into a subordinated convertible debt agreement (the “Convertible Notes”), whereby the Company issued $100 million of Convertible Notes to certain holders maturing on September 30, 2025. The Convertible Notes have an annual interest rate of 8.28%, which accrues as paid-in-kind through the duration of the contract. Repayment of principal and accrued interest (“PIK Interest”) may be made in cash or shares of the Company upon the occurrence of certain qualifying events or at the end of the contract term. Interest is accrued over the term of the debt and is payable upon repayment at maturity or earlier upon the occurrence of certain events.
As a part of the subordinated convertible debt agreement, the Company identified embedded derivatives that require bifurcation under ASC 815, Derivatives and Hedging, relating to the contingent conversion option, payment of liquidation, default payment and prepayment options. See Note 9—Derivative instruments for further discussion on the Company’s accounting for these embedded derivatives.
In conjunction with the IPO on July 15, 2021, the outstanding Convertible Notes of $106.3 million of principal and interest were converted into 14,847,066 shares of common stock at a conversion price of $16.00.
Subordinated Second Lien Term Loan
On October 6, 2020, the Company entered into a Subordinated Second Lien Term Loan (“Subordinated Credit Agreement”) with certain lenders which committed the lenders to provide $125 million of financing to the Company in exchange for a note payable. This agreement matures over a five-year period that carries a Paid-In Kind (“PIK”) Interest rate of 13.00%. PIK Interest is accrued over the term of the Subordinated Credit Agreement. The Subordinated Credit Agreement had a maturity date of October 5, 2025.
In connection with issuing the note, the Company paid the lenders approximately $3.8 million in fees. Similarly, the Company paid third parties fees of approximately $1.0 million associated with issuing the note. The Company determined that all fees paid to the lenders and third parties would result in a reduction of the initial carrying amount of the note. The Company amortized the debt discount and debt issuance costs into interest expense utilizing the effective interest method.
On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Subordinated Credit Agreement. The Company used proceeds from its IPO to repay $150.5 million under the terms of the Subordinated Credit Agreement, inclusive of a prepayment penalty of $3.8 million and penalty of six months of advanced interest for $9.3 million as a result of the repayment of indebtedness or termination of the Subordinated Credit Agreement.
First Lien Loan
The Company entered into a senior Secured Credit Agreement, dated as of September 18, 2019 (the “Secured Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Australian Security Trustee, Lender, Swingline Lender and Issuing Bank, consisting of a $20.0 million revolving credit facility (the “Revolving Facility”) and a $30.0 million term loan facility (the “Term Facility”). Initial borrowings of $30.0 million from the Term Facility and $11.9 million of the availability under the Revolving Facility were used to repay, in full, amounts due to common stockholders as a result of the MWIG transaction. See Note 14—Convertible preferred stock and stockholders’ equity (deficit) for further discussion. The remaining availability under the Revolving Facility may be drawn and used for general corporate purposes. The obligations under the Secured Credit Agreement are guaranteed by certain operating subsidiaries of the Company and secured by a majority of the Company’s assets. The Revolving Facility may be prepaid and terminated by the Company at any time without premium or penalty (subject to customary LIBOR breakage fees). The Term Facility bore interest at floating rate of LIBOR plus 1.5 percent. The Term Facility principal and interest payments are due quarterly in accordance with an amortization schedule with a maturity date of September 18, 2022.
On June 23, 2020, the Company amended the Secured Credit Agreement to allow it to enter into a definitive agreement with a special purpose acquisition corporation. On October 6, 2020, the Company amended the agreement a second time. Through the second amendment, the Company agreed to convert $8,000,000 of the amount outstanding on the Revolving Facility to be part of the Term Facility. In addition to converting a portion of the Revolving Facility to the Term Facility, the Company agreed to repay $5,000,000 of the principal amount of the Revolving Facility outstanding. The interest rate of both
the Term Facility and the Revolving Facility were amended to 4.00% and 3.00% for Eurodollar loans and letters of credit, and ABR Loans, respectively.
On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Term Facility. The Company used proceeds from its IPO to repay the Term Facility and Revolving Facility in the amount of $31.1 million and $7.0 million, respectively.
On August 13, 2021, the Company entered into an amended and restated credit agreement (“Credit Agreement”) which amends and restates the Secured Credit Agreement dated September 18, 2019. The Credit Agreement provides for a $90 million five-year senior secured revolving facility (“Facility”). The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $35 million. The proceeds from the Facility will be used for general corporate purposes. Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s election, the LIBOR rate plus a margin of 2.50% to 3.50% per annum, or base rate plus a margin of 1.50% to 2.50%, in each case depending on the Company’s total leverage ratio.
As a result of the amendment, the Company modified the existing covenant under the Secured Credit Agreement. The total leverage ratio was modified such that the Company is required to maintain a total leverage ratio for any four quarters, of less than 3.00 to 1.00.
In connection with the Credit Agreement, the Company paid the lenders approximately $0.9 million in fees. Similarly, the Company paid third-party fees of approximately $0.1 million associated with the amendment. The Company concluded that the amendment resulted in a modification of debt rather than a debt extinguishment. As such, the Company determined that all fees incurred in connection with the Credit Agreement would be deferred and amortized over the term of the new arrangement.
The outstanding balance of the Facility as of March 31, 2022 and December 31, 2021 was $31.6 million and $0, respectively. The unamortized debt issuance cost in connection to the Facility as of March 31, 2022 and December 31, 2021 was $0.9 million and $1.0 million, respectively. The availability on the Facility as of March 31, 2022 and December 31, 2021 was $56.9 million and $88.5 million, respectively.
The weighted-average interest rate on the Company’s outstanding debt as of March 31, 2022 was 2.94%. There was no outstanding debt as of December 31, 2021.
As of March 31, 2022 and December 31, 2021, the Company was in compliance with its covenants on the Secured Credit Agreement.
PPP Loan
On April 10, 2020, the Company received loan proceeds of approximately $2.1 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses to help sustain its employee payroll costs, rent, and utilities due to the impact of the recent COVID-19 pandemic. Loans obtained through the PPP are eligible to be forgiven as long as the proceeds are used for qualifying purposes, which include the payment of payroll costs, interest on covered mortgage obligations, rent obligations and utility payments. The receipt of these funds, and the forgiveness of the loan is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its adherence to the forgiveness criteria. In June 2020, Congress passed the Payroll Protection Program Flexibility Act that made several significant changes to PPP loan provisions, including providing greater flexibility for loan forgiveness.
The Company used the proceeds from the PPP loan to fund payroll costs in accordance with the relevant terms and conditions of the CARES Act. The Company followed the government guidelines and tracking costs to ensure full forgiveness of the loan. To the extent it was not forgiven, the Company would have been required to repay that portion at an interest rate of 1% over a period of 1.5 years, beginning November 2020 with a final installment in April 2025.
During the third quarter of 2021, the outstanding balance on the PPP loan including interest was forgiven by the U.S. Small Business Administration (“SBA”). The Company is subject to examination by the SBA as the total loan forgiveness exceeds $2 million threshold.
Interest expense
Interest expense recorded on the debt facilities was $0.3 million and $8.4 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
Note 9—Derivative Instruments
Interest Rate Swap
The Company is subject to interest rate volatility with regard to existing debt. From time to time, the Company enters into swap agreements to manage exposure to interest rate fluctuations.
On October 25, 2019, the Company entered into an interest rate swap contract (the “Swap Agreement”) with JP Morgan Chase Bank N.A. to fix the interest rate on the Term Facility over the life of the loan. The notional amount of the swap covers the entire $30.0 million borrowings outstanding under the Term Facility. Under the terms of the Swap Agreement, the Term Facility, which formerly accrued interest at a rate of LIBOR plus 1.50%, started effectively accruing interest on the effective date (October 30, 2019) at a fixed rate of 1.74% on an annualized basis.
To hedge the variability in cash flows due to changes in benchmark interest rates, the Company entered into an interest rate swap agreement related to debt issuances. The swap agreement is designated as a cash flow hedge. The derivative's gain or loss is recorded in other comprehensive income (loss) and is subsequently reclassified to interest expense over the life of the related debt.
The Company recognized an unrealized gain of $0.1 million on this instrument during the three months ended March 31, 2021, respectively. The unrealized gain has been presented within other comprehensive income (loss) in the condensed consolidated statements of operations and comprehensive income (loss). On July 21, 2021, in connection with the repayment in full of all outstanding obligations under the Subordinated Credit Agreement, the Company terminated the swap agreement. The Company paid $0.5 million to terminate the Swap Agreement.
Convertible notes
In October 2020, the Company entered into a subordinated convertible debt agreement (the “Convertible Notes”) as discussed in Note 8—Debt, whereby the Company issued $100 million of
convertible notes to certain holders maturing on September 30, 2025. These notes can be converted
into common shares of the Company at the holders’ option. The Company has analyzed the
conversion and redemption features of the agreement and determined that certain of the embedded
features should be bifurcated and classified as derivatives. The Company has bifurcated the following
embedded derivatives: (i) Liquidity Event Conversion Option; (ii) Liquidity Event Redemption Option;
and (iii) Qualified Public Offering (“QPO”) Redemption Option.
The $27.8 million initial fair value of the embedded derivatives for the Convertible Notes was
recorded as a debt discount along with a corresponding liability in the Company’s consolidated balance sheets. The initial debt discount is not subsequently re-valued and is being amortized using the effective interest method over the life of the Convertible Notes. Prior to the Company’s IPO, the derivative liabilities were classified in the consolidated balance sheets as non-current as the Company was not required to net cash settle within 12 months of the balance sheet date and were marked-to-market at each reporting period.
As discussed in Note 8—Debt, in connection with the IPO, outstanding Convertible Notes of $106.3 million, including principal and interest, were converted into 14,847,066 shares of common stock.
Note 10—Fair Value
The Company’s carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid expenses, accounts payable and other accrued liabilities approximate their fair value due to their short-term nature of settlement. As of March 31, 2022 and December 31, 2021, none of the Company’s assets or liabilities are currently accounted for at fair value on a recurring basis.
Credit risk relates to the risk of loss resulting from the non-performance or non-payment by the Company’s counterparties in connection with contractual obligation. Risk around counterparty performance and credit could ultimately impact the amount and timing of cash flows. The Company believes it has appropriately addressed any credit risk due to the financial standing of the counterparties with which it trades. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.
Note 11—Income taxes
For interim reporting periods, the Company’s provision for income taxes is calculated using its annualized estimated effective tax rate for the year. This rate is based on its estimated full-year income and the related income tax expense for each jurisdiction in which the Company operates. Changes in the geographical mix, permanent differences or the estimated level of annual pre-tax income can affect the effective tax rate. This rate is adjusted for the effects of discrete items occurring in the period.
Provision (benefit) for income taxes
The provision for income taxes was $2.5 million for the three months ended March 31, 2022. The benefit for income taxes was $0.4 million for the three months ended March 31, 2021. The effective tax rate for the three months ended March 31, 2022 of 50.24% differed from the expected U.S. statutory tax rate of 21% primarily due to state taxes, the foreign tax rate differential and by current period losses incurred by F45 Holdings Inc. not benefited due to its full valuation allowance. The effective tax rate for the three months ended March 31, 2021 of 1.10% differed from the U.S. statutory tax rate of 21% primarily due to state taxes, the foreign tax rate differential and interest and penalties for uncertain tax positions.
Note 12—Related party transactions
As discussed in Note 1—Nature of the business and basis of presentation, due to the repurchase of the Company’s shares from two primary directors that occurred in October 6, 2020, the Company no longer considers these two directors as related parties from October 6, 2020 onward.
Group Training, a related party, is owned by certain existing stockholders that are executive officers and directors of the Company, through which they operate two F45 studios in the United States. During the three months ended March 31, 2022, the Company recognized less than $0.1 million of franchise revenue related to fees under the management service agreement. During the three months ended March 31, 2021, the Company recognized no franchise revenue from studios owned by Group Training. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). As of March 31, 2022 and December 31, 2021, the Company had receivables related to fees under this management service agreement of $0.8 million and $0.7 million, respectively. These amounts are included in due from related parties on the condensed consolidated balance sheets.
During the three months ended March 31, 2022 and 2021, the Company recognized less than $0.1 million of franchise revenue and equipment revenue from studios owned by Messrs. Wahlberg and
Raymond. As of March 31, 2022 and December 31, 2021, the Company had less than $0.1 million outstanding receivables. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and equipment and merchandise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
During the three months ended March 31, 2022 and 2021, the Company recognized less than $0.1 million franchise revenue, respectively, from studios owned by an entity in which an existing stockholder that is an executive officer and director of the Company holds a 10% ownership interest. As of March 31, 2022 and December 31, 2021, the Company had less than $0.1 million outstanding receivables from these studios, respectively. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and equipment and merchandise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
During the three months ended March 31, 2022 and 2021, the Company incurred expenses totaling approximately $3.3 million and $0.9 million, respectively, in connection with certain shipping and logistic services from a third-party vendor that is owned by an immediate family member of an executive officer of the Company. As of March 31, 2022 and December 31, 2021, the Company had approximately $1.5 million and $1.3 million, respectively, of outstanding payables to the third-party vendor. The Company has presented the expenses incurred during these periods in cost of equipment and merchandise revenue in the condensed consolidated statements of operations and comprehensive income (loss).
During the three months ended March 31, 2022, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $0.1 million from three studios owned by employees. During the three months ended March 31, 2021, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $0.1 million from two studios owned by employees. As of March 31, 2022, the Company had no receivables outstanding related to this revenue, As of December 31, 2021, the Company had receivables outstanding related to this revenue of less than $0.1 million.
Transaction with LIIT LLC
On June 23, 2020, the Company entered into an Asset Transfer and Licensing Agreement with
LIIT LLC (“LIIT”) an entity wholly-owned by Adam Gilchrist (F45’s Co-Founder and Chief Executive Officer). Pursuant to this agreement, F45 sold to LIIT certain at-home exercise equipment packages (including the intellectual property rights thereto) for $1.0 million payable on or before December 31, 2020. LIIT assumed all outstanding rights and obligations related to these exercise equipment packages from F45. In addition, pursuant to this agreement, LIIT will receive access to F45’s library of programming related to existing and future fitness content for the duration of the license period of 10 years. In exchange for this license, LIIT will pay F45 an annual license fee equal to the greater of (a) $1.0 million and (b) 6% of the annual gross revenue of LIIT, less any payments made by LIIT to third parties in connection with the sale of such exercise equipment packages payable annually on July 30. This agreement will expire on July 1, 2030, unless otherwise terminated upon mutual agreement of F45 and LIIT. Upon termination or expiration of this agreement, LIIT must: (i) immediately cease all use and application of the licensed intellectual property; (ii) promptly return to F45, or otherwise dispose of as F45 may instruct, all documents, databases, lists and materials (whether hard copy or electronic form) including any advertising and promotion material, labels, tags, packaging material, advertising and promotional matter and all other material relating to the licensed intellectual property in the possession or control of LIIT; and (iii) immediately cease to hold itself out as having any rights in relation to the licensed intellectual property from the date of termination.
The Company recognized $0.3 million and no revenue, respectively, and no cost of sales in conjunction with the transaction with LIIT LLC during the three months ended March 31, 2022 and 2021.
The outstanding receivable balance as of March 31, 2022 and December 31, 2021 was $1.8 million and $1.5 million, respectively.
Transaction with Club Franchise Group LLC
On June 15, 2021, the Company entered into a long-term multi-unit studio agreement, with Club Franchise Group LLC (“Club Franchise”), an affiliate of KLIM. Pursuant to the term multi-unit studio agreement, the Company granted to Club Franchise the right to, and Club Franchise has agreed to, open at least 300 studios in certain territories in the U.S. over 36 months, with the first 150 studios to be open at least within 18 months of the date of the multi-unit studio agreement, or December 15, 2022. Club Franchise had 0 studios opened as of March 31, 2022 under the multi-unit studio agreement.
Club Franchise is obligated to pay to the Company the same general fees as other franchisees in the U.S., and to enter into a franchise agreement in respect of each studio upon approval by the Company of the studio site. Consistent with some of the franchise agreements in the United States entered into since July 2019, Club Franchise is required to pay the Company a monthly franchise fee based on the greater of a fixed monthly franchise fee of $2,500 per month or 7% of gross monthly studio revenue, regardless of whether such studios are open. Club Franchise has also agreed to pay the Company an upfront establishment fees of $7,500,000 as follows: (i) $1,875,000 upon execution of the multi-unit studio agreement (which amount has been paid as of December 31, 2021); (ii) $1,875,000 by June 2022; (iii) $1,875,000 by December 2022; and (iv) $1,875,000 by December 2023. Club Franchise is required to pay monthly franchise fees to the Company in respect of additional studios with monthly franchise fees for 150 studios being payable by December 2022. With respect to the remaining 150 studios, the Company and Club Franchise have agreed to negotiate a payment schedule that provides for the monthly franchise fees in respect of such studios to commence no later than 12 months after the opening date of the relevant studio. Like other franchisees, Club Franchise is also obligated to pay the Company other fees, including fees related to marketing and equipment and merchandise, some of which the Company has agreed to provide at a discounted rate.
The Company recognized $2.3 million of franchise revenue in conjunction with the transaction with Club Franchise Group LLC during the three months ended March 31, 2022. There was a less than $0.1 million and no outstanding receivable balance owed by Club Franchise as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company recognized less than $0.1 million and no unbilled receivable in other short-term assets on the condensed consolidated balance sheets, respectively. The Company recognized $6.7 million and $4.4 million of unbilled receivable in other long-term assets on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.
Related party franchise arrangements were transacted at arm’s length pricing with standard contractual terms.
Note 13—Commitments and contingencies
Litigation
Where appropriate, the Company establishes accruals in accordance with FASB guidance over loss contingencies (ASC 450). As of March 31, 2022, the Company had established a litigation accrual of $4.0 million in accounts payable and accrued expenses for claims brought against the Company in the ordinary course of business. Our accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. The Company discloses the amount accrued if the Company believes it is material or if the Company believes such disclosure is necessary for our financial statements to not be misleading. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount previously accrued, the Company assesses whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and the Company adjusts the accruals and disclosures accordingly. The Company does not presently believe that the ultimate resolution of the foregoing matters will have a material adverse effect on the Company’s results of
operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations.
Lease commitments
The Company leases twelve office buildings in the United States and other international locations. Future minimum lease payments, which include non-cancelable operating leases at March 31, 2022, are as follows (in thousands):
| | | | | |
| Operating Leases |
| Remainder of 2022 | $ | 2,208 | |
| 2023 | 3,557 | |
| 2024 | 2,852 | |
| 2025 | 2,749 | |
| 2025 | 2,531 | |
| Thereafter | 10,228 | |
| Total Minimum Lease Payments | $ | 24,125 | |
Rent expense for all operating leases was approximately $1.3 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. The Company has presented rent expense during these periods in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
In December 2020, the Company entered into a lease agreement (“Lease”) to lease 44,171 square feet of office space in Austin, Texas. The Lease has an initial term of eight years and one five-year tenant renewal option, with the initial term beginning after completion of leasehold improvements or 180 days after the space was delivered to the Company to begin leasehold improvements. The Company is obligated to make rent payments totaling approximately $13.9 million over the initial term, with $1.6 million of rent during the first year subject to rent escalations on an annual basis throughout the initial term. In connection with the Lease, the Company is entitled to receive a tenant improvement allowance of $3.8 million funded by the landlord. The Company was given the right to control physical access to the leased space to begin leasehold improvements on March 1, 2021, which is considered the lease commencement date used in calculating the straight-line rent expense as the Company is deemed the accounting owner of the leasehold improvement assets. The Company recorded $3.8 million of tenant improvement allowance as deferred rent as of December 31, 2021 and amortized $0.1 million as reductions to rent expense over the lease term of approximately 9.4 years for the three months ended March 31, 2022.
As of March 31, 2022, the Company had an outstanding guarantee of $2.6 million in aggregate total for lease payments related to four franchisee studio leases in the state of California with non-cancelable lease periods ranging from 4 to 10 years.
Promotional Agreements
Liability-classified awards
On October 15, 2020, the Company entered into a promotional agreement with ABG-Shark, LLC (“ABG-Shark”). Pursuant to this agreement, Greg Norman will provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, ABG-Shark is entitled to receive additional performance-based cash compensation based on the Company’s enterprise value. On the same date, Malibu Crew, Inc., a
subsidiary of the Company, also entered into a promotional agreement with Greg Norman, whereby, he will provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 15% of the fair market value of Malibu Crew, Inc. (“Malibu Crew”). Both of these promotional agreements expire on October 14, 2025. As of March 31, 2022, the Malibu Crew concept is still in the incubation phase.
On November 24, 2020, the Company entered into a promotional agreement with DB Ventures Limited (“DB Ventures”). Pursuant to this agreement, DB Ventures will provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, DB Ventures is entitled to receive the greater of 1% of the Company’s issued and outstanding common stock or $5 million on the six- and 12-month anniversaries of the Company becoming publicly traded. This agreement will expire on December 5, 2025. The Company will recognize expenses related to promotional activities and image rights under this agreement ratably over the five-year contractual term. As part of the agreement, the Company is obligated to create two F45 studios for DB Ventures who will then have the option to take ownership of the studios upon termination of the agreement for no additional service or consideration. In December 2021, the Company invested in a joint venture with 75% ownership in the newly incorporated CLF High Street Limited that operates the DB studios and provided $0.5 million of cash for equipment and other studio opening costs. For the three months ended March 31, 2022 and 2021, the Company recorded $1.4 million and $0.5 million in expense related to this agreement, respectively. During the three months ended March 31, 2022, 914,692 of common shares vested under this agreement as a result of meeting the six-month anniversary of the Company becoming publicly traded.
On April 12, 2021, the Company entered into a promotional agreement with Magic Johnson
Entertainment (“MJE”). Pursuant to this agreement, MJE will provide certain promotional services to the Company in exchange for compensation. In connection with the Company becoming publicly traded on July 15, 2021, MJE agreed to a cash payment of $4.0 million in lieu of equity compensation that MJE was entitled to receive as a result of the IPO. The prepayment of $4.0 million was recorded as prepaid expenses on the condensed consolidated balance sheets and the amount is amortized ratably over the service period. Additionally, in connection with the Company becoming publicly traded on July 15, 2021, the Company is obligated to grant MJE a number of shares of common stock equal to the result of $5.0 million divided by the Average Trading Price upon each occurrence of a vesting event based on increases in the Company’s market capitalization as defined in the agreement. The agreement between the Company and MJE terminates on January 23, 2026.
On June 25, 2021, the Company entered into a promotional agreement with Craw Daddy Productions (“CDP”). Pursuant to this agreement, effective July 1, 2021, Cindy Crawford will provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, the Company is obligated to grant CDP a number of shares of common stock equal to the result of $5.0 million divided by the Average Trading Price upon each occurrence of a Vesting Event which is based on increases in the Company’s market capitalization as defined in the agreement. On the same date, Avalon House, a subsidiary of the Company, also entered into a promotional agreement with Cindy Crawford, whereby, she will provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 10% of the fair market value of Avalon House. Both of these promotional agreements expire on June 30, 2026. As of March 31, 2022, the Avalon House concept is still in the incubation phase.
On September 24, 2021, the Company entered into a promotional agreement with Big Sky, Inc. (“Big Sky”). Pursuant to this agreement, Joe Montana will provide certain promotional services to the Company in exchange for annual compensation. On the same date, Malibu Crew also entered into a promotional agreement with Big Sky, whereby Joe Montana will provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 1% of the fair market value of Malibu Crew. As part of the agreement, the Company is obligated to provide franchise rights to five Malibu Crew studios and cover costs associated with start-up of the studios, subject to the Company’s ability to recoup these start-up costs over a negotiated period of time to be defined in the
underlying franchise agreements. As of March 31, 2022, these studios and associated start-up costs had yet to commence.
The Company determined that the common stock to be issued upon settlement of the promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP are liability-classified awards. As of March 31, 2022, the Company recorded $2.7 million of stock-based compensation liability in accounts payable and accrued expenses and $0.4 million of stock-based compensation liability in other long-term liabilities in the condensed consolidated balance sheets.
The Company estimates the fair value of its liability-classified awards using a Monte-Carlo simulation model at each reporting period until settlement. The other significant assumptions used in the analysis as of March 31, 2022 were as follows:
| | | | | | | | |
| | As of March 31, 2022 |
| Risk-free interest rate | | 0.61% - 2.40% |
| Expected dividend yield | | — |
| Expected term in years | | 0.29 - 4.25 |
| Expected volatility | | 27.20% - 30.50% |
Equity-classified awards
On December 17, 2021, the Company entered into a promotional agreement with Timothy Kennedy (“TK”). Pursuant to this agreement, effective December 30, 2021, Timothy Kennedy will provide certain promotional services to the Company in exchange for annual compensation and $0.1 million of the Company’s Restricted Stock Awards (“RSAs”) for each 12-month period of service. RSAs will vest 100% upon each of the first four one-year anniversaries of the services being provided. The agreement between the Company and TK terminates on December 16, 2026. The Company determined that the RSAs granted to TK are equity-classified awards. The stock-based compensation expense related to the RSAs is recognized ratably over the requisite service period in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
See Note 15—Stock-based compensation for discussion on the stock option activities and total stock-based compensation expense for the three months ended March 31, 2022 and March 31, 2021, respectively.
Note 14—Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Issuance of convertible preferred stock and common stock
In connection with the transaction with MWIG described in Note 1—Nature of the business and basis of presentation, the Company amended its articles of incorporation and authorized 108,000,000 shares of common stock with a par value of $0.00005 and 11,000,000 shares of preferred stock with a par value of $0.0001. As of March 31, 2022 and December 31, 2021, the Company had 95,682,833 and 95,806,063 shares of common stock, respectively. As of March 31, 2022 and December 31, 2021, the Company had no shares of convertible preferred stock issued and outstanding.
As part of the transaction with MWIG and in return for Flyhalf Acquisition Company Pty Ltd acquiring 100% of the shares in F45 Aus Hold Co, the Company issued 58,000,000 shares of its common stock to F45 Aus Hold Co’s existing stockholders. In addition, Flyhalf Acquisition Company Pty Ltd made a payment to F45 Aus Hold Co’s existing stockholders of $100 million.
The payment of $100 million was funded by MWIG, subscribing for 10,000,000 shares of preferred stock at $10.00 per share in the Company. This amount was ultimately paid to F45 Aus Hold
Co’s existing stockholders pro rata in proportion to their interests in F45 Aus Hold Co. Further, Flyhalf Acquisition Company Pty Ltd issued $50.0 million secured promissory notes to F45 Aus Hold Co’s existing stockholders pro rata in proportion to their interests in F45 Aus Hold Co (the “Sellers Notes”). The $100.0 million payment, $50.0 million Sellers Notes and related interest thereon have been recorded as a dividend in the consolidated statements of changes in convertible preferred stock and stockholders’ deficit during the year ended December 31, 2019. In addition to the initial issue of 10,000,000 shares of Preferred Stock, MWIG was granted an option to acquire an additional 1,000,000 shares of Preferred Stock for $10.00 per share under the Share Purchase Agreement. The $10.0 million in funds raised by the issue of the additional Preferred Stock were used in full to partially settle the outstanding Sellers Notes.
On December 30, 2020, MWIG converted 1,145,568 shares of preferred stock of the Company
into 3,181,514 shares of common stock of the Company and sold those shares of common stock to affiliates of L1 Capital Fund, an Australian based global fund manager.
The rights and features of the Company’s preferred stock are as follows:
Dividends
The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than stock dividends) unless the holders of the preferred stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of preferred stock in an amount at least equal to the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (2) the number of shares of common stock issuable upon conversion of a share of preferred stock.
Liquidation
Upon the occurrence of a deemed liquidation event, as defined in the Company’s Amended and Restated Certificate of Incorporation, the holders of preferred stock shall be entitled to receive, before any distribution or payment to the holders of common stock, an amount equal to the greater of (1) preferred stock issue price per share for such preferred stock, as adjusted to reflect any combination or subdivision, stock dividend or other similar recapitalization, plus declared but unpaid dividends, if any, on such shares, and (2) the amount per share of common stock to which the holder would be entitled had all outstanding Preferred Stock shares been converted to common stock immediately before the distribution. After the distributions or payments to the holders of preferred stock have been paid in full, the entire remaining assets and funds, if any, will be distributed ratably among the holders of common stock in proportion to the number of shares of common stock held by them.
Conversion
The holder of each share of preferred stock has the option to convert the share at any time, into the number of fully paid and non-assessable shares of common stock that results from dividing the preferred stock issue price for the preferred stock share by the preferred stock conversion price that is in effect at the time of conversion. In addition, on (i) the consummation of Qualified Public Offering (as defined in the Company’s Amended and Restated Certificate of Incorporation) or (ii) with the consent of the holders of a majority of the outstanding shares of preferred stock, each share of preferred stock will be automatically converted. The preferred stock conversion price should initially be equal to the preferred stock issue price but subject to special adjustment upon either a Qualified Public Offering, a deemed liquidation event or a fair market value determination (each a “Conversion Price Adjustment Event”). Upon the occurrence of a Conversion Price Adjustment Event, the conversion price will be adjusted based on a formula, as defined in the Company’s Amended and Restated Certificate of Incorporation, which results in reductions to the preferred stock conversion price and additional value to the holder based on higher enterprise value; provided that in no event shall the preferred stock conversion price exceed $10.00 or be
less than $7.2014 (subject to appropriate adjustment in the event of any combination or subdivision, stock dividend or other similar recapitalization).
Voting rights
The holders of preferred, on an as-converted basis, and common stock vote together as a single class, except with respect to certain matters specified in the Company’s Amended and Restated Certificate of Incorporation that require the separate approval of the holders of preferred stock.
The Company classified the preferred stock in temporary equity in accordance with ASC 480-10-S99 because the preferred stock is redeemable for cash or other assets of the Company upon a Deemed Liquidation Event (as defined in the Company’s Amended and Restated Certificate of Incorporation) that are not solely within the control of the Company. The net carrying amount of the preferred stock is not currently accreted to a redemption value because the preferred stock is not currently redeemable or probable of becoming redeemable in the future.
In July 2021, due to the completion of a public offering, all preferred stock outstanding was automatically converted into an aggregate of 27,368,102 shares of common stock with a conversion price of $16.00. There were no shares of convertible preferred stock outstanding as of March 31, 2022 and December 31, 2021.
Note 15—Stock-based compensation
Issuance of restricted stock units
In connection with the transaction with MWIG described in Note 1—Nature of the business and basis of presentation, on March 15, 2019, the Company entered into a promotional agreement with Mark Wahlberg (“Mr. Wahlberg”), a member of the Company’s Board of Directors and an investor in MWIG, pursuant to which Mr. Wahlberg agreed to provide promotional services to the Company. In exchange for the agreed upon services provided in the promotional agreement, the Company issued 2,738,648 restricted stock units (RSUs) to Mr. Wahlberg.
The RSUs were to vest based on the Company attaining certain valuation thresholds upon a vesting event, defined as: (i) a deemed liquidation event or change in control; (ii) the closing of a financing transaction including the sale, issuance or redemption of the Company’s (or one of its subsidiaries) equity securities, and any initial public offering; or (iii) at any time that the Company’s common stock is publicly traded, with the Company’s equity value exceeding the following thresholds:
| | | | | | | | |
| Company Equity Value Threshold | | Potential Restricted Stock Units Vested |
| $1.0 billion | | 912,882 |
| $1.5 billion | | 912,882 |
| $2.0 billion | | 912,884 |
The Company determined that the RSUs are equity classified awards that contained both performance (deemed liquidation event, closing of a financing transaction or the public trading of the Company’s common stock) and market conditions (achievement of prescribed Company equity values) in order for the units to vest.
On July 5, 2021, the Company approved the acceleration of Mr. Wahlberg’s RSUs such that 100% of the RSUs granted to Mr. Wahlberg are fully vested concurrent with and subject to the consummation of the IPO, effectively eliminating the market condition based on the achievement of prescribed Company equity values. The RSUs shall be settled in shares of common stock on a date determined by the Company during 2022 but no later than March 15, 2022. All remaining terms and conditions in the original promotional agreement are still applicable. The Company determined the modification of the RSUs as a Type IV modification in accordance with ASC 718, Compensation - Stock Compensation, because at the modification date, both the original and modified awards were considered
improbable of vesting as the performance condition has not been met on the modification date of July 5, 2021. The Company utilized the assumed initial public offering price of $16.00 per share as the modification date fair value.
In connection with the Company becoming publicly traded on July 15, 2021, the fair value of the RSUs of 2,738,648 fully vested and was recognized as compensation expense in the amount of $43.8 million for the year ended December 31, 2021, which was included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). The Company issued the fully vested RSUs during the three months ended March 31, 2022.
2021 Incentive Plan
The Company’s stock-based compensation plan, which became effective at the IPO date, includes equity incentive compensation plans under which three types of share-based compensation plans are granted to the employees, directors and consultants of the Company, which are stock options (SOs), RSUs and restricted stock awards (RSAs). The purpose of the plan is to assist the Company in securing and retaining the service of eligible award recipients to provide incentives to employees, directors and consultants and promote the long-term financial success of the Company and thereby increase stockholder value. In accordance with the 2021 Incentive Plan, subject to adjustment for certain dilutive or related events, the maximum aggregate number of shares that may be subject to stock awards and sold under this plan is 5,000,000 shares, or the share reserve (“Share Reserve”). Beginning on January 1, 2022 and ending on January 1, 2031, the Share Reserve will automatically increase on January 1 of each year during the term of the 2021 Incentive Plan in an amount equal to 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; provided, however, that the Company’s board of directors may provide that there will not be a January 1 increase in the Share Reserve in a given year or that the increase will be less than 5% of the shares of common stock outstanding on the preceding December 31.
Employees meeting certain employment qualifications are eligible to receive stock-based awards. In accordance with the Company’s accounting policy, forfeitures of SOs, RSUs and RSAs are accounted for as they occur.
Stock options
SOs granted under the incentive equity plans are generally non-statutory stock options, but the incentive equity plans permit some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over one to three years from the date of grant. The exercise price of a stock option is equal to the closing price of the Company’s stock on the option grant date. The majority of stock options issued by the Company are subject to only service vesting conditions. As of December 31, 2021, the total number of shares subject to outstanding SOs was 252,737. As of March 31, 2022, the total number of shares subject to outstanding SOs was 673,292.
The Company utilizes the Black-Scholes option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:
| | | | | | | | |
| Weighted-average fair value (1) | | $ | 4.14 | |
| Expected volatility (2) | | 26.3% - 29.20% |
| Risk-free interest rate (3) | | 0.92% - 2.55% |
| Expected dividend yield (4) | | — | |
| Expected term in years | | 5.46 - 6.25 |
| | | | | |
| (1) | The weighted-average fair value based on stock options granted during the period. |
| (2) | Selected volatility is relevered equity volatility based on median asset volatility. |
| (3) | The risk-free interest rate was estimated based on the yield on U.S. Treasury scrips. |
| (4) | The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award. |
A summary of option activity under the employee share option plan as of March 31, 2022, and changes during the period then ended is presented below:
| | | | | | | | | | | | | | |
| Shares (in thousands) | Weighted - Average Exercise Price | Weighted - Average Remaining Contractual Term | Aggregate Intrinsic Value (in thousands) |
| | | | |
| | | | |
| | | | |
| | | | |
| Outstanding as of January 1, 2022 | 252 | $ | 15.92 | | | $ | — | |
| | | | |
| | | | |
| Granted | 441 | $ | 12.47 | | | |
| Exercised | — | | | | |
| Forfeited or expired | (20) | | 15.92 | | | |
| Outstanding as of March 31, 2022 | 673 | $ | 13.66 | | | $ | — | |
| Vested and Exercisable | 63 | $ | 15.92 | | | $ | — | |
| Expected to Vest | 610 | $ | 13.43 | | 1.86 | $ | — | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the quarter ended March 31, 2022. The aggregate intrinsic value of vested and unvested option as of March 31, 2022 was $0, since the options were out-of-the-money. The aggregate intrinsic value is the difference between the Company’s closing stock price of $10.70 on the last trading day of March 31, 2022 and the exercise price of $16.00 multiplied by the number of in-the-money options. All the options were out-of-the-money. During the three months ended March 31, 2022, no options vested.
As of March 31, 2022, the total unrecognized pre-tax stock-based compensation expense related to non-vested stock options was $2.5 million, which is expected to be recognized over a weighted-average vesting period of 1.86 years. The maximum contractual term of the SO is approximately three years.
Restricted stock units
RSUs may be granted at any time and from time to time as determined by the Company. The Company will set vesting criteria at its discretion, which, depending on the extent to which the criteria are met, will determine the number of RSUs that will be paid out to the participant. The Company may set vesting criteria based upon the passage of time, the achievement of target levels of performance, or the occurrence of other events or any combination thereof as determined by the Company at its discretion. Dividend equivalents shall not be paid on a RSU during the period it is unvested. The RSUs granted by the Company are subject to service vesting conditions. RSUs also provide for accelerated vesting in certain circumstances as defined in the plans and related grant agreements. As of March 31, 2022, the total number of shares subject to outstanding RSUs was 1,385,683. During the three months ended March 31, 2022, the Company withheld 1,045,661 shares of common stock related to net share settlement of restricted stock units vested during the prior year.
The Company uses the closing stock price on the grant date to estimate the fair value of service-based RSUs. The Company estimates the fair value of RSUs subject to performance-adjusted vesting conditions using the closing stock price on the grant date.
A summary of RSU’s activity is as follows:
| | | | | | | | |
| Shares (in thousands) | Weighted - Average Grant Date Fair Value Per Share |
| Outstanding as of January 1, 2022 | 997 | | $ | 15.74 | |
| Granted | 389 | | 12.85 | |
| Vested | — | | — | |
| Forfeited | — | | — | |
| Outstanding as of March 31, 2022 | 1,386 | | $ | 14.37 | |
No RSUs vested during the three months ended March 31, 2022. During the three months ended March 31, 2022, total recognized pre-tax stock-based compensation expense related to non-vested RSUs was $0, which was included in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). As of March 31, 2022, total unrecognized pre-tax stock-based compensation expense related to non-vested RSUs was $19.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.45 years. The maximum contractual term of RSUs is approximately three years.
Restricted stock awards
Subject to the terms and provisions of the plan, the Company, at any time and from time to time, may grant shares of restricted stock to service providers in such amounts as the Company, in its sole discretion, will determine. During the period of restriction, service providers holding shares of restricted stock may exercise full voting rights and will be entitled to receive all dividends and other distributions paid with respect to such shares, unless the Company determines otherwise. If any such dividends or distributions are paid in shares; the shares will be subject to the same restrictions on transferability and forfeitability as the shares of restricted stock with respect to which they were paid. The RSAs granted by the Company are subject to service vesting conditions. As of March 31, 2022, the total number of shares subject to outstanding RSAs was 103,748.
The Company uses the closing stock price on the grant date to estimate the fair value of service-based RSAs. The Company estimates the fair value of RSAs subject to performance-adjusted vesting conditions using the closing stock price on the grant date.
A summary of RSAs activity is as follows:
| | | | | | | | |
| Shares (in thousands) | Weighted - Average Grant Date Fair Value Per Share |
| Outstanding as of January 1, 2022 | 117 | | $ | 14.60 | |
| Granted | — | | — | |
| Vested | (8) | | 15.15 | |
| Forfeited | (5) | | 15.15 | |
| Outstanding as of March 31, 2022 | 104 | | $ | 15.09 | |
The total grant date fair value of RSAs vested during the three months ended March 31, 2022 was $0.1 million. For the three months ended March 31, 2022, total recognized pre-tax stock-based compensation expense related to non-vested RSAs was $0.5 million, which was included in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). Total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards was $0.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.21 years. The maximum contractual term of the RSAs is less than one year.
Non-employee promotional agreements
Liability-classified awards
As described in Note 13—Commitments and contingencies, the Company entered into promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP which included RSUs that contain equity-based payments, which have performance and market conditions.
The Company determined that the RSUs are liability-classified awards that contain both performance (deemed liquidation event, closing of a financing transaction or the public trading of the Company’s common stock) and market conditions (achievement of prescribed Company equity values) in order for the units to vest. As of March 31, 2022, the market conditions have not been met on any of the non-employee promotional agreements other than those listed in Note 13 under the promotional agreement with DB Ventures. The Company began recognizing stock-based compensation expense ratably over the requisite service period when the performance condition was met through the achievement of the IPO on July 15, 2021.
Equity-classified awards
The promotional agreement with TK included RSAs that contain equity-based payment, which has a service condition. The Company determined that the RSAs granted to TK are equity based awards that contains a service condition to vest. The stock-based compensation expense related to the RSAs are recognized ratably over the requisite service period in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
Note 16—Basic and diluted earnings (loss) per share
The computation of earnings (loss) per share and weighted average shares of the Company’s common stock outstanding for the periods presented are as follows (in thousands, except share and per share data):
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended
March 31, |
| | | | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net income (loss) | | | | | $ | 2,512 | | | $ | (36,845) | |
| Net income (loss) allocated to participating preferred shares | | | | | — | | | — | |
| Net income (loss) attributable to common stockholders—basic and diluted | | | | | $ | 2,512 | | | $ | (36,845) | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average common shares outstanding—basic | | | | | 95,709,671 | | | 29,281,514 | |
| Effect of dilutive securities | | | | | 977,612 | | | — | |
| Weighted average shares outstanding—diluted | | | | | 96,687,283 | | | 29,281,514 | |
| | | | | | | |
| Net earnings (loss) per share: | | | | | | | |
| Basis earnings (loss) per share | | | | | $ | 0.03 | | | $ | (1.26) | |
| Diluted earnings (loss) per share | | | | | $ | 0.03 | | | $ | (1.26) | |
| | | | | | | |
| Anti-dilutive securities excluded from diluted earnings (loss) per share: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Stock options to purchase common stock | | | | | 662,935 | | | — | |
| Convertible preferred stock | | | | | — | | | 9,854,432 | |
| Restricted stock units | | | | | — | | | 2,738,648 | |
| Convertible notes | | | | | — | | | 5,856,302 | |
Total | | | | | 662,935 | | | 18,449,382 | |
The contingently issuable shares in relation to the promotional agreements with ABG-Shark, MJE, and CDP are not included in diluted earnings (loss) per share computation as the market conditions have not been met to be vested as of March 31, 2022.
Note 17—Segment and geographic area information
The Company’s operating segments align with how the Company manages its business and interacts with its franchisees on a geographic basis. F45 is organized by geographic region based on the Company’s strategy to become a globally recognized brand. F45 has three reportable segments: United States, Australia and Rest of World. The Company refers to “Australia” as the operations in Australia, New Zealand and the immediately surrounding island nations. The Company refers to “Rest of World” as the operations in locations other than the United States and Australia. The Company’s Chief Operating Decision Maker (“CODM”) group is comprised of two executive officers, Messrs. Adam Gilchrist and Chris Payne. Segment information is presented in the same manner that the Company’s CODM reviews the operating results in assessing performance and allocating resources. The CODM reviews revenue and gross profit for each of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment.
The Company does not allocate assets at the reportable segment level as these are managed on an entity wide group basis.
The following is key financial information by reportable segment which is used by management in evaluating performance and allocating resources (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
March 31, 2022 | | For the Three Months Ended
March 31, 2021 |
| Revenue | | Cost of revenue | | Gross profit | | Revenue | | Cost of revenue | | Gross profit |
| United States: | | | | | | | | | | | |
| Franchise | $ | 12,401 | | | $ | 1,015 | | | $ | 11,386 | | | $ | 7,015 | | | $ | 1,022 | | | $ | 5,993 | |
| Equipment and merchandise | 22,848 | | | 7,754 | | | 15,094 | | | 2,481 | | | 1,478 | | | 1,003 | |
| $ | 35,249 | | | $ | 8,769 | | | $ | 26,480 | | | $ | 9,496 | | | $ | 2,500 | | | $ | 6,996 | |
| Australia: | | | | | | | | | | | |
| Franchise | $ | 3,448 | | | $ | 119 | | | $ | 3,329 | | | $ | 3,289 | | | $ | 178 | | | $ | 3,111 | |
| Equipment and merchandise | 2,130 | | | 1,733 | | | 397 | | | 839 | | | 807 | | | 32 | |
| $ | 5,578 | | | $ | 1,852 | | | $ | 3,726 | | | $ | 4,128 | | | $ | 985 | | | $ | 3,143 | |
| Rest of World: | | | | | | | | | | | |
| Franchise | $ | 4,011 | | | $ | 97 | | | $ | 3,914 | | | $ | 2,852 | | | $ | 14 | | | $ | 2,838 | |
| Equipment and merchandise | 5,170 | | | 1,456 | | | 3,714 | | | 1,715 | | | 896 | | | 819 | |
| $ | 9,181 | | | $ | 1,553 | | | $ | 7,628 | | | $ | 4,567 | | | $ | 910 | | | $ | 3,657 | |
| Consolidated: | | | | | | | | | | | |
| Franchise | $ | 19,860 | | | $ | 1,231 | | | $ | 18,629 | | | $ | 13,156 | | | $ | 1,214 | | | $ | 11,942 | |
| Equipment and merchandise | 30,148 | | | 10,943 | | | 19,205 | | | 5,035 | | | 3,181 | | | 1,854 | |
| $ | 50,008 | | | $ | 12,174 | | | $ | 37,834 | | | $ | 18,191 | | | $ | 4,395 | | | $ | 13,796 | |
Selling, general and administrative expenses, other expenses, and taxes are not allocated to individual segments as these are managed on an entity wide group basis. The reconciliation between reportable segment gross profit to condensed consolidated net income (loss) is as follows (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended
March 31, |
| 2022 | | 2021 |
| Segment gross profit | $ | 37,834 | | | $ | 13,796 | |
| Selling, general and administrative expenses | 32,090 | | | 16,828 | |
| | | |
| Loss on derivative liabilities, net | — | | | 25,505 | |
| Interest expense, net | 126 | | | 8,415 | |
| Other expense, net | 570 | | | 291 | |
| Provision (benefit) for income taxes | 2,536 | | | (398) | |
| Net income (loss) | $ | 2,512 | | | $ | (36,845) | |
For the three months ended March 31, 2022, the Company had CIP additions of $0.1 million in the United States. For the three months ended March 31, 2021, the Company’s long-lived asset additions were not significant.
Note 18—Subsequent events
The Company has evaluated subsequent events from March 31, 2022 through May 16, 2022, the date on which the March 31, 2022 condensed consolidated financial statements were available for issuance, and has determined that there are no subsequent events requiring adjustments to or disclosure in the condensed consolidated financial statements, other than as discussed below.
F45 SPV Finance Company and Strategic Financing Facility with Affiliates of Fortress Credit Corp
On May 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 (the “Borrower”), and Fortress Credit Corp., as administrative agent, collateral agent and a lender (“Fortress”), and the other parties party thereto from time to time. The New Credit Agreement provides for a $150 million (the “Maximum Committed Amount”) seven-year credit facility (the “Facility”); provided, that the Maximum Committed Amount may be increased to $300 million in certain circumstances under the terms of the New Credit Agreement (a “Facility Increase”). The New Credit Agreement requires that the Company enter into a limited guaranty, guaranteeing the Borrower’s obligations under the Facility, in an amount not to exceed 10% of the total Facility size (the “Guaranty”). The proceeds from the Facility will be used by the Borrower to purchase loans made by another subsidiary of the Company, F45 Intermediate Holdco, LLC, to certain franchisees of the Company (the “Receivables”). The obligations under the New Credit Agreement are secured by the Receivables.
In connection with the entry into the New Credit Agreement, on May 13, 2022, the Company entered into a warrant purchase agreement (the “Warrant Agreement”), pursuant to which the Company is obligated to issue warrants (the “Warrants”) to certain affiliates of Fortress (collectively, the “Holders”) in up to four tranches, each representing 1.25% of the fully diluted shares of common stock of the Company par value $0.00005 per share (the “Common Stock”), outstanding on the issue date of the Warrant (in the case of Immediately Exercisable Warrants (as defined herein)) or the Vesting Date (as defined herein) (in the case of a 50% Utilization Warrant (as defined herein)). Concurrently with the execution of the Credit Agreement, the Company issued (i) immediately exercisable warrants (an “Immediately Exercisable Warrant”) to the Holders to purchase an aggregate of up to 1,211,210 shares of Common Stock (representing 1.25% of the fully diluted shares of Common Stock as of May 13, 2022) and (ii) warrants that will become exercisable on the date on which loans in an amount equal to 50% of the Maximum Committed Amount (as in effect on the date any Warrant is issued) have been drawn under the Credit Agreement (a “50% Utilization Warrant”) (the date a 50% Utilization Warrant becomes exercisable upon reaching required utilization levels under the Facility, a “Vesting Date”) to the Holders to purchase up to 1.25% of the fully diluted shares of Common Stock as of the Vesting Date. In the event of a Facility Increase, the Company will issue additional Immediately Exercisable Warrants and 50% Utilization Warrants to the Holders, in each case, representing the right to purchase up to an aggregate of 1.25% of the fully diluted Common Stock of the Company as of the issue date of the Warrant (in the case of the Immediately Exercisable Warrants) or the Vesting Date (in the case of the 50% Utilization Warrants).
In connection with the entry into the New Credit Agreement, on May 13, 2022, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement. Pursuant to the Second Amendment, certain amendments were made to the terms of the Credit Agreement to permit the execution of the New Credit Agreement (including establishing the securitization of the franchisee loans described above) and the issuance of the Warrants pursuant to the Warrant Agreement.
Joint Venture with Club Sports Group LLC
On May 16, 2022, the Company announced the formation of a joint venture with Club Sports Group LLC, a Delaware limited liability company (“CSG”), to, among other things, make, hold and monetize certain loans to prospective franchisees of the Company who have prior military service, with such loans secured by first priority senior liens on the equity interests of such franchisees and all or substantially all of the assets of such franchisee and its subsidiaries (if applicable). The joint venture will be conducted through FAFC LLC, a newly-formed Delaware limited liability company (“FAFC”). CSG is an affiliate of Kennedy Lewis Management LP, a significant stockholder of the Company which beneficially owns directly or indirectly through funds it manages, as of the date hereof, in excess of 10% of the Company’s outstanding common stock and has the right to designate a member of the Company’s board of directors.
Also on May 16, 2022, and in connection with establishment of the joint venture, (i) the Company entered into a Limited Liability Company Agreement of FAFC, dated as of May [16], 2022 (the “LLC Agreement”), between the Company and CSG and (ii) FAFC entered in a Servicing Agreement, dated as of May 16, 2022 (the “Servicing Agreement”), between FAFC and CSG. The LLC Agreement is the primary operating document of the joint venture and contains the understanding of the Company and CSG regarding the governance and operation of FAFC. Pursuant to the LLC Agreement, the joint venture will be managed by its members, with day-to-day operations of the joint venture, subject to certain consent rights of the members, to be managed by CSG or one of its affiliates, pursuant to the Servicing Agreement.
The LLC Agreement provides, among other things: (i) unless earlier dissolved in accordance with the LLC Agreement, the term will continue until the soonest date after which all investments thereunder are fully resolved or otherwise sold and all other Company matters related to such investments have been wound up, (ii) each of the Company and CSG have an initial 50% equity interest in FAFC, (iii) procedures for the Company to purchase CSG’s interest in FAFC in connection with a material breach of the LLC Agreement by either member, (iii) that the Company or its affiliates shall enter into a franchise agreement and management services agreement with and provide all customary franchisee support services to each franchisee to whom loans are made through FAFC on substantially similar terms as the Company provides to its other franchisees, (iv) FAFC may, subject to the conditions set forth in the LLC Agreement, call additional capital from the members, provided that no member shall be required to fund aggregate capital contributions in excess of fifty million dollars ($50,000,000.00) plus their pro rata share of any administrative expenses incurred by FAFC, (v) neither the Company nor CSG may transfer its equity interest in FAFC without the consent of the other party and the consent of both parties is required in connection with the admission of any additional member and (vi) specific provisions regarding any distributions, and the priority and terms thereof, to the members of FAFC. The LLC Agreement also contains other customary provisions and other agreements by the parties.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 are F45 Training, the fastest growing fitness franchisor in the world according to Entrepreneur in 2021, focused on creating a leading global fitness training and lifestyle brand. We primarily offer consumers functional 45-minute workouts that are effective, fun, and community-driven. Our workouts combine elements of high-intensity interval, circuit, and functional training to offer consumers what we believe is the world’s best functional training workout. We deliver our workouts through our digitally-connected global network of studios, and we have built a differentiated, technology-enabled platform that allows us to create and distribute workouts to our global franchisee base. Our platform enables the rapid scalability of our model and helps to promote the success of our franchisees. We offer our members a continuously evolving fitness program in which virtually no two workouts are ever the same. Our vast and growing library of functional training content allows us to vary workout programs to keep consumers engaged with fresh content, stay at the forefront of consumer trends and drive maximum individual results, while helping our members achieve their fitness goals.
Impact of the COVID-19 pandemic
The COVID-19 pandemic 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.
As of March 31, 2022, we had approximately 1,691 Open Studios, which represents approximately 91% of our Total Studios. The remaining 9% of our Total Studios are generally located in regions that continue to face restrictions, which we expect to be relaxed over time.
We have found that, on average, studios that have re-opened following temporary closure quickly return close to pre-pandemic levels on a weekly revenue basis, and eventually exceed pre-pandemic levels on the same basis.
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 in the United States and South America. We refer to “Australia” as our operations in Australia, New Zealand and the immediately surrounding island nations. We refer to “Rest of World” or “ROW” as our operations in locations other than those in the United States and Australian segments. We evaluate the performance of our segments and allocate resources to them based on revenue and gross profit. Revenue and gross profit for all operating segments include only transactions with external customers and do not include inter-segment transactions. The tables on the following pages summarize the financial information for our segments for the three months ended March 31, 2022 and 2021. In all other sections of this filing when we present geographic data, we are presenting such data for the named region on a stand-alone basis
Our Franchise Model
We operate a nearly 100% franchise model. We believe our franchise model is attractive due to its potential for asset-light growth, strong profitability and robust cash flow generation, and has helped to facilitate our rapid growth and strong financial performance prior to the COVID-19 pandemic. Despite challenges posed by the COVID-19 pandemic, we grew our footprint and experienced minimal permanent closures during 2020, which we believe underscores the resilience of our business model. Between Q1 2022 and Q1 2021, our Total Franchises Sold increased by 78% and our Total Studios increased by 25%. For the three months ended March 31, 2022, as compared with the same period in 2021, our revenue increased by 175%.
Notwithstanding the ongoing challenges presented by the COVID-19 pandemic, we believe we are well positioned to continue to successfully manage through the pandemic and drive growth in the future.
Our opportunities to drive the long-term growth of our business include:
•expanding our studio footprint throughout the United States, Australia, and the Rest of World (“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.
Key Non-GAAP Financial and Operating Metrics
In addition to our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees, and monitor our business.
Our financial condition and results of 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 months ended March 31, 2022 and 2021 (in thousands except, net earnings (loss) per share):
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| Three Months Ended
March 31, |
| 2022 | | 2021 |
| Net income (loss) | $ | 2,512 | | | $ | (36,845) | |
| Net earnings (loss) per share | $ | 0.03 | | | $ | (1.26) | |
| System-wide Sales | $ | 117,388 | | | $ | 94,052 | |
| System-wide Visits | 7,216 | | | 6,776 | |
| Same store sales growth | 6.2 | % | | (21.2) | % |
| New Franchises Sold, net | 706 | | | 3 | |
| Total Franchises Sold, end of period | 4,007 | | | 2,247 | |
| Initial Studio Openings, net | 117 | | | 50 | |
| Total Studios, end of period | 1,866 | | | 1,487 | |
| EBITDA | 6,974 | | | (28,176) | |
| Adjusted EBITDA | $ | 17,664 | | | $ | 5,270 | |
| Adjusted EBITDA margin | 35.3 | % | | 29.0 | % |
System-wide Sales
We define System-wide Sales as all payments made to our studios and includes payment for classes, apparel and other sales for a given period. We track System-wide Sales as an indication of the strength of our franchisee network.
During the three months ended March 31, 2022, our System-wide Sales were approximately $117.4 million, which compares favorably to approximately $94.1 million for the three months ended March 31, 2021, as presented in the table below:
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| Three Months Ended
March 31, |
| 2022 | | 2021 |
| (in thousands) |
United States | $ | 52,695 | | | $ | 30,473 | |
Australia | 42,953 | | | 51,998 | |
ROW | 21,740 | | | 11,581 | |
Total | $ | 117,388 | | | $ | 94,052 | |
System-wide Sales year-over-year growth of 73% in our US segment and 88% in our ROW segment was driven by both new studio openings during the period and a greater percentage of total studios which were not impacted by COVID-19 restrictions or temporary closures during the quarter. System-wide Sales year-over-year declined 17% for our Australian segment, driven by a greater percentage of studios in this segment being impacted by COVID-19 restrictions and temporary closures.
System-wide Visits
We define System-wide Visits as the number of registered individual workouts for any specified period. A workout is registered when the consumer checks into a class.
Our long-term growth will depend in part on our continued ability to attract and retain consumers to visit our studios for individual workouts. Our franchisees must continue to provide an experience that both attracts new consumers and retains existing consumers.
During the three months ended March 31, 2022, our System-wide Visits were approximately 7.2 million, which compares favorably to approximately 6.8 million for the three months ended March 31, 2021, as presented in the table below:
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| Three Months Ended
March 31, |
| 2022 | | 2021 |
| (in thousands) |
United States | 3,101 | | | 2,266 | |
Australia | 2,674 | | | 3,742 | |
ROW | 1,441 | | | 768 | |
Total | 7,216 | | | 6,776 | |
System-wide Visits year-over-year growth of 37% in our US segment and 88% in our ROW segment was driven by both new studio openings during the period and a greater percentage of total studios which were not impacted by COVID-19 restrictions or temporary closures during the year. System-wide Visits year-over-year declined by 29% for our Australian segment, driven by fewer new studio openings during the period and a greater percentage of studios in this segment being impacted by COVID-19 restrictions and temporary closures.
New Franchises Sold
New Franchises Sold refers to the number of franchises sold during any specific period. We classify Total Franchises Sold, as of any specified date, as the total number of signed franchise agreements in place as of such date that have not been terminated. Each new franchise is included in the number of franchises sold from the date 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 in the United States and ROW, and we believe we can significantly grow our franchisee base. If we cannot sell new franchises as quickly as we would like in these geographies, our operating results may be adversely affected.
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| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| U.S. | | Australia | | ROW | | Total | | U.S. | | Australia | | ROW | | Total |
Total Franchises Sold, beginning of period | 1,710 | | | 803 | | | 788 | | | 3,301 | | | 931 | | | 679 | | | 634 | | | 2,244 | |
New Franchises Sold, net(a) | 692 | | | 1 | | | 13 | | | 706 | | | 10 | | | (3) | | | (4) | | | 3 | |
Total Franchises Sold, end of period | 2,402 | | | 804 | | | 801 | | | 4,007 | | | 941 | | | 676 | | | 630 | | | 2,247 | |
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(a) New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to the initial studio opening.
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| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| U.S. | | Australia | | ROW | | Total | | U.S. | | Australia | | ROW | | Total |
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Total Franchises Sold, beginning of period | 931 | | | 679 | | | 634 | | | 2,244 | | | 814 | | | 643 | | | 435 | | | 1,892 | |
New Franchises Sold, net(a) | 779 | | | 124 | | | 154 | | | 1,057 | | | 117 | | | 36 | | | 199 | | | 352 | |
Total Franchises Sold, end of period | 1,710 | | | 803 | | | 788 | | | 3,301 | | | 931 | | | 679 | | | 634 | | | 2,244 | |
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(a) New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to the initial studio opening.
During the three months ended March 31, 2022, we sold a net average of 235 new franchises per month. This compares favorably to the 1 net average new Franchise Sold during the three months ended March 31, 2021. This increase is supported by recent multi-unit franchise deals.
Initial Studio Openings and Total Studios
Initial Studio Openings refers to the number of studios that were determined to be first opened during such period. Prior to October 1, 2021, we classified an Initial Studio Opening to occur in the first month in which the studio first generates monthly revenue of at least $4,500. Starting on October 1, 2021, we classify an Initial Studio Opening to occur in the month in which we record the initial studio opening in our internal systems. Any studios that did not have an Initial Studio Opening under the prior definition are included as of October 1, 2021. We classify Total Studios, as of any specified date, as the total cumulative Initial Studio Openings as of that date less cumulative permanent studio closures as of that date. Neither Initial Studio Openings nor Total Studios are adjusted downward for studios that were temporarily closed due to the COVID-19 pandemic or otherwise.
Our long-term growth will depend in part on our continued ability to open new studios. We believe that we will experience continued expansion of new studio openings in the United States and ROW. However, if delays or difficulties are encountered and new studio openings do not occur as quickly as we would like, our operating results may be adversely affected.
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| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| U.S. | | Australia | | ROW | | Total | | U.S. | | Australia | | ROW | | Total |
Total Studios, beginning of period | 654 | | | 653 | | | 442 | | | 1,749 | | | 486 | | | 616 | | | 335 | | | 1,437 | |
Initial Studio Openings, net(a) | 73 | | | 10 | | | 34 | | | 117 | | | 32 | | | 1 | | | 17 | | | 50 | |
Total Studios, end of period | 727 | | | 663 | | | 476 | | | 1,866 | | | 518 | | | 617 | | | 352 | | | 1,487 | |
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(a) Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.
During the three months ended March 31, 2022, we had net initial studio openings of 39 new franchises per month during the three months ended March 31, 2022 compared to the net initial studio openings of 17 franchises per month during the three months ended March 31, 2021. The slight increase in net initial studio openings was driven by gross studio openings in the Australia and ROW generated by studio sales during the latter half our fiscal year ended December 31, 2021.
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 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.
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| Three Months Ended
March 31, |
| 2022 | | 2021 |
| Other Data: | (in thousands) |
| EBITDA | $ | 6,974 | | | $ | (28,176) | |
| Adjusted EBITDA | $ | 17,664 | | | $ | 5,270 | |
Adjusted EBITDA margin (1) | 35.3 | % | | 29.0 | % |
Same Store Sales growth (2) | 6.2 | % | | (21.2) | % |
(1)Management believes that EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are useful to
investors as they eliminate certain items identified as affecting the period-over-period comparability of our operating results. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin eliminate, among other items, non-cash depreciation and amortization expense that results from our capital investments and intangible assets, as well as income taxes, which may not be comparable with other companies based on our tax structure.
Other companies may define Adjusted EBITDA and Adjusted EBITDA margin differently, and as a result, our measures of Adjusted EBITDA and Adjusted EBITDA margin may not be directly comparable to those of other companies. 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.
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA (in thousands):
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| Three Months Ended
March 31, |
| 2022 | | 2021 |
| |
| Net income (loss) | $ | 2,512 | | | $ | (36,845) | |
| Interest expense, net | 126 | | | 8,415 | |
| Provision (benefit) for income taxes | 2,536 | | | (398) | |
| Depreciation and amortization | 1,174 | | | 204 | |
| Amortization of deferred costs | 626 | | | 448 | |
| EBITDA | $ | 6,974 | | | $ | (28,176) | |
| Sales tax reserve (a) | — | | | 100 | |
| Transaction fees (b) | 1,788 | | | 1,582 | |
| Loss on derivative liabilities (c) | — | | | 25,505 | |
| Certain legal costs and settlements (d) | 2,325 | | | 2,537 | |
| Stock-based compensation (e) | 2,603 | | | — | |
| Recruitment (f) | 655 | | | — | |
| COVID concessions (g) | 896 | | | 2,482 | |
| Relocation (h) | 724 | | | 69 | |
| Development costs (i) | 1,699 | | | 1,171 | |
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| Adjusted EBITDA | $ | 17,664 | | | $ | 5,270 | |
(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 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.
(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 March 31, 2022 and 2021, there were 1,328 and 1,010 studios, respectively in our comparable base of franchise studios.
Same Store Sales
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.
Components of Our Results of Operations
Revenue
We generate revenue from the following sources:
•Franchise Revenue: Consists primarily of upfront establishment fees, monthly franchise fees, and other franchise-related fees, including fees related to marketing and other recurring fixed fees paid by franchisees on a monthly basis for various services we provide, such as the use of intranet, email and the studio’s website. Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement, generally for two additional five year terms, as well as the license for certain trademarks and systems to operate that studio.
Monthly franchise fees generally become payable six to nine months after we and a franchisee execute a franchise agreement, irrespective of whether the franchise has opened their studio. 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 new F45 Training studios, which are comprehensive opening packs containing the standardized set of F45-branded fitness equipment and related technology required to operate an F45 Training studio and (ii) subsequent additional and/or replacement equipment and merchandise sales to franchisees including technology, apparel and other fitness-related products. Typically, a portion of the World Pack fee is required to be paid upon the execution of a franchise agreement, with the balance due upon the earlier of: (i) the date the franchisee orders the World Pack; or (ii) eight months from the effective date of the franchise agreement. The franchise agreement mandates all franchisees to order and update new equipment on an annual basis.
Expenses
We primarily incur the following expenses directly related to our cost of revenues:
•Cost of Franchise Revenue: Consists of direct costs associated with franchise sales, lead generation and the provision of marketing services to our franchisees. Our cost of franchise revenue changes primarily based on the number of Total Franchises Sold and Total Studios.
•Cost of Equipment and Merchandise Revenue: Primarily includes the direct costs associated with World Pack equipment as well as additional and replacement equipment and merchandise sales to new and existing franchisees. World Pack costs consist of the cost of the components included in opening packs sold to franchisees, including: (i) gym equipment; (ii) our tech pack (e.g., TVs, F45TV adapters / dongles, heart monitors); and (iii) uniforms and merchandise. Our cost of equipment and merchandise changes primarily based on the World Pack equipment sales, which is driven by the number of Franchises Sold. Cost of equipment revenue is reduced by consideration (i.e. rebates) payable by the equipment supplier, in which the amount is recognized in the condensed consolidated statements of operations and comprehensive income (loss) generally upon delivery of the equipment.
•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
delivery platform, marketing and promotional activities for the F45 Training brand, and professional expenses.
•Other Income, Net: Our other income, net, primarily relates to realized and unrealized gains and losses on foreign currency transactions.
Provision (Benefit) for Income Taxes
Our effective income tax rate differed from the U.S. statutory tax rate of 21% primarily due to the effect of certain nondeductible expenses, permanent differences, foreign jurisdiction earnings taxed at different rates, reserves for uncertain tax positions, and a valuation allowance against certain domestic deferred tax assets that are not more likely than not to be realized.
Recent Transactions
On October 29, 2021, Company entered into a share purchase agreement to acquire 100% of the outstanding stock of Vive Active. Vive Active, located in Australia, provides Pilates classes through its online platform and its studios. The consideration exchanged for the acquisition amounts to $7.5 million (50% cash up front and 50% deferred cash paid no later than 6 months after completion and which is not subject to any other conditions). The stock acquisition was a strategic transaction to leverage Vive’s intellectual property, content, and expertise to supplement the Company’s brands, to expand the Company’s corporate footprint across Australia and key global markets, and to leverage Vive management team’s experience in developing corporate-owned studios.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated: | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| (dollars in thousands) |
| Revenues: | | | | | | | |
Franchise (Related party: $2,616 and $45 for the three months ended March 31, 2022 and 2021, respectively) | $ | 19,860 | | | $ | 13,156 | | | | | |
Equipment and merchandise (Related party: $7 and $0 for the three months ended March 31, 2022 and 2021, respectively) | 30,148 | | | 5,035 | | | | | |
| Total revenues | 50,008 | | | 18,191 | | | | | |
| Costs and operating expenses: | | | | | | | |
| Cost of franchise revenue | 1,231 | | | 1,214 | | | | | |
Cost of equipment and merchandise (Related party: $3,286 and $941 for the three months ended March 31, 2022 and 2021, respectively) | 10,943 | | | 3,181 | | | | | |
| Selling, general and administrative expenses | 32,090 | | | 16,828 | | | | | |
| Forgiveness of loans to directors | — | | | — | | | | | |
| Total costs and operating expenses | 44,264 | | | 21,223 | | | | | |
| Income (loss) from operations | 5,744 | | | (3,032) | | | | | |
| Loss on derivative liabilities, net | — | | | 25,505 | | | | | |
| Interest expense, net | 126 | | | 8,415 | | | | | |
| Other expense, net | 570 | | | 291 | | | | | |
| Income (loss) before income taxes | 5,048 | | | (37,243) | | | | | |
| Provision (benefit) for income taxes | 2,536 | | | (398) | | | | | |
| Net income (loss) | $ | 2,512 | | | $ | (36,845) | | | | | |
Comparison of the three months ended March 31, 2022 and 2021
Revenue
Franchise Revenue
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| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
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| (dollars in thousands) | | | | |
| Franchise | | | | | | | |
| USA | $ | 12,401 | | | $ | 7,015 | | | $ | 5,386 | | | 77 | % |
| Australia | 3,448 | | | 3,289 | | | 159 | | | 5 | % |
| ROW | 4,011 | | | 2,852 | | | 1,159 | | | 41 | % |
| Total franchise revenue | $ | 19,860 | | | $ | 13,156 | | | $ | 6,704 | | | 51 | % |
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| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| U.S. | | Australia | | ROW | | Total | | U.S. | | Australia | | ROW | | Total |
Total Franchises Sold, beginning of period | 1,710 | | | 803 | | | 788 | | | 3,301 | | | 931 | | | 679 | | | 634 | | | 2,244 | |
New Franchises Sold, net(a) | 692 | | | 1 | | | 13 | | | 706 | | | 10 | | | (3) | | | (4) | | | 3 | |
Total Franchises Sold, end of period | 2,402 | | | 804 | | | 801 | | | 4,007 | | | 941 | | | 676 | | | 630 | | | 2,247 | |
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| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| U.S. | | Australia | | ROW | | Total | | U.S. | | Australia | | ROW | | Total |
Total Studios, beginning of period | 654 | | | 653 | | | 442 | | | 1,749 | | | 486 | | | 616 | | | 335 | | | 1,437 | |
Initial Studio Openings, net(a) | 73 | | | 10 | | | 34 | | | 117 | | | 32 | | | 1 | | | 17 | | | 50 | |
Total Studios, end of period | 727 | | | 663 | | | 476 | | | 1,866 | | | 518 | | | 617 | | | 352 | | | 1,487 | |
The $5.4 million, or 77%, increase in franchise revenue in the United States for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to the increase in the number of franchise sales as well as an increase in studio openings in the United States driven by the increase in the number of franchise sales as well as the increase in studios openings in the United States. The amount of total Franchises Sold in the United States increased by 1,461, or 155%, from 941 Franchises Sold as of March 31, 2021 to 2,402 Franchises Sold as of March 31, 2022. In addition, the number of studios open in the United States increased by 209, or 40%, from 518 studios as of March 31, 2021 to 727 studios as of March 31, 2022.
The $0.2 million, or 5%, increase in franchise revenue in Australia for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to the increase in the number of franchise sales in Australia, partially offset by the impact of COVID restrictions impacting the three months ended March 31, 2022. The total amount of Franchises Sold in Australia increased by 128, or 19%, from 676 Franchises Sold as of March 31, 2021 to 804 Franchises Sold as of March 31, 2022. In addition, the number of studios open in Australia increased by 46, or 7%, from 617 studios as of March 31, 2021 to 663 studios as of March 31, 2022.
The $1.2 million, or 41%, increase in franchise revenue in ROW for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to the increase in the number of franchise sales as well as increase in studio openings in ROW. The total number of Franchises Sold in ROW increased by 171, or 27%, from 630 Franchises Sold as of March 31, 2021 to 801 Franchises Sold as of March 31, 2022. In addition, the number of studios open in ROW increased by 124, or 35%, from 352 studios as of March 31, 2021 to 476 studios as of March 31, 2022.
Equipment and Merchandise Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Equipment and merchandise | | | | | | | |
| USA | $ | 22,848 | | | $ | 2,481 | | | $ | 20,367 | | | 821 | % |
| Australia | 2,130 | | | 839 | | | 1,291 | | | 154 | % |
| ROW | 5,170 | | | 1,715 | | | 3,455 | | | 201 | % |
| Total equipment and merchandise revenue | $ | 30,148 | | | $ | 5,035 | | | $ | 25,113 | | | 499 | % |
The $20.4 million, or 821%, increase in equipment and merchandise revenue in the United States for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to the increase in equipment and merchandise deliveries that was driven by purchases from studios under development agreements entered into during 2021 and delivery of required top-up equipment. The total deliveries of equipment and merchandise increased by 151, or 719%, from 21 studios during the three months ended March 31, 2021 to 172 studios during the three months ended March 31, 2022.
The $1.3 million, or 154%, increase in equipment and merchandise revenue in Australia for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 in Australia 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 11, or 220%, from 5 studios during the three months ended March 31, 2021 to 16 studios during the three months ended March 31, 2022.
The $3.5 million, or 201%, increase in equipment and merchandise revenue for the three months ended March 31, 2022 compared to the three months ended March 31, 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. The total deliveries of equipment and merchandise increased by 31, or 148%, from 21 studios during the three months ended March 31, 2021 to 52 studios during the three months ended March 31, 2022.
Cost of revenue
Cost of franchise revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Franchise | | | | | | | |
| USA | $ | 1,015 | | | $ | 1,022 | | | $ | (7) | | | (1) | % |
| Australia | 119 | | | 178 | | | (59) | | | (33) | % |
| ROW | 97 | | | 14 | | | 83 | | | 593 | % |
| Total cost of franchise revenue | $ | 1,231 | | | $ | 1,214 | | | $ | 17 | | | 1 | % |
| Percentage of franchise revenue | 6 | % | | 9 | % | | | | |
The less than $0.1 million, or 1%, decrease in cost of franchise revenue in the United States for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to the decrease in marketing expenses due to the COVID-19 pandemic and reflective of the reduction in marketing revenue on hold during the COVID-19 pandemic.
The $0.1 million, or 33%, decrease in cost of franchise revenue in Australia during the three months ended March 31, 2022 as compared to the same period in 2021 was attributable to a decrease in expenses related to the membership marketing programs due in large part to temporary studio closures as a result of the COVID-19 pandemic.
The $0.1 million, or 593%, increase in cost of franchise revenue in ROW during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to the increase in marketing expense from additional 34 of Franchises Opened in the three months ended March 31, 2022.
Cost of equipment and merchandise revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Equipment and merchandise | | | | | | | |
| USA | $ | 7,754 | | | $ | 1,478 | | | $ | 6,276 | | | 425 | % |
| Australia | 1,733 | | | 807 | | | 926 | | | 115 | % |
| ROW | 1,456 | | | 896 | | | 560 | | | 63 | % |
| Total cost of equipment and merchandise revenue | $ | 10,943 | | | $ | 3,181 | | | $ | 7,762 | | | 244 | % |
| Percentage of equipment and merchandise revenue | 36 | % | | 63 | % | | | | |
The $6.3 million, or 425%, increase in cost of equipment and merchandise revenue for the United States for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to the increase in equipment and merchandise deliveries, offset by $2.7 million of rebates that was recorded as a reduction to the cost of equipment delivered to franchisees in the quarter ended March 31, 2022.
The $0.9 million, or 115%, increase in cost of equipment and merchandise for Australia for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily due to an increase in equipment and merchandise deliveries, offset by $0.2 million of rebates that was recorded as a reduction to the cost of equipment delivered to franchisees in the quarter ended March 31, 2022.
The $0.6 million, or 63%, increase in cost of equipment and merchandise for ROW for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to an increase in equipment and merchandise deliveries, offset by $0.3 million of rebates that was recorded as a reduction to the cost of equipment delivered to franchisees in the quarter ended March 31, 2022.
Selling, general, and administrative expenses | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Selling, general and administrative expenses | $ | 32,090 | | | $ | 16,828 | | | $ | 15,262 | | | 91 | % |
| Percentage of revenue | 64 | % | | 93 | % | | | | |
The $15.3 million, or 91%, increase in selling, general, and administrative expenses during the three months ended March 31, 2022 as compared to the same period in 2021 was primarily attributable to a $5.8 million increase of payroll related to the increase in headcount from 122 to 225 due to the continuing expansion of the business, a $4.0 million increase in business travel expenses related to site visits for the Company’s continued brand expansion and easing of COVID restrictions globally compared to the prior year quarter, a $3.0 million increase in marketing expenses due to ongoing brand awareness campaigns with worldwide celebrities and localized brand events, a $2.1 million increase in stock-based compensation issued to brand ambassadors and certain employees and directors as the Company’s incentive plan became effective at the IPO date, and a $1.0 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
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Loss on derivative liabilities, net | $ | — | | | $ | 25,505 | | | $ | (25,505) | | | (100) | % |
On October 6, 2020, we entered into a subordinated convertible debt agreement, or the
Convertible Notes, whereby we issued $100 million of Convertible Notes to certain holders maturing on
September 30, 2025. The Convertible Notes contain embedded derivatives that required bifurcation and recognition as liabilities on the condensed consolidated balance sheet. The liabilities for these embedded
derivatives was measured at fair value as of October 6, 2020, and the subsequent change in the
estimated fair value was recorded as a loss during the three months ended March 31, 2021.
The $25.5 million decrease in the loss on derivative liabilities was attributable to the change in the derivative liabilities’ fair value resulting from the Company’s growing equity value and increasing probability of the IPO event from when the Company entered into the subordinated convertible debt agreement in October 2020 to the consummation of the IPO on July 15, 2021. The embedded derivatives were extinguished in connection with the repayment of the debt upon the IPO.
Interest expense, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Interest expense, net | $ | 126 | | | $ | 8,415 | | | $ | (8,289) | | | (99) | % |
The $8.3 million, or approximately 99%, decrease in interest expense, net for the three months ended March 31, 2022 compared to the same period in 2021 was primarily attributable to a reduction of outstanding debt obligations during the three months ended March 31, 2022 due to repayments of indebtedness on our Term Facility and conversion of our outstanding Convertible Notes in connection with the IPO during July 2021.
Other expense, net | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Other expense, net | $ | 570 | | | $ | 291 | | | $ | 279 | | | 96 | % |
The $0.3 million, or 96%, increase in other expense, net represents realized and unrealized gains and losses on foreign currency transactions. This increase during the three months ended March 31, 2022, was mostly due to the volatility of foreign exchange rates during the three months ended March 31, 2022 as a result of 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
March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| | | | | | | |
| (dollars in thousands) | | | | |
| Provision (benefit) for income taxes | $ | 2,536 | | | $ | (398) | | | $ | 2,934 | | | 737 | % |
The $2.9 million, or 737%, increase in the provision (benefit) for income taxes was primarily driven by an increase in pre-tax income reported by the US and Australia segments in the three months ended March 31, 2022. The increase in income before income taxes was most significantly driven by the increase in equipment and merchandise revenue driven by the increase in Total Franchises Sold during the prior twelve months.
Liquidity and Capital Resources
Overview
As of March 31, 2022, we held $14.0 million of cash and cash equivalents, of which $12.2 million was held by our foreign subsidiaries outside of the United States. In the event that we repatriate these funds from our foreign subsidiaries, we would need to accrue and pay applicable United Sates taxes and withholding taxes payable to various countries. As of March 31, 2022, our intent was to permanently reinvest these funds outside of the United States. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately $43.9 million of undistributed earnings from these foreign subsidiaries as those earnings continue to be permanently reinvested. It is not practicable to estimate income tax liabilities that might be incurred if such earnings were remitted to the United States due to the complexity of the underlying calculation. Although we have no intention to repatriate the undistributed earnings of our foreign subsidiaries for the foreseeable future, if such funds are needed for operations in the United States, to the extent applicable and material, we will revise future filings to address the potential tax implications. Our primary cash needs are for the funding of day-to-day operations, financing capital investments and to address our working capital needs.
We believe that our operating cash flows and cash on hand will be adequate to meet our operating, investing and financing needs for the next 12 months. If necessary, we may borrow funds from our $90 million five-year senior secured revolving facility (“Facility”) to finance our liquidity requirements, subject to customary borrowing conditions. The available balance of the Revolving Facility as of March 31, 2022 was $56.9 million. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained
through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in 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
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | |
| 2022 | | 2021 | | | | | | | | |
| | | | | | | | | | | |
| (dollars in thousands) | | | |
| Net cash used in operating activities | $ | (44,990) | | | $ | (201) | | | | | | | | | |
| Net cash used in investing activities | (3,413) | | | (179) | | | | | | | | | |
| Net cash provided by (used in) financing activities | 20,609 | | | (1,313) | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (218) | | | (384) | | | | | | | | | |
| Net decrease in cash and cash equivalents | $ | (28,012) | | | $ | (2,077) | | | | | | | | | |
Net cash used in operating activities
Net cash used in operating activities during the three months ended March 31, 2022, was $45.0 million, which resulted from a net income of $2.5 million, adjusted for non-cash charges of $5.7 million and net cash outflow of $53.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $2.1 million for stock-based compensation expense and $1.5 million provision for bad debt. The net cash outflow from changes in operating assets and liabilities were primarily the result of a $20.1 million increase in prepaid expenses, which increased due to our deposits placed on equipment and merchandise, a $16.4 million increase in accounts receivable, which increased primarily due to orders on equipment and merchandise, a $12.5 million increase in other current assets and an $8.1 million increase in other assets due to an increase in unbilled receivables, a $4.2 million increase in inventory, partially offset by a $3.5 million increase in deferred revenue, and a $2.0 million increase in accounts payable and accrued expenses.
Net cash used in operating activities during the three months ended March 31, 2021, was $0.2 million, which resulted from a net loss of $36.8 million, adjusted for non-cash charges of $36.0 million and net cash inflow of $0.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $25.5 million for loss on derivative liability, $6.3 million of paid-in-kind interest, and $1.7 million provision for bad debt. The net cash outflow from changes in operating assets and liabilities were primarily the result of a $6.9 million increase in accounts payable and accrued expenses, a $3.7 million increase in deferred revenue, a $1.3 million increase in other liabilities, partially offset by a $5.3 million increase in accounts receivable, a $3.5 million increase in inventory, and a $1.6 million increase in other assets.
Net cash used in investing activities
Net cash used in investing activities during the three months ended March 31, 2022, of $3.4 million resulted primarily from purchases of property and equipment of $2.1 million and capitalization of internal-use software development costs, trademarks, and patents of $1.3 million.
Net cash used in investing activities during the three months ended March 31, 2021 of $0.2 million resulted primarily from purchases of property and equipment of $0.1 million and capitalization of internal-use software development costs, trademarks, and patents of $0.1 million.
Net cash provided by (used in) financing activities
Net cash provided by financing activities of $20.6 million during the three months ended March 31, 2022, was primarily due to borrowings under our Revolving Facility of $31.6 million during the three months ended March 31, 2022 to provide cash to fund purchases and deposits placed on equipment. The net change in cash provided by financing activities was partially offset by $11.0 million of taxes paid related to net share settlement of equity awards.
Net cash used in financing activities of $1.3 million during the three months ended March 31, 2021 was due to required repayments under our term facility.
Contractual Obligations and Commitments
Contractual obligations and commitments as of March 31, 2022, consisted of $24.1 million in operating leases, all of which is due within the next four years and thereafter. Please see Note 8—Debt and Note 13—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.
Off-Balance Sheet Arrangements
As of March 31, 2022, our off-balance sheet arrangements consisted of guaranties provided by the Company for leases for office space by unconsolidated organizations. See Note 13—Commitments and contingencies 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 with U.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. We believe that the critical accounting policies listed below are those that are most important
to our results of operations or involve the most difficult management decisions related to the use of significant estimates and assumptions as described above. For a more detailed summary of our significant accounting policies, see the notes to our condensed consolidated financial statements included elsewhere in this filing.
Revenue Recognition
Our contracts with customers are typically comprised of multiple performance obligations, including exclusive franchise rights to access our intellectual property to operate an F45 Training-branded fitness facility in a specific territory (franchise agreements), a material right related to discounted renewals of the franchise agreements, and equipment and merchandise.
Franchise revenue
Our primary performance obligation under the franchise agreement is granting certain exclusive rights to access the Company’s intellectual property to operate an F45 Training-branded fitness facility in a defined territory. This performance obligation is a right to access our intellectual property, which is satisfied ratably over the term of the franchise agreement. Renewal fees are generally recognized over the renewal term for the respective agreement from the start of the renewal period. Transfer fees are recognized over the remaining term of the franchise agreement beginning at the time of transfer.
Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement. Earlier franchise agreements had an initial term of three years while more recent agreements have an initial term of five years. With our approval, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is paid. Our arrangements have no financing elements as there is no difference between the promised consideration and the cash selling price. Additionally, we have assessed that a significant amount of the costs incurred under the contract to perform are incurred up-front.
Franchise revenue consists primarily of upfront establishment fees, monthly franchise fees, and other franchise-related fees. The upfront establishment fee is payable by the franchisee upon signing a new franchise agreement and monthly franchise and related fees are payable throughout the term of the franchise license. Historically, franchisees have paid a fixed monthly franchise fee. For new franchisees, the franchise fee is based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue.
Discounted franchise agreement renewal fees
Our franchise agreements may include discounted renewal options allowing franchisees to renew at no cost or at a reduction of the initial upfront establishment fee. The resulting discount in fees at renewal provides a material right to franchisees. Our obligation to provide future discounted renewals to franchisees are accounted for as separate performance obligations. The value of these material rights related to the future discount was determined by reference to the estimated franchise agreement term, which has been estimated to be 10 years, and related estimated transaction price. The estimated transaction price allocated to the franchise agreements, including the upfront establishment fee, is recognized as revenue over the estimated contract term of 10 years, which gives recognition to the renewal option containing a material right. At the end of the initial contract term, any unrecognized transaction price would be recognized during the renewal term, if exercised, or when the renewal option expires, if unexercised.
Equipment and merchandise revenue
We require our franchisees to purchase fitness and technology equipment directly from us and payment is required to be made prior to the placement of the franchisees’ orders. Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the franchisee, which is when the franchisee obtains physical possession of the goods, legal title has transferred, and the franchisee has all risks and rewards of ownership. The franchisees are charged for all freight costs incurred for the delivery of equipment.
Allocation of transaction price
Our contracts include multiple performance obligations—typically the franchise license, equipment and material rights for discounted renewal fees. Judgment is required to determine the standalone selling price for these performance obligations. We do not sell the franchise license or World Pack equipment on a stand-alone basis (our contracts with customers almost always include both performance obligations), as such the standalone selling price of the performance obligations are not directly observable on a stand-alone basis. Accordingly, we estimate the standalone selling prices using available information including the prices charged for each performance obligation within its contracts with customers in the relevant geographies and market conditions. Individual standalone selling prices are estimated for each geographic location, primarily the United States, Australia, and ROW, due to the unique market conditions of those performance obligations in each region.
Business combination
We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill based on the expected benefit from the business combination. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Valuation methods include, but not limited to, multi-period excess earnings for customer contracts, relief from royalty methods for brand names, and replacement cost for software. Such methods are widely-accepted valuation techniques, which inherently use critical assumptions such as future revenue growth rates, royalty rates, and discount rates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Stock-based compensation
Our stock-based compensation plan, which became effective at the IPO date, includes equity incentive compensation plans under which three types of share-based compensation plans are granted to our employees, directors, and consultants, including stock options (“SOs”), restricted stock units (“RSUs”), and restricted stock awards (“RSAs”). Stock-based compensation cost is measured at the grant date, based on the fair value of the award. We estimate the fair value of stock-based payment awards subject to both performance and market conditions on the date of grant using a Monte Carlo simulation model. Stock-based compensation cost for awards whose vesting is subject to the occurrence of both a performance condition and market condition is recognized immediately at the time the performance condition is achieved. Liability-classified awards are accounted at fair value at the grant date and remeasured at each reporting period until the awards are settled. In determining the valuation, we have utilized the valuation report prepared by third-party valuation specialists, as well as any significant internal and external events occurring subsequent to the report that may impact the fair value of the awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimates used in our valuation of stock-based compensation are highly complex and subjective. The valuation and estimates of our common stock value are no longer necessary as we will rely on market price to determine the market value of our shares going forward from the IPO.
Income taxes
We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits, which to date have not been material, are recognized within (benefit) provision for income taxes.
Contract assets
Our contract assets primarily consist of unbilled revenue where we are utilizing our costs incurred
as the measure of progress of satisfying our performance obligation. When the contract price is
invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. The unbilled receivable represents the amount expected to be billed and collected for services performed through period-end in accordance with contract terms.
Deferred costs
Deferred costs consist of incremental costs to obtain (e.g., commissions) and fulfill (e.g., payroll costs) a contract with a franchisee. Both the incremental costs to obtain and fulfill a contract with a franchisee are capitalized and amortized on a straight-line basis over the expected period if we expect to recover those costs. As of March 31, 2022 and December 31, 2021, we had $14.5 million and $13.8 million of deferred costs, respectively, to obtain and fulfill contracts with franchisees. During the three months ended March 31, 2022 and 2021, we recognized $0.6 million and $0.4 million in amortization of these deferred costs, respectively.
Impairment of long-lived assets, including intangible assets
We assess potential impairments to our long-lived assets, which include property and equipment,
whenever events or circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an
asset group to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment charges recorded on long-lived assets during the three months ended March 31, 2022 and 2021.
We evaluate our indefinite-lived intangible asset (trademark) to determine whether current events and circumstances continue to support an indefinite useful life. In addition, our indefinite-lived
intangible asset is tested for impairment annually. The indefinite-lived intangible asset impairment test consists of a comparison of the fair value of each asset with its carrying value, with any excess of
carrying value over fair value being recognized as an impairment loss. We are also permitted to make a qualitative assessment of whether it is more likely than not an indefinite-lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If, based on our qualitative assessment, it is more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment may be required.
We perform our annual impairment test for our indefinite-lived intangible asset during the fourth quarter of the calendar year. We also test for impairment whenever events or circumstances indicate that the fair value of such indefinite-lived intangible asset has been impaired. No impairment of our indefinite-lived intangible asset was recorded during the three months ended March 31, 2022 and 2021.
Internal-use software
We capitalize certain development costs incurred in connection with our internal-use software and
website. These capitalized costs are primarily related to our software tools that are hosted by us and accessed by our customers on a subscription basis. Costs incurred in the preliminary stages of
development are expensed as incurred. Once an application has reached the development stage,
internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial
testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. Maintenance costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life,
generally three years.
Recent Accounting Pronouncements
See 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.