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Form 10-Q F45 Training Holdings For: Jun 30

August 15, 2022 5:59 PM EDT

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
ý
Smaller reporting company
ý
Emerging growth company
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: Yes No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No
As of August 12, 2022, there were approximately 96,491,418 shares of the registrant's common stock outstanding.
1


F45 Training Holdings Inc.
Form 10-Q
Table of Contents
Part I.Financial Information
Page
Item 1.
Item 2.
Item 3.
Item 4.
Part II.Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


2


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words, variations of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:
our dependence on the operational and financial results of, and our relationships with, our         franchisees and the success of their new and existing studios;
our ability to protect our brand and reputation;
our ability to identify, recruit and contract with a sufficient number of qualified franchisees;
our ability to execute our growth strategy, including through development of new studios by new and existing franchisees;
our ability to manage our growth and the associated strain on our resources;
our ability to identify, source and procure components of our inventories on a timely basis and at attractive economics terms;
our ability to successfully integrate any acquisitions, or realize their anticipated benefits;
the high level of competition in the health and fitness industry;
economic, political and other risks associated with our international operations, including due to the Russia-Ukraine conflict;
changes to the industry in which we operate;
our reliance on information systems and our and our franchisees’ ability to properly maintain the confidentiality and integrity of our data;
the occurrence of cyber incidents or a deficiency in our cybersecurity protocols;
our and our franchisees’ ability to attract and retain members;
our and our franchisees’ ability to identify and secure suitable sites for new franchise studios;
risks related to franchisees generally;
our ability to obtain third-party licenses for the use of music to supplement our workouts;
certain health and safety risks to members that arise while at our studios;
our ability to adequately protect our intellectual property;
risks associated with the use of social media platforms in our marketing;
our ability to obtain and retain high-profile strategic partnership arrangements;
our ability to comply with existing or future franchise laws and regulations;
our ability to anticipate and satisfy consumer preferences and shifting views of health and fitness;
our business model being susceptible to litigation; and
additional factors discussed in our SEC filings, including those identified under the header “Risk Factors” beginning on Page 71 of this Quarterly Report on Form 10-Q.

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

The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward- looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
1



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

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

2


Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements (Unaudited)
F45 Training Holdings Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts and share data)
(unaudited)
June 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$8,476 $42,004 
Restricted cash2,582  
Accounts receivable, net40,376 27,788 
Due from related parties3,029 2,442 
Inventories36,251 12,300 
Deferred costs1,992 1,887 
Prepaid expenses19,716 12,706 
Other current assets19,061 9,515 
Total current assets131,483 108,642 
Property and equipment, net10,805 5,645 
Deferred tax assets, net22,066 22,716 
Goodwill4,386 4,614 
Intangible assets, net28,636 28,446 
Deferred costs, net of current12,097 11,871 
Other long-term assets36,588 21,960 
Total assets$246,061 $203,894 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses$48,190 $36,594 
Deferred revenue7,544 7,137 
Interest payable287 276 
Income taxes payable14,990 9,624 
Total current liabilities71,011 53,631 
Deferred revenue, net of current3,437 7,385 
Long-term debt61,600  
Warrant liabilities3,192  
Other long-term liabilities10,947 12,605 
Total liabilities150,187 73,621 
Commitments and contingencies (Note 16)
Stockholders’ equity
Common stock, $0.00005 par value; 96,491,418 and 95,806,063 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
6 5 
Additional paid-in capital663,599 662,946 
Accumulated other comprehensive (loss) income(2,036)603 
Accumulated deficit(390,975)(358,561)
Less: Treasury stock(174,720)(174,720)
Total stockholders' equity95,874 130,273 
Total liabilities and stockholders' equity$246,061 $203,894 


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


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

Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Revenues:
Franchise (Related party: $2,360 and $158 for the three months ended June 30, 2022 and 2021, respectively, and $4,976 and $245 for the six months ended June 30, 2022 and 2021, respectively)
$19,109 $20,581 $38,969 $33,737 
Equipment and merchandise (Related party: $0 and $0 for the three months ended June 30, 2022 and 2021, respectively, and $10,632 and $0 for the six months ended June 30, 2022 and 2021, respectively)
10,924 6,251 41,072 11,286 
Total revenues30,033 26,832 80,041 45,023 
Costs and operating expenses:
Cost of franchise revenue1,690 1,462 2,921 2,676 
Cost of equipment and merchandise (Related party: $1,039 and $1,203 for the three months ended June 30, 2022 and 2021, respectively, and $4,325 and $2,144 for the six months ended June 30, 2022 and 2021, respectively)
8,679 3,739 19,622 6,920 
Selling, general and administrative expenses52,828 18,562 84,918 35,390 
Total costs and operating expenses63,197 23,763 107,461 44,986 
(Loss) income from operations(33,164)3,069 (27,420)37 
Loss on derivative liabilities, net 23,098  48,603 
Change in fair value - warrant liabilities(1,265)$ (1,265) 
Interest expense, net696 8,853 822 17,268 
Other (income) expense, net(1,184)329 (614)620 
Loss before income taxes(31,411)(29,211)(26,363)(66,454)
Provision for income taxes3,515 1,313 6,051 915 
Net loss$(34,926)$(30,524)$(32,414)$(67,369)
Other comprehensive income (loss)
Unrealized gain on interest rate swap, net of tax 132  203 
Foreign currency translation adjustment, net of tax(3,545)(75)(2,639)(107)
Comprehensive loss$(38,471)$(30,467)$(35,053)$(67,273)
Net loss per share
Basic and diluted$(0.36)$(1.04)$(0.34)$(2.30)
Shares used in computing net loss per share
Basic and diluted95,917,556 29,281,514 95,814,188 29,281,514 


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

2


F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)

Three Months Ended June 30, 2022
Convertible Preferred StockCommon StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders'
Equity
SharesAmountSharesAmount
Balances as of March 31, 2022 $ 95,682,833 $6 $655,405 $(174,720)$1,509 $(356,049)$126,151 
Stock-based compensation— — — — 3,734 — — — 3,734 
Exercise of warrants— — 346,192 — 4,460 — — — 4,460 
Restricted stock awards granted— — 334,141 — — — — — — 
Vested restricted stock units— — 128,252 — — — — — — 
Net income— — — — — — — (34,926)(34,926)
Cumulative translation adjustment, net of tax— — — — — — (3,545)— (3,545)
Balances as of June 30, 2022 $ 96,491,418 $6 $663,599 $(174,720)$(2,036)$(390,975)$95,874 

Three Months Ended June 30, 2021
Convertible Preferred StockCommon StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders'
Deficit
SharesAmountSharesAmount
Balances as of March 31, 20219,854,432 $98,544 29,281,514 $1 $11,456 $(174,720)$(943)$(212,691)$(376,897)
Net loss— — — — — — — (30,524)(30,524)
Unrealized gain on interest rate swap, net of tax— — — — — — 132 — 132 
Cumulative translation adjustment, net of tax— — — — — — (75)— (75)
Balances as of June 30, 20219,854,432 $98,544 29,281,514 $1 $— $11,456 $— $(174,720)$— $(886)$— $(243,215)$— $(407,364)

3


Six Months Ended June 30, 2022
Convertible Preferred StockCommon StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders'
Equity
SharesAmountSharesAmount
Balances as of December 31, 2021 $ 95,806,063 $5 $662,946 $(174,720)$603 $(358,561)$130,273 
Stock-based compensation— — — — 4,221 — — — 4,221 
Exercise of warrants— — 346,192 — 4,460 — — — 4,460 
Restricted stock awards granted— — 341,880 — — — — — — 
Vested restricted stock units— — 128,252 — — — — — — 
Issuance of common stock related to 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— — — — — — — (32,414)(32,414)
Cumulative translation adjustment, net of tax— — — — — — (2,639)— (2,639)
Balances as of June 30, 2022 $ 96,491,418 $6 $663,599 $(174,720)$(2,036)$(390,975)$95,874 

Six Months Ended June 30, 2021
Convertible Preferred StockCommon StockAdditional Paid- In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders' Deficit
SharesSharesAmount
Balances as of December 31, 20209,854,432 $98,544 29,281,514 $1 $11,456 $(174,720)$(982)$(175,846)$(340,091)
Net loss— — — — — — — (67,369)(67,369)
Unrealized gain on interest rate swap, net of tax— — — — — — 203 — 203 
Cumulative translation adjustment, net of tax— — — — — — (107)— (107)
Balances as of June 30, 20219,854,432 $98,544 29,281,514 $1 $11,456 $(174,720)$(886)$(243,215)$(407,364)



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


F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
20222021
Cash flows from operating activities
Net loss$(32,414)$(67,369)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation602 130 
Amortization of intangible assets1,834 1,247 
Amortization of deferred costs1,682 725 
Accretion and write-off of debt discount 2,983 
Amortization of debt offering costs329  
Bad debt expense6,680 3,514 
Stock-based compensation4,221  
Deferred income taxes217  
Change in fair value - warrant liabilities(1,265) 
Loss on derivative liabilities, net 48,603 
Paid-in-kind interest accrual 12,851 
Unrealized foreign currency transaction gains(957)185 
Other(73)155 
Changes in operating assets and liabilities:
Due from related parties(592)549 
Accounts receivable, net(18,991)(6,715)
Inventories(24,093)(2,125)
Prepaid expenses(7,128)(934)
Other current assets(13,332)(3,722)
Deferred costs(956)(1,280)
Other long-term assets(4,969)(7,234)
Accounts payable and accrued expenses9,354 5,351 
Deferred revenue(420)3,912 
Interest payable (107)
Income taxes payable5,759 702 
Other long-term liabilities288 1,000 
Net cash used in operating activities(74,224)(7,579)
Cash flows from investing activities
Purchases of property and equipment(4,728)(345)
Disposal of property and equipment 19 
Purchases of intangible assets(1,923)(576)
Net cash used in investing activities(6,651)(902)
5


Six Months Ended June 30,
20222021
Cash flows from financing activities
Borrowings under revolving facility61,600  
Repayment of 1st lien loan (2,625)
Taxes paid related to net share settlement of equity awards(10,991) 
Deferred financing costs(454) 
Net cash provided by (used in) financing activities$50,155 $(2,625)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(226)300 
Net change in cash, cash equivalents, and restricted cash(30,946)(10,806)
Cash and cash equivalents at beginning of period42,004 28,967 
Restricted cash at beginning of period  
Cash, cash equivalents, and restricted cash at beginning of period42,004 28,967 
Cash and cash equivalents at end of period8,476 16,604 
Restricted cash at end of period2,582 1,557 
Cash, cash equivalents, and restricted cash at end of period$11,058 $18,161 
Supplemental disclosures of cash flow information:
Income taxes paid$222 $ 
Interest paid633 1,109 
Supplemental disclosures of noncash financing and investing activities:
Liability assumed on intellectual property license agreement with FW SPV II LLC $ $20,790 
Property and equipment included in accounts payable and accrued expenses1,137  
Intangible assets included in accounts payable and accrued expenses253  
Deferred financing costs incurred pursuant to issuance of liability warrants8,917  
Reduction in liability warrant related to exercise of put option via net share settlement4,460  
Deferred financing costs included in accounts payable and accrued expenses2,446  
Deferred offering costs included in accounts payable and accrued expenses 2,248 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6

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 17—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 19, 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 overallotment option to purchase an additional 307,889 shares of the Company’s common stock from the Company and to purchase an additional 1,231,555 shares of the Company’s common stock from the selling stockholder at a public offering price of $16.00 per share. The over-allotment sale was consummated on August 17,
7


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

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. As of June 30, 2022, no activity has occurred through FAFC.

Basis of presentation

The accompanying unaudited 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.

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, warrant liability, 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.

Sources and Uses of Liquidity

The Company currently funds its operations and growth primarily from cash on hand, credit facilities, and operating cash flow. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent on the Company’s operating cash flows and the availability of and access to debt and equity financing. The Company has a history of negative cash flows from operations. While we believe that our cash, liquid assets, amounts available under credit facilities and cash generated by operating cash flows, including from the actions taken subsequent to June 30, 2022 discussed in Note 21—Subsequent events, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated
8


obligations as they become due in the twelve months subsequent to the date of issuance of these condensed consolidate financial statements, changes in forecasted growth and available funds could have a further negative impact on our future liquidity.

The Company continues to manage its liquidity and could take further action, if needed, to protect its liquidity position including, but not limited to, the sale of excess inventory, entry into a borrowing facility with one or more lenders, and the reduction of promotional and professional advisory contracts. However, there can be no assurance that such matters can be implemented, if needed, on acceptable terms or at all.

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.

Cash, cash equivalents, and restricted cash

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. Restricted cash relates to cash held in escrow as a requirement of lending transactions pertaining to the Fortress Credit Facility (see Note 10—Debt).

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 June 30,For the Six Months Ended June 30,
2022202120222021
Balance at beginning of period$5,366 $4,753 $8,132 $5,746 
Provisions for bad debts, included in selling, general and administrative5,216 1,848 6,680 3,514 
Uncollectible receivables written off(4,826)(1,345)(9,056)(4,004)
Balance at end of period$5,756 $5,256 $5,756 $5,256 

One of the Company’s customers accounted for approximately 19% of the Company’s accounts receivable as of June 30, 2022. None of the Company’s customers accounted for more than 10% of the Company’s accounts receivable as of December 31, 2021. As of June 30, 2022, $1.7 million of long-term receivables were reported in other long-term assets on the condensed consolidated balance sheet. No customer accounted for more than 10% of the Company’s revenues for the three months ended June 30, 2022. Two of the Company’s customers accounted for approximately 24% of the Company’s revenues for the six months ended June 30, 2022. No customers accounted for more than 10% of the Company’s revenues for the three and six months ended June 30, 2021, respectively.

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
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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 and six months ended June 30, 2022 and 2021, respectively.

Warrant liabilities

The Company accounts for its Immediately Exercisable Warrants and the 50% Utilization Warrants (as defined in Note 12—Warrant liabilities) under the provisions of ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging - Contracts in Entity’s Own Equity (“ASC 815”). ASC 480 requires the recording of certain liabilities at their fair value. Changes in the fair value of these liabilities are recognized in earnings. The Company determined the fundamental transaction provisions required the warrants to be accounted for as a liability at fair value on the date of the transaction, with changes in fair value recognized in earnings in the period of change. On May 17, 2022, the holders of the Immediately Exercisable Warrants exercised the Put Option via a net share settlement, resulting in the issuance of 346,192 shares of Common Stock.

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 loss and equipment and merchandise. Taxes collected from customers and remitted to government authorities are recorded on a net basis.

Franchise revenue

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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

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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 and credits provided to studios impacted by the COVID-19 pandemic. As of June 30, 2022 and December 31, 2021, the Company had contract assets of $14.9 million and $4.3 million, respectively, in other current assets, and $21.4 million and $18.4 million, respectively, in other long-term assets. These contract assets are subject to impairment assessment. During the three and six months ended June 30, 2022, the Company recognized $0.3 million and $0.3 million, respectively, of impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss. During the three and six months ended June 30, 2021, respectively, 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 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 June 30, 2022 and December 31, 2021, the Company had $14.1 million and $13.8 million, respectively, of deferred costs to obtain and fulfill contracts with franchisees. During the three and six months ended June 30, 2022, the Company recognized $1.1 million and $1.7 million, respectively, in amortization of these deferred costs. During the three and six months ended June 30, 2021, the Company recognized $0.3 million and $0.7 million, respectively, in 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 loss. During the three and six months ended June 30, 2022 and June 30, 2021, the Company recognized $0.5 million in impairment charges with respect to these assets within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

Revenue recognition—Change in estimate

During the COVID-19 pandemic in 2020, the Company entered into franchise agreements that included a discount on upfront establishment fees and modified other contract terms as part of a limited-time promotional offer made exclusively to existing franchises (“limited-time promotional deals”). The Company deemed that the limited-time promotional deals did not meet the criteria of a contract at the inception of the agreement under ASC 606-10-25-1 due to the Company’s inability to determine that collectability under the agreements was probable, and as such, the Company did not begin immediately recognizing revenue upon the inception of these franchise agreements. During the three months ended June 30,
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2021, the Company assessed the limited-time promotional deals and determined the criteria of a contract under ASC 606-10-25-1 had been met and, as a result, recorded cumulative revenue of $2.2 million during the three and six months ended June 30, 2021. The Company noted the assessment of collectability was primarily driven by a review of post-COVID payment and collection histories for franchisees who owned multiple studios within the Company's network, system-wide sales per region, and increases in post re-opening weekly visit volume and store-level gross sales volumes compared to specified periods in which the contracts were initially signed.

The Company’s United States subsidiary, F45 Training, Inc., operates in various states within the United States which require the Company to defer collection of certain fees (“the Deferred States”), including the initial establishment fees, until certain criteria are met as specified by state and local requirements. In Deferred States, the Company concluded that the deferred establishment fees represent variable consideration as receipt was subject to uncertainty due to a lack of experience with contracts requiring deferral of establishment fees and uncertainty on the length of timing between inception of an agreement and the opening of a studio. As a result, establishment fees were excluded from the transaction price upon signing of the franchise agreements within the Deferred States. The Company re-evaluates the transaction price on its Deferred States franchise agreements if there is a significant change in facts and circumstances at the end of each reporting period. During the three months ended June 30, 2021, the Company increased the transaction price of the Deferred States contracts by $1.7 million because of an enhanced history of franchise agreements and collections history on Deferred States franchise agreements, as well as a review of post-COVID payment and collection history for similar franchisees, resulting in the recognition of an additional $1.3 million in revenue during the three and six months ended June 30, 2021.

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. During the three and six months ended June 30, 2022, the Company recognized $1.3 million and $4.5 million, respectively, 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 loss. Additionally, $1.5 million of consideration from its suppliers is included as a reduction to inventory in the condensed consolidated balance sheets as of June 30, 2022. For the three and six months ended June 30, 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 loss.

Advertising

Advertising and marketing costs are expensed as incurred. Advertising expenses included in selling, general and administrative expenses totaled $6.1 million and $4.1 million for the three months ended June 30, 2022 and June 30, 2021, respectively, and $12.6 million and $7.7 million for the six months ended June 30, 2022 and June 30, 2021, respectively.

Reclassifications

Certain prior year amounts in the unaudited condensed consolidated statement of cash flows have been reclassified to conform to the current year presentation. The reclassifications and change in presentation of the statements of cash flows did not impact previously recorded (loss) income from operations, net loss or stockholders’ equity.

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.

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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 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;
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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—Other current assets

Other current assets consists of the following as of June 30, 2022 and December 31, 2021 (in thousands):

June 30, 2022December 31, 2021
Unbilled receivables, current14,871 4,289 
Tenant improvement allowance2,141 3,105 
Prepaid taxes1,863 1,182 
Other186 939 
Total19,061 9,515 

Note 4—Property and equipment, net

Property and equipment, net, consists of the following as of June 30, 2022 and December 31, 2021 (in thousands):
Estimated Useful Life
June 30, 2022December 31, 2021
(years)
Vehicles5$263 $177 
Furniture and fixtures71,121 542 
Office and other equipment51,222 945 
Leasehold improvementsLesser of lease term or useful life7,972 2,825 
Construction in progressn/a1,580 2,241 
12,158 6,730 
Less: accumulated depreciation(1,353)(1,085)
Total property and equipment, net$10,805 $5,645 

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Construction in progress (“CIP”) consists of costs associated with the leasehold improvement activities of the Company’s new headquarters in Austin, Texas. During the six months ended June 30, 2022, the Company began moving into the headquarters and partially placed the related assets into service.

Depreciation expense related to property and equipment was approximately $0.3 million and $