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As filed with the Securities and Exchange Commission on July 13, 2021.

Registration No. 333-257193

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

F45 Training Holdings Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7997   38-3978689

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

F45 Training Holdings Inc.

801 Barton Springs Road, 9th Floor

Austin, Texas 78704

(737) 787-1955

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Adam J. Gilchrist

President and Chief Executive Officer

F45 Training Holdings Inc.

801 Barton Springs Road, 9th Floor

Austin, Texas 78704

(737) 787-1955

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Peter W. Wardle   Tad J. Freese
Daniela L. Stolman   Brian D. Paulson
Gibson, Dunn & Crutcher LLP   Latham & Watkins LLP
333 South Grand Avenue   140 Scott Drive
Los Angeles, CA 90071   Menlo Park, CA 94025
(213) 229-7000   (650) 328-4600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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. (Check one):

 

  Large accelerated filer      Accelerated filer  
  Non-accelerated filer      Smaller reporting company  
       Emerging growth company  

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 to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount to be

Registered(1)

 

Proposed Maximum

Offering Price Per
Share(2)

 

Proposed Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.00005 par value per share

  23,359,375   $17.00  

$397,109,375

  $43,325(3)

 

 

 

(1)

Includes 3,046,875 shares that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.

(3)

Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 13, 2021

PRELIMINARY PROSPECTUS

20,312,500 Shares

LOGO

F45 Training Holdings Inc.

Common Stock

 

 

This is the initial public offering of shares of common stock of F45 Training Holdings Inc.

We are offering 18,750,000 shares of our common stock. The selling stockholder identified in this prospectus, is offering 1,562,500 shares of common stock. We will not receive any proceeds from the sale of common stock being sold by the selling stockholder.

Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $15.00 and $17.00 per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “FXLV.”

We are an “emerging growth company” and a “smaller reporting company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced disclosure requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company and Smaller Reporting Company.”

Our current major stockholders, including certain of our directors and officers, who will beneficially own approximately 72.4% of our outstanding common stock after this offering (or approximately 69.3% if the underwriters exercise in full their option to purchase additional shares of common stock), will be able to control or substantially influence corporate decisions following this offering.

One or more funds affiliated with Caledonia have indicated an interest in purchasing an aggregate of up to $100.0 million in shares of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, one or more funds affiliated with Caledonia could determine to purchase more, less or no shares in this offering or the underwriters could determine to sell more, less or no shares to one or more funds affiliated with Caledonia. The underwriters will receive the same discount on any of our shares of common stock purchased by one or more funds affiliated with Caledonia as they will from any other shares of common stock sold to the public in this offering.

 

 

Investing in our common stock involves a high degree of risk. See the section entitled “Risk Factors” beginning on page 24 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per share      Total  

Initial public offering price

   $                  $              

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

Proceeds, before expenses, to the selling stockholder

   $        $    

 

(1) 

See “Underwriting (Conflicts of Interest)” beginning on page 176 for additional disclosure regarding underwriting discounts and commissions and estimated offering expenses.

We have granted to the underwriters an option to purchase up to 625,000 additional shares of common stock and the selling stockholder has granted the underwriters an option to purchase up to 2,421,875 shares of common stock, in each case at the initial public offering price, less the underwriting discounts and commissions, solely to cover overallotments.

The underwriters expect to deliver the shares of common stock to purchasers on or about                , 2021.

 

Goldman Sachs & Co. LLC   J.P. Morgan
Baird   Cowen     Guggenheim Securities   Macquarie Capital       Roth Capital Partners

 

 

Prospectus dated                , 2021.


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LOGO

TEAM TRAINING LIFE CHANGING


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OUR MISSION IMPROVE PEOPLE’S LIVES WITH THE WORLD’S BEST FUNCTIONAL WORKOUT


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LOGO

“I fell in love with the energy. I fell in love with the sense of community.” Mark Wahlberg


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LOGO

TOTAL FRANCHISES SOLD 2,801 COUNTRIES 63 TOTAL STUDIOS 1,555 * Data as of June 30, 2021 **The June 30, 2021 business metrics included in this prospectus have been prepared by, and are the responsibility of, our management. These metrics represent preliminary estimated results for the three months ended June 30, 2021 and are subject to change.


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LOGO

FUNCTIONAL 45


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2,801 TOTAL FRANCHISES SOLD 84 FRANCHISES 2014 255 FRANCHISES 2015 549 FRANCHISES 2016 907 FRANCHISES 2017 1,274, FRANCHISES 2018 1,892 FRANCHISES 2019 2,244 FRANCHISES 2020, TOTAL FRANCHISES SOLD 2,247 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 255 FRANCHISES 2015 2017 907 FRANCHISES 2018 1,274 FRANCHISES 2019 1,892 FRANCHISES 2020 2,244 FRANCHISES March 2021 2,247 FRANCHISES 84 FRANCHISES 2014 2016 549 FRANCHISES ** All data prior to 2021 represents the number of Franchises Sold as of the applicable year end. *Data as of June 30, 2021 **The June 30, 2021 business metrics included in this prospectus have been prepared by, and are the responsibility of, our management. These metrics represent preliminary estimated results for the three months ended June 30, 2021 and is subject to change.


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TABLE OF CONTENTS

 

     Page  

General Information

     ii  

Prospectus Summary

     1  

Risk Factors

     24  

Special Note Regarding Forward-Looking Statements

     65  

Use of Proceeds

     67  

Dividend Policy

     69  

Capitalization

     70  

Dilution

     72  

Selected Historical Consolidated Financial and Other Data

     74  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77  

Business

     109  

Management

     130  

Executive Compensation

     142  

Certain Relationships and Related Party Transactions

     150  

Principal and Selling Stockholder

     161  

Description of Capital Stock

     164  

Shares Eligible for Future Sale

     169  

U.S. Federal Income Tax Considerations for Non-U.S. Holders

     171  

Underwriting (Conflicts of Interest)

     176  

Legal Matters

     183  

Experts

     183  

Where You Can Find More Information

     183  

Index to Consolidated Financial Statements

     F-1  

 

                                                 

Neither we, the selling stockholder nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus we have prepared. We, the selling stockholder and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholder are offering to sell, and seeking offers to buy, shares of common stock only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.

For investors outside the United States:    Neither we, the selling stockholder nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus outside the United States.

 

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GENERAL INFORMATION

Industry, Market and Other Data

This prospectus contains estimates, projections and other information concerning our industry, our business, our franchises and the markets for our products and services. Some data and statistical information are based on independent reports from third parties, including the International Health, Racquet & Sports Club Association, or IHRSA, and a member survey with 4,184 respondents that we conducted in October 2017.

Some data and other information related to our franchisees, including estimated initial investment, EBITDA margins and average unit volumes, are based on internal estimates and calculations that are derived from research we conducted. In order to determine certain franchise and studio-level information, we conducted a survey of our franchisees, or the Franchise Survey, in July 2019, which only reflects data from prior to the outbreak of COVID-19. This survey was provided to the franchisees of all studios at the time that the survey was conducted and generated responses from franchisees representing approximately 57% of studios across our global network of studios. In generating the data, estimates and calculations derived from the information provided by these respondents, we excluded certain responses that were incomplete or that we determined to be significant outliers. As a result, while we believe that the data and other information related to our franchisees presented in this prospectus are accurate and reliable, such data and other information are based on responses provided by a limited respondent pool, which may not represent the broader network of franchisees, and that have not been independently verified by us or any independent sources. Such data also does not reflect any impacts on our business or franchisees from COVID-19 or otherwise after July 2019.

We believe the information described in the paragraphs above to be accurate as of the date of this prospectus. However, this information generally involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such information, estimates or projections. Industry publications and other reports we have obtained from independent parties generally state that the data contained in these publications or other reports have been obtained in good faith or from sources considered to be reliable, but they do not guarantee the accuracy or completeness of such data. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the projections and estimates made by the independent third parties and us.

Trademarks, Trade Names and Service Marks

This prospectus includes some of our trademarks, trade names and service marks, including F45, F45 Training and the names of certain of our workouts and products. Each one of these trademarks, trade names or service marks is either our registered trademark, a trademark for which we have a pending application, a trade name or service mark for which we claim common law rights or a registered trademark or application for registration which we have been authorized by a third party to use.

Solely for convenience, the trademarks, service marks and trade names included in this prospectus are without the ®, or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

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Certain Definitions

As used in this prospectus, unless otherwise noted or the context otherwise requires:

 

   

“we,” “our,” “us,” “F45” and the “Company” refer to (i) for the period prior to the MWIG Transaction, the business of F45 Aus and (ii) for the period after the completion of the MWIG Transaction, the business of F45 Training Holdings, in each case together with its consolidated subsidiaries;

 

   

“F45 Aus” refers to F45 Aus Hold Co Pty Ltd, an Australia proprietary limited company;

 

   

“F45 Training Holdings” refers to F45 Training Holdings Inc., a Delaware corporation;

 

   

“MWIG” refers to a special purpose private investment fund vehicle led by FOD Capital LLC, a family office investment fund, and Mark Wahlberg;

 

   

“MWIG Transaction” refers to the series of transactions effectuated on March 15, 2019, pursuant to which MWIG acquired a minority interest in us;

 

   

“our convertible notes” refers to the $100.0 million aggregate principal amount of convertible notes issued by us pursuant to the Convertible Credit Agreement, dated as of October 6, 2020; and

 

   

“our convertible preferred stock” refers to our outstanding shares of convertible preferred stock, par value $0.0001 per share, held by MWIG.

Non-GAAP Financial Information

Certain financial measures presented in this prospectus, such as EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized under U.S. generally accepted accounting principles, or GAAP. We define these terms as follows:

 

   

“EBITDA” means, for any reporting period, net income before interest, taxes, depreciation and amortization.

 

   

“Adjusted EBITDA” means, for any reporting period, net income before interest, taxes, depreciation and amortization and adjusted to exclude the impact of sales tax liability, transaction expenses, certain legal costs and settlements, forgiveness of loans to directors and relocation costs as well as certain other items identified as affecting comparability, when applicable.

 

   

“Adjusted EBITDA margin” means, for any reporting period, Adjusted EBITDA, divided by revenue.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have been included in this prospectus 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.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. These non-GAAP metrics have certain limitations and should not be considered as alternatives to financial measures prepared in accordance with GAAP, such as net income, or as measures of financial performance or

 

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any other performance measure derived in accordance with GAAP or as measures of liquidity. These measures also should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items for which these non-GAAP measures make adjustments. Management compensates for these limitations by using EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this prospectus, limiting their usefulness as a comparative measure.

The non-GAAP information in this prospectus should be read in conjunction with our audited annual financial statements and the related notes included elsewhere in this prospectus. For a reconciliation of the most directly comparable GAAP measures, see “Prospectus Summary—Summary Historical Combined and Consolidated Financial and Other Data.”

Additional Financial Metrics and Other Data

 

   

“Average Unit Volume” or “AUV” means average studio-level revenue generated by a group of studios during a particular period of time. Due to the relatively young age of our studio base, we believe it is appropriate to assess AUV for studios that have been open for the full period for which AUV is calculated. We define a cohort as a group of studios that opened during the same full year and are also open and operational during the six months ended June 30, 2021.

 

   

“Cash-on-cash returns” means studio-level EBITDA over initial investment.

 

   

“Initial Studio Openings” means the number of studios that were determined to be first opened during such period. We classify an Initial Studio Opening to occur in the first month in which the studio first generates monthly revenue of at least $4,500. Initial Studio Openings are not adjusted downward for studios that were temporarily closed due to the COVID-19 pandemic or otherwise.

 

   

“Members” refers to the number of paying members who were billed $20 or more in membership fees in a given month.

 

   

“New Franchises Sold” means, for any specific period, the number of franchises sold during such period using the methodology set forth below for “Total Franchises Sold.”

 

   

“Open Studios” means the number of studios that were open for business as of a certain date. A studio may be classified as an Open Studio regardless of whether or not it generated minimum monthly revenue of $4,500. During the COVID-19 pandemic, a significant portion of our network was forced to temporarily close, which reduced the number of Open Studios. As studios re-open in accordance with state and local regulations, they are reflected in the Open Studios figures.

 

   

“Same store sales” means, for any reporting period, studio-level revenue generated by a comparable base of franchise studios, which we define as open studios that have been operating for more than 16 months.

 

   

“System-wide Sales” are defined 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.

 

   

“Total Franchises Sold” represents, as of any specified date, (i) the total number of signed franchise agreements in place as of such date for which an establishment fee has been paid and (ii) the total number of franchises committed in a multi-studio agreement in place as of such date for which an upfront payment has been made, in each case that have not been terminated. Each new franchise is included in the number of Total Franchises Sold from the date on which such franchise first satisfies the condition in clause (i) or (ii) above, as applicable. 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.

 

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“Total Studios” as of any specified date, means the total cumulative Initial Studio Openings as of that date less cumulative permanent studio closures as of that date. Total Studios are not adjusted downward for studios that were temporarily closed due to the COVID-19 pandemic or otherwise.

 

   

“Visits” means the number of registered individual workouts for any specified period. A workout is registered when the consumer checks into a class.

 

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PROSPECTUS SUMMARY

The following is a summary of material information discussed in this prospectus. This summary is not complete and does not contain all the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto included elsewhere in this prospectus, before making an investment decision to purchase shares of our common stock. Some of the statements in this summary constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”

Overview

We are F45 Training, one of the fastest growing fitness franchisors in the United States based on number of franchises sold in the United States, focused on creating a leading global fitness training and lifestyle brand. We 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 primarily 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 consumers a continuously evolving fitness program in which virtually no two workouts are ever the same. Our vast and growing library of functional training movements 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.

We were founded in 2013 in Sydney, Australia. Our CEO and co-founder Adam Gilchrist recognized an opportunity to leverage technology to offer consumers an effective, multi-disciplinary and community-driven workout that serves as an affordable alternative to one-on-one personal training and repetitive, single-discipline studio classes. Soon after the first F45 Training studio opened in Paddington, Australia, our founders focused on using technology to streamline and standardize the F45 Training experience in order to franchise the business. We quickly expanded, initially selling franchises to members of the original studio, after which viral word-of-mouth marketing led to rapid growth, and we opened nearly 200 studios over the following 30 months. In less than eight years, we have scaled our global footprint to 2,801 Total Franchises Sold in 63 countries, including 1,555 Total Studios, of which 1,415 had re-opened following temporary closures related to the COVID-19 pandemic, as of June 30, 2021.

Our in-studio experience utilizes our proprietary technologies: our fitness programming algorithm and our patented technology-enabled delivery platform. Our fitness programming algorithm leverages a rich content database of over 3,900 unique functional training movements to offer new workouts each day. Our content delivery platform allows us to standardize the F45 Training experience across our global footprint and broadcast content, including workout instructions and timing, directly to our in-studio F45TVs and speaker systems. Our in-studio experience is further enhanced by trainers who provide guidance on proper form and movement, as well as motivate our members and foster a positive sense of community. We believe our approach helps to provide a consistent and high-quality fitness experience across our network of studios, keeping members highly engaged and helping them to achieve and sustain their fitness goals.


 

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We operate a nearly 100% franchise model that offers compelling economics to us and our franchisees. We believe our franchisees generally benefit from a relatively low initial investment and low four-wall operating expenses, which in turn can generate strong returns on franchisee investments. The optimized box layout of our studios, which requires as little as approximately 1,600 square feet of training area, contributes to the relatively low initial investment and operating costs of our franchisees, and allows our studios to be located in a wide array of attractive prospective retail locations. We believe this flexibility will enable us to capitalize on our estimated long-term global opportunity of over 23,000 studios. Based on the Franchise Survey conducted prior to the COVID-19 pandemic, we estimate that a typical F45 Training franchise in a normalized operating environment requires an aggregate initial investment of approximately $315,000 and, in its third year of operation can produce average EBITDA margins in excess of 30% and average cash-on-cash returns in excess of 33%.

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 2018 and 2020 we grew our Total Franchises Sold at the annual rate of 33% and our Total Studios at the rate of 34%. From June 30, 2020 to June 30, 2021, our Total Franchises Sold increased by 36% and our Total Studios increased by 22%.

 

Total Franchises Sold (as of period end)

 

  Total Studios (as of period end)1

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¹

Due to the lead time associated with opening a new studio after a franchise is sold, Total Franchises Sold is always greater than Total Studios as of a certain date. Of our 1,555 Total Studios as of June 30, 2021, we had 1,415 Open Studios, which are studios that were open for business.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic, related shelter-in-place restrictions and other containment efforts have had and continue to have a significant impact on the gym and fitness industry generally, as well as our business, financial condition and results of our 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.


 

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Over the course of the pandemic, we developed new programs to support our franchisee network and maintain member engagement. In order to support franchisees, we launched several programs, including training seminars on government assistance, promotional offerings, support with rent deferrals, franchise fee relief and assistance with reopening plans. To maintain member engagement, we launched the F45 AtHome Challenge and helped franchisees develop live-streaming options. We also released a digital platform in response to temporary studio closures called F45 AtHome Workouts. This platform provides members with the ability to access part of F45’s library of fitness and wellness offerings, and allows users to maintain their engagement with F45 at home during temporary studio closures. These strategies proved to be successful in driving engagement with, and retention of, our members during the pandemic, but we do not currently expect to further develop or focus on our at home offering as our studios continue to re-open in full. As of June 30, 2021, our total membership stood at 13% higher compared to December 31, 2019, while 9% of our network remained temporarily closed.

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 and other restrictions, including company-implemented health and safety policies. We have also been providing additional operating guidance to our franchisees by assisting with modifications to studio layouts and workouts to accommodate proper social distancing.

As of June 30, 2021, we had approximately 1,415 Open Studios, which represented 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 lifted over time. The following chart illustrates the number of Open Studios as a percentage of Total Studios at the end of each month for the 18 months ended June 30, 2021.

Open Studios as a Percentage of Total Studios for the 18 Months Ended June 30, 2021

 

 

LOGO

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. As of June 30, 2021, the median weekly revenue of the 618 studios that have been re-opened the longest since temporary closure exceeded pre-pandemic levels.

We believe our performance over the course of the pandemic has underscored the resilience of our business model. While our revenues decreased to $82.3 million for the year ended December 31, 2020 compared to $92.7 million for the year ended December 31, 2019 due to the pandemic, between February 1, 2020 and June 30, 2021, only 19 studios permanently closed due to financial hardship or otherwise, which represents approximately 1% of our Total Studios as of June 30, 2021. Additionally, only approximately 9% of our Total Backlog Studios, which is the difference between the Total Franchises Sold and Total Studios, terminated franchise agreements during that same period. These metrics compare favorably to the estimated 15% of all U.S. health clubs that had permanently closed as of September 30, 2020, according to IHRSA, as well as the estimated 25% that were expected to permanently close by the end of 2020.


 

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Despite challenges posed by the COVID-19 pandemic such as temporary closure of our studios, we successfully continued to sell new franchises and open new studios during 2020. Of the 909 New Franchises Sold during the 18 months ended June 30, 2021, 253 were sold as part of a limited-time promotional offer made exclusively to existing franchisees. The following tables illustrate the number of New Franchises Sold and Initial Studio Openings during the 18 months ended June 30, 2021.

 

    Monthly Total Franchises Sold for the 18 Months Ended June 30, 2021  
    JAN     FEB     MAR     APR     MAY     JUNE     JULY     AUG     SEP     OCT     NOV     DEC     JAN     FEB     MAR     APR     MAY     JUN  

Total Franchises Sold, beginning of period

    1,892       1,922       1,947       1,959       1,961       1,997       2,059       2,113       2,160       2,214       2,227       2,242       2,244       2,247       2,255       2,247       2,340       2,487  

New Franchises Sold, net¹

    30       25       12       2       36       62       54       47       54       13       15       2       3       8       (8     93       147       314  

Total Franchises Sold, end of period

    1,922       1,947       1,959       1,961       1,997       2,059       2,113       2,160       2,214       2,227       2,242       2,244       2,247       2,255       2,247       2,340       2,487       2,801  

 

    Monthly Total Studios for the 18 Months Ended June 30, 2021  
    JAN     FEB     MAR     APR     MAY     JUNE     JULY     AUG     SEP     OCT     NOV     DEC     JAN     FEB     MAR     APR     MAY     JUN  

Total Studios, beginning of period

    1,140       1,186       1,224       1,242       1,241       1,249       1,275       1,300       1,337       1,376       1,404       1,422       1,437       1,452       1,463       1,487       1,515       1,539  

Initial Studio Openings, net¹

    46       38       18       (1     8       26       25       37       39       28       18       15       15       11       24       28       24       16  

Total Studios, end of period

    1,186       1,224       1,242       1,241       1,249       1,275       1,300       1,337       1,376       1,404       1,422       1,437       1,452       1,463       1,487       1,515       1,539       1,555  

 

¹

New Franchises Sold and Initial Studio Openings shown net of 112 franchise terminations and 19 permanent studio closures that occurred during the 18 months ended June 30, 2021. For June 2021, New Franchises Sold includes 300 franchises sold pursuant to a long-term multi-unit studio development agreement with Club Franchise Group LLC. See “Certain Relationships and Related Party Transactions - Franchise Relationships.”

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. For additional information on the impact of COVID-19 on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Impact.”

The Three Pillars of F45 Training

Our differentiated approach to fitness is firmly rooted in the three pillars of our DNA: Innovation, Motivation and Results.

Innovation: at the core of everything we do.    We are dedicated to driving new innovations that will continue to elevate the F45 Training experience and further our position as a global fitness training and lifestyle brand. We are able to distinguish ourselves from competitors through such innovations as:

 

   

Technology-Enabled Centralized Delivery Platform:    Our technology-enabled centralized delivery platform distributes daily workout content via in-studio F45TVs that display proper


 

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exercise form, timing and sequencing, driving consistency and efficiency across our global network of studios. In-studio trainers coach members throughout their workout and adjust movements to suit individual levels of experience, strength and flexibility;

 

   

Proprietary Fitness Programming Algorithm:    Our fitness programming algorithm configures movements from our vast content library into new workout plans based on various criteria, including duration, target muscle group, equipment type and aerobic versus anaerobic focus, among others, ensuring that virtually no two workouts are ever the same; and

 

   

Curated High-Quality Workout Plans:    Our curated workout plans are subject to a rigorous in-house quality control process and are designed to sequence movements in what we believe to be a safe, effective manner. This quality control process is led by our centralized F45 Athletics Department, which consists of training professionals, athletes and sports scientists.

Motivation: the key to creating a community and sanctuary.    We believe the foundation for any effective fitness program is motivation. We motivate our members through a combination of positivity, inclusivity and teamwork, which encourages our members to view each studio as a sanctuary and is driven by:

 

   

Positive Trainers:    Our in-studio trainers are responsible for fostering a positive environment for all members before, during and after workouts, and we specifically instruct them to drive positivity, inclusivity and teamwork;

 

   

No Mirrors, No Microphones, No Egos”:    Our studios are deliberately free of mirrors and microphones, which mitigates the appearance-related pressures and trainer intimidation that are associated with many fitness alternatives. Our goal is to emphasize our members’ achievements in completing our workouts; and

 

   

Community:    Our positive, inclusive philosophy permeates the studio and creates a genuine sense of camaraderie, team-building and community amongst our members.

Results: supported by the sustainability of our workouts over time.    We strive to help our members achieve and maintain results by focusing on creating a sustainable fitness program. Our fitness programming algorithm offers new workouts each day and is specifically designed to encourage members to visit studios multiple times per week over the course of their long-term fitness journey. We believe we offer members a winning formula to achieve long-term results, driven by:

 

   

Total Body Workout:    Our fitness programming algorithm offers a total body workout that combines cardiovascular and strength modalities to deliver comprehensive results;

 

   

Safety:    We believe our emphasis on functional training movements and relatively low weight resistance helps to mitigate the risk of injury, thereby enabling our members to push themselves and maximize individual performance without compromising their safety; and

 

   

Frequency:    The curation, style and cadence of workouts, combined with the use of low weight resistance, allows for members to visit as frequently as their schedules permit. Workouts alternate between cardiovascular and strength modalities from day to day, which alternates the impact on the body.

Our Competitive Strengths

We believe there are several competitive strengths that form the foundation of our strategy and are key differentiating factors of our business.


 

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The Next Generation Global Fitness Training and Lifestyle Brand Striving to Deliver the Best Functional Training Workout

Over the last eight years, we have focused on leveraging our approach to fitness to develop a global brand that is viewed as the gold standard in functional fitness. We strive to offer our members the best functional training workout in each F45 Training studio on a daily basis. Our differentiated, technology-driven approach, including our proprietary fitness programming algorithm’s database of over 3,900 unique functional training movements, helps us to design workouts that are fun, challenging, safe, dynamic and sustainable for members to attend day after day and week after week. The versatility of our workouts resonates with both women and men, and across a broad range of fitness levels.

Innovative and Differentiated Technology-Enabled Delivery Platform Driving Quality and Consistency within Each Studio

A critical component to the success of our business is our patented technology that provides us with the ability to remotely manage each in-studio experience across our global network of 1,555 Total Studios as of June 30, 2021 from a centralized hub at F45 Training headquarters. We have built an automated, centralized delivery platform that gives us the ability to control the delivery and timing of our workout content through our F45TVs in each of our studios. Our centralized delivery platform enables a seamless F45 Training experience on a consistent basis at scale across a broad geographic footprint. In response to temporary studio closures due to the COVID-19 pandemic, we were able to leverage our technology platform and create a home digital product called F45 AtHome Workouts. This offering provides users with the ability to access part of our library of fitness and wellness offerings from remote or outdoor locations, and allows users to maintain their engagement with F45 during temporary studio closures. In addition, as our studios have re-opened, our adaptable workout model has enabled us to modify workouts so they can be completed in socially distanced setting and with minimal equipment requirements.

Highly Scalable Commercial Delivery and Franchise Development Model

Our differentiated approach, including our fitness programming algorithm and our proprietary technology-enabled delivery platform, plays an integral role in the scalability of our business. By integrating technology into the workout experience, we have been able to develop a franchise model that is highly replicable for both new and existing franchisees across multiple geographies. In addition, our purpose-built studio design, which utilizes an open floor plan and modest physical footprint (as little as 1,600 square feet of training area), can be built within a wide array of attractive prospective retail locations. We have also substantially simplified the pre-opening process by providing franchisees with a comprehensive studio opening pack, which we call a World Pack, that includes the key items needed to operate the studio, including fitness equipment, technology, AV equipment and more. Our World Pack has resulted in a streamlined pre-opening process for our franchisees.

Compelling Franchisee Studio Economics

We believe we offer a compelling business opportunity for franchisees to generate strong returns driven by a relatively low initial investment combined with healthy AUV and low four-wall operating expenses. Prior to the COVID-19 pandemic and based on data collected through our booking systems and the Franchise Survey, we estimate that in a normalized operating environment, a typical F45 Training franchise requires an aggregate initial investment of approximately $315,000 and, in its third year of operation can produce an AUV of approximately $354,000, average EBITDA margins in excess of 30% and average cash-on-cash returns in excess of 33%.


 

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Across the F45 network, we believe that many studios that have re-opened following the onset of the COVID-19 pandemic have demonstrated the ability to ramp up AUV levels. Further, we believe that many studios that have re-opened following the onset of COVID-19 have been able to return to or lower their pre COVID-19 operating costs. During the six months ended June 30, 2021, studios that were open for the full period experienced an AUV increase of approximately 27% compared to the same period in 2020.

Predictable, Asset-Light Model Driving Rapid Growth

As a franchisor, we have employed an economic model that, other than due to the unprecedented global shutdown of our network due to the COVID-19 pandemic, has been predictable, asset light and cash flow generative and has enabled us to open new studios at an accelerated pace versus the owner-operator model that is common in the studio fitness landscape. For the majority of franchises that we sell, we receive an upfront payment from the franchisee, which varies by geography. Once a new studio has opened, we receive contractual, recurring franchise fee revenue streams that provide us with a high degree of revenue visibility. During the most challenging months of the COVID-19 pandemic, we offered franchisees temporary relief from contractual franchise fees. As our network of total studios grows, we expect recurring revenue as a percentage of total revenue to increase.

Given our model is nearly 100% franchised, we have also been able to maintain a strong margin profile. For the quarter ended March 31, 2021, we reported operating margin and Adjusted EBITDA margin of (16.7)% and 29.0%, respectively. For the quarter ended March 31, 2020, we reported operating margin and Adjusted EBITDA margin of 5.4% and 10.5%, respectively. For the year ended December 31, 2020, we reported operating margin and Adjusted EBITDA margin of (6.3)% and 30.9% respectively. For the year ended December 31, 2019, we reported operating margin and Adjusted EBITDA margin of (9.4)% and 33.1%, respectively.

Proven Management Team with Value-Added Investors

F45 Training is led by an experienced and passionate team dedicated to driving the continued growth of the business. Our CEO Adam Gilchrist has developed and fostered our strategic vision and culture of excellence from the very beginning. Our broader management team consists of a deep bench of experienced professionals with expertise in finance, operations, marketing and other critical areas, which we believe helps to position us to execute on our long-term strategy.

In March 2019, a group led by Mark Wahlberg and FOD Capital LLC, or FOD Capital, a family office investment fund, made a strategic minority investment in F45 Training, providing critical branding and marketing capabilities to supplement the strengths of our management team. We expect that Mr. Wahlberg’s involvement, leveraging his broad celebrity reach (with over 17 million Instagram followers) and well-known affinity for fitness, will continue to be a key differentiator in helping us to continue to drive growth.

In addition to Mr. Wahlberg, we have established relationships with Earvin “Magic” Johnson, Jr., David Beckham, Greg Norman, Cindy Crawford and other professional athletes and personalities in order to promote our products.

Our Growth Strategies

We believe there are several attractive opportunities to continue to drive the long-term growth of our business.


 

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Expand Studio Footprint in the United States

We believe there is a significant opportunity to meaningfully expand our franchise studio footprint in the United States. As of June 30, 2021, we had 1,379 franchises sold and 556 total studios in the United States. Prior to the COVID-19 pandemic, we had seen the pace of our U.S. growth accelerate with average net franchises sold per month increasing from 12 in 2017 to 18 in 2018 to 32 in 2019. Due to COVID-19, the average net franchises sold per month decreased in 2020 to 10. Based on current franchises sold in Australia per capita as of June 30, 2021, we believe there is long-term studio potential for us to open over 7,000 studios in the United States.

Expand Studio Footprint Throughout the Rest of the World

We believe in the proven portability of our brand and franchise model, as evidenced by our strong growth outside of our core U.S. and Australian markets. We have designed our studios to be deployed successfully in both developed and emerging markets, and to drive continued growth in both underpenetrated and new markets. As of June 30, 2021, we had 637 franchises sold outside of our core markets of the United States and Australia. Based on an extrapolation of current franchises sold in Australia per capita as of June 30, 2021, we believe there is a long-term global opportunity for over 23,000 studios, with a potential for approximately 16,000 studios outside of the U.S. market. We believe we can continue to grow our international presence through our existing franchising strategy and by opportunistically pursuing master franchising agreements to sell select territories to experienced, local partners.

Grow Same Store Sales and Transition to a Revenue-Based Franchise Fee Model

Prior to the onset of the COVID-19 pandemic, we had successfully delivered consistent positive system-wide same store sales growth for 20 consecutive quarters by driving increased brand awareness to acquire new members and increased existing member spend. We see continued opportunity to drive same store sales growth by leveraging our organic, word-of-mouth marketing and the network effect as we continue to open new studios.

Historically, our franchise agreements have generally included a fixed monthly franchise fee per studio. Since July 2019, we have transitioned our model in the United States for new franchisees to a franchise fee based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue, generally 7%, which we believe will help to further align our interests with those of our franchisees while also providing us with the opportunity to increase revenue. In select markets outside of the United States and for renewals of existing franchisees in the United States, we are in the process of developing a strategy for transitioning to a similar model.

Pursue Franchise Agreements with Multi-Unit Franchise Systems

The majority of our franchisees today consist of owner-operators that manage single locations. Going forward, we intend to seek opportunities to develop multi-unit franchise systems with select financial partners. As of March 31, 2021, approximately 51% of our franchises sold were owned by multi-unit franchisees, up from approximately 41% as of December 31, 2019, which highlights the strong market demand for multi-unit franchise opportunities.

We recently entered into long-term multi-unit studio development agreements with three financial partners, including an affiliate of Kennedy Lewis Management, or KLIM, one of our principal stockholders. Pursuant to each such agreement, we have granted to the financial sponsor the right to develop, and the financial sponsor has agreed to develop, an agreed number of studios within certain territories in the United States, with one sponsor agreeing to develop at least 70 studios over a 7 year


 

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period, another to at least 87 studios over 6 years and the sponsor affiliated with KLIM agreeing to at least 300 studios over 36 months. In certain cases, we have also agreed to a right of first refusal in favor of the financial sponsor developer within their territories with respect to any new concepts developed by us.

Expand Into New Channels

We believe there is a significant opportunity to expand into new channels, and we are actively pursuing potential opportunities to partner with major universities, hospitality operators, corporations and military facilities. As of March 31, 2021, we had five employees on our franchise sales force devoted specifically to such pursuits. In 2016, we believe we became the first external studio fitness provider to open a studio on a major U.S. university campus through our collaboration with the University of Southern California. As of March 31, 2021, we had 29 studios located on major university campuses in the United States, including the University of Southern California, Stanford University and the University of Texas at Austin. In June 2021, we opened our first studio on a government military base at the U.S. Air Force Station in Miramar, CA.

Develop Workout Programs to Access New Target Demographics

We believe there is a significant opportunity to create workout programs that enable us to target a broader range of consumer demographic groups. In 2018, we successfully launched “Prodigy,” a training program designed to target children and young adults between the ages of 11 and 18 years. Prodigy is generally offered globally. Following an initial development period, franchisees will have the opportunity to incorporate the Prodigy program into existing studios for additional fees. We have also recently developed a new fitness concept called FS8, which we began marketing in Australia in March 2021. FS8 integrates three popular methods in the health and fitness industry, the remixing of pilates, yoga and tone, to create a new workout style. This workout style is an effective method of building lean muscle and definition. FS8 offers members a premium fitness experience through F45’s platform of training systems, the FS8tv and FS8 App, and also offers franchisees a proprietary business model and large community via the franchise network. We also have a dedicated support team to assist across all business functions. As of June 30, 2021, we had sold 106 total FS8 studios in Australia.

We also have additional concepts in development, including Malibu Crew, a functional fitness studio clubhouse targeting men over the age of 50, as well as Avalon House, a studio sanctuary for women of a similar age.

Strategically Utilize M&A to Further Grow Footprint and Attract New Members

The boutique fitness industry remains highly fragmented, which offers attractive opportunities to utilize strategic and bolt-on M&A to drive consolidation. On March 31, 2021, we entered into an agreement to purchase certain assets consisting primarily of intellectual property and customer assets in connection with the Flywheel indoor cycling studio business, which we anticipate will close concurrently with the closing of this offering. We intend to continue to opportunistically pursue acquisitions to grow our franchise network and attract new members in both new and existing markets.

Drive Increased Member Spend Through Ancillary Product Offerings

We believe there are several opportunities by enhancing our offering of health and fitness-related products across our global network of studios. Examples of product categories include footwear and apparel, prepared meal plans, nutrition and supplements and wearables, such as the LionHeart heart rate monitor designed exclusively for F45 Training.


 

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Franchise Model

Franchising Strategy

We utilize an attractive franchise model that has allowed us to scale our business rapidly. As of June 30, 2021, we had a global network of 2,801 Total Franchises Sold, including 1,555 Total Studios, of which 1,415 had re-opened following one or more temporary COVID-related closures. Approximately 49% of Total Franchises Sold are owned by single-unit franchisee owners, with the other 51% owned by multi-unit franchisees. As of March 31, 2021, our largest franchisee owns 24 franchises, representing approximately 1% of our Total Franchises Sold. As we pursue opportunities to develop multi-unit franchise systems with financial partners, we expect the percentage of multi-unit franchisees to increase over time.

Attractive Franchisee Return Profile

Our franchise model has the potential to generate strong returns for franchisees as a result of a relatively low initial investment and favorable operating cost structure driven by our purpose-built studio design and proprietary technology-enabled ecosystem. We believe that our scale provides us with cost advantages that allow us to offer our equipment to our franchisees for a significantly lower cost than if they were to acquire it on their own. We recommend that our franchisees typically staff one lead trainer and at least one assistant trainer during business hours. We also provide ongoing back-office support through our customer relationship management capabilities to assist with day-to-day booking and operation of the business. We believe the modest initial investment, combined with limited staffing needs, creates the potential for strong financial performance and expands the universe of potential franchisees.

Prior to the COVID-19 pandemic and based on data collected through our booking systems and the Franchise Survey, we estimate that in a normalized operating environment, a typical F45 Training franchise requires an aggregate initial investment of approximately $315,000, which includes all of the required studio equipment contained in the World Pack, and, in its third year of operation can produce an AUV of approximately $354,000, average EBITDA margins in excess of 30% and average cash-on-cash returns in excess of 33%.

Across the F45 network, we believe that many studios that have re-opened following the onset of the COVID-19 pandemic have demonstrated the ability to ramp up AUV levels. Further, we believe that many studios that have re-opened following the onset of COVID-19 have been able to return to or lower their pre COVID-19 operating costs. During the six months ended June 30, 2021, studios that were open for the full period experienced an AUV increase of approximately 27% compared to the same period in 2020.

Summary of Risks Factors

Our business is subject to numerous risks and uncertainties, including, but not limited to, the following:

 

   

COVID-19 and the related governmental restrictions have had, and are expected to continue to have, a material and adverse effect on our business, financial condition and results of operations.

 

   

If we are unable to anticipate and satisfy consumer preferences and shifting views of health and fitness and successfully develop and introduce new, innovative and updated fitness services, our business may be adversely affected.

 

   

The high level of competition in the health club and fitness industry could materially and adversely affect our business.

 

   

Our financial results are affected by the number of franchises sold and studios we open and by the operating and financial results of such studios.


 

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If we fail to identify, recruit and contract with qualified franchisees, our ability to open new franchised studios and increase our revenue could be materially adversely affected.

 

   

If we are unable to renew our franchise agreements with our existing franchisees, our business, results of operations and financial condition would be materially and adversely affected.

 

   

We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business, and our franchisees are impacted by factors that are beyond our control.

 

   

If we fail to successfully implement our growth strategy, which includes new studio development by existing and new franchisees, our brand and ability to increase our revenue and operating profits could be materially and adversely affected.

 

   

If we and our franchisees are unable to identify and secure suitable sites for new franchise studios, our revenue growth rate and operating profits may be negatively impacted.

 

   

If we are unable to sustain pricing levels for our establishment fees, World Packs and franchise fees, our business could be adversely affected.

 

   

If our relations with existing or potential franchisees deteriorate, our business could be adversely affected.

 

   

Our business is subject to various franchise laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations and other legal developments that impact franchising, could materially and adversely affect our business.

 

   

Our success depends substantially on the value of our brand.

 

   

Our marketing strategy relies on the use of social media platforms and any negative publicity on such social media platforms may adversely affect the public perception of our brand which in turn could have a material and adverse effect on our business, results of operations and financial condition. In addition, our use of social media platforms could subject us to fines or other penalties.

 

   

We and our franchisees may be unable to attract and retain members, which would materially and adversely affect our business, results of operations and financial condition.

 

   

We have identified three material weaknesses in our internal control over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.

 

   

If we fail to obtain and retain high-profile strategic partnership arrangements, or if the reputation of any of our partners is impaired, our business may suffer.

 

   

Economic, political and other risks associated with our international operations could adversely affect our profitability and international growth prospects.

 

   

Our planned growth could place strains on our management, employees, information systems and internal controls, which may materially and adversely impact our business.

 

   

Acquisitions may expose us to significant risks and additional costs.

 

   

Any inability to successfully integrate acquisitions, or realize their anticipated benefits, could have a material adverse effect on us.

 

   

We depend upon third-party licenses for the use of music to supplement our workouts and workout tutorials. An adverse change to, loss of or claim that we or our franchisees do not hold necessary licenses may have an adverse effect on our business, results of operations and financial condition.


 

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We require our franchisees to secure certain music licenses to use music in our studios and to supplement our workouts. Any failure to secure such licenses or comply with the terms and conditions of such licenses may lead to third party claims or lawsuits and/or have an adverse effect on our business.

 

   

Our intellectual property rights, including trademarks and trade names, may be infringed, misappropriated or challenged by others.

 

   

We and our franchisees rely heavily on information systems, and any material failure, interruption or weakness in these systems may prevent us from effectively operating our business and damage our reputation.

 

   

Our dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and could materially and adversely affect our revenue and gross profit.

 

   

We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which would adversely affect our results of operations and financial condition.

 

   

Our current major stockholders will continue to have significant control over us after this offering, which could limit your ability to influence the outcome of matters subject to stockholder approval, including a change of control.

 

   

We and our franchisees could be subject to claims related to health and safety risks to members that arise at our studios.

Investing in our common stock involves substantial risk. You should carefully consider all of the information set forth in this prospectus and, in particular, the information in the section entitled “Risk Factors” beginning on page 24 of this prospectus prior to making an investment in our common stock. These risks could, among other things, prevent us from successfully executing our strategies and could have a material adverse effect on our business, results of operations and financial condition.

Our Corporate Information

We were originally incorporated in Delaware in March 2019 under the name “Flyhalf Holdings Inc.” We were formed by MWIG in connection with its acquisition of a minority interest in us, as discussed below. On March 15, 2019, in connection with the consummation of the MWIG Transaction, we changed our name to “F45 Training Holdings Inc.”

Our principal executive offices are located at 801 Barton Springs Road, 9th Floor, Austin, TX 78704 and our telephone number is (737) 787-1955. Our website address is www.f45training.com. The information contained on or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, nor is it incorporated by reference herein, and potential investors should not rely on such information in making a decision to purchase our common stock in this offering.

Principal Stockholders

Our principal stockholders include:

 

   

Adam Gilchrist (25.4% post-offering), our Co-Founder, President and Chief Executive Officer;

 

   

MWIG (28.6% post offering), a special purpose private investment fund vehicle led by FOD Capital LLC, a family office investment fund, and Mark Wahlberg, which acquired a minority investment in us in March 2019 through an acquisition of our convertible preferred stock;


 

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Entities affiliated with KLIM (11.4% post offering), a global investment manager; and

 

   

Funds affiliated with L1 Capital (7.1% post offering), a global investment manager.

The beneficial ownership percentages reflected above assumes the conversion of our convertible preferred stock into 27,368,102 shares of common stock, and the conversion of our convertible notes into 14,847,066 shares of common stock.

Implications of Being an Emerging Growth Company and Smaller Reporting Company

We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies, including:

 

   

presenting only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

reduced disclosure about our executive compensation arrangements;

 

   

exemption from the requirements to hold non-binding shareholder advisory votes on executive compensation or golden parachute arrangements;

 

   

extended transition periods for complying with new or revised accounting standards;

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; and

 

   

exemption from complying with any requirement that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis).

We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company at the start of the first fiscal year after we have more than $1.07 billion in annual gross revenue, at the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year (and we have been a public company for at least 12 months and have filed at least one annual report on Form 10-K) or the date on which we have, during the previous three-year period, issued more than $1 billion of non-convertible debt securities. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting obligations in this prospectus. Further, pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies.


 

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We are also a “smaller reporting company” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock, and our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. See “Risk Factors—Risks Related to Our Common Stock and This Offering—We are an “emerging growth company” and a “smaller reporting company.” As a result of the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies, our common stock may be less attractive to investors.”

Summary Organizational Chart

The following diagram depicts our current corporate structure:

 

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The Offering

 

Common stock offered by us

18,750,000 shares

 

Common stock offered by the selling
stockholder

1,562,500 shares

 

Option to purchase additional shares of
common stock granted by us and the selling stockholder

3,046,875 shares

 

Common stock to be outstanding immediately
after this offering

90,246,682 shares (or 90,871,682 shares if the underwriters exercise in full their option to purchase additional shares).

 

Indication of Interest

One or more funds affiliated with Caledonia have indicated an interest in purchasing $100.0 million in shares of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, one or more funds affiliated with Caledonia could determine to purchase more, less or no shares in the offering or the underwriters could determine to sell more, less or no shares to one or more funds affiliated with Caledonia. The underwriters will receive the same discount on any of our shares of common stock purchased by one or more funds affiliated with Caledonia as they will from any other shares of the common stock sold in this offering.

 

Use of proceeds

We estimate that we will receive net proceeds of approximately $275.9 million (or approximately $285.2 million if the underwriters exercise in full their option to purchase additional shares), based on an assumed initial public offering price of $16.00 per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholder.

 

 

We intend to use the net proceeds we receive from this offering (i) to repay indebtedness, (ii) to pay the purchase price for our acquisition of certain assets of the Flywheel indoor cycling studio business, (iii) to pay cash bonuses to


 

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certain of our employees, including certain of our executive officers, in connection with this offering, (iv) to pay expenses incurred in connection with this offering and (v) for working capital and general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

We have no present intention to pay cash dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our debt agreements and other factors that our board of directors deems relevant. See “Dividend Policy.”

 

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under “Risk Factors” beginning on page 24 and all other information in this prospectus before investing in our common stock.

 

Conflicts of Interest

Affiliates of J.P. Morgan Securities LLC are lenders under the Term Facility and Revolving Facility. As described in the section entitled “Use of Proceeds,” a portion of the net proceeds from this offering will be used to repay borrowings under the Term Facility and Revolving Facility. Because we expect that more than 5% of the proceeds of this offering will be received by affiliates of J.P. Morgan Securities LLC, each of which is a lender under the Term Facility and Revolving Facility, this offering is being conducted in compliance with Rule 5121, as administered by the Financial Industry Regulatory Authority, or FINRA. Goldman Sachs & Co. LLC has agreed to act as the “qualified independent underwriter” with respect to this offering and has performed due diligence investigations and participated in the preparation of this registration statement. See the section entitled “Underwriting (Conflicts of Interest)—Conflicts of Interest.”

 

Listing

We have applied to have our common stock approved for listing on the New York Stock Exchange, or the NYSE, under the symbol “FXLV.”

 

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The number of shares of our common stock to be outstanding immediately after this offering is based on 90,246,682 shares of common stock outstanding as of June 30, 2021 and excludes                  (i) shares that will become available for future issuance under the F45 Training Holdings Inc. 2021 Equity Incentive Plan, or the 2021 Plan, upon the effectiveness of the registration statement of which this prospectus forms a part (which includes 3,590,900 shares of our common stock issuable upon the settlement of restricted stock units, or RSUs, and 263,684 shares of our common stock issuable upon the exercise of stock options to be granted in connection with this offering under the 2021 Plan to certain of our employees (including certain executive officers), with the stock options to have an exercise price per share equal to the initial public offering price in this offering and (ii) 2,738,648 RSUs, which were issued to Mr. Wahlberg pursuant to a promotional services agreement that we entered into in connection with the MWIG investment (see “Certain Relationships and Related Party Transactions—Promotional Agreement” for more details regarding the RSUs held by Mr. Wahlberg), which RSUs will vest in connection with offering, but not settle until 2022).

Except as otherwise indicated, all information in this prospectus reflects and assumes the following:

 

   

an initial public offering price of $16.00 per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

the effectiveness of our restated certificate of incorporation and restated bylaws in connection with the completion of this offering;

 

   

the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 27,368,102 shares of common stock upon completion of this offering;

 

   

the conversion of all of our outstanding convertible notes into an aggregate of 14,847,066 shares of common stock upon completion of this offering; and

 

   

no exercise by the underwriters of their option to purchase additional shares of our common stock in this offering.


 

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Summary Historical Consolidated Financial and Other Data

The following tables present the summary consolidated financial and other data for our business as of and for the three months ended March 31, 2021 and 2020 and the summary consolidated financial and other data for our business as of and for the years ended December 31, 2020 and 2019.

The following summary historical combined and consolidated financial information for these periods has been derived from our interim unaudited condensed consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 and the audited annual consolidated financial statements as of and for the years ended December 31, 2020 and 2019 included elsewhere in this prospectus. These financial statements have been prepared in accordance with GAAP and are presented in U.S. dollars. The results of operations for the periods presented below are not necessarily indicative of the results to be expected in the future.

The information presented below should be read in conjunction with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited

annual consolidated financial statements, the unaudited interim condensed consolidated financial statements, the accompanying notes, and other financial information appearing elsewhere in this prospectus.

 

     Three Months Ended March 31,      Year Ended December 31,  
     2021      2020      2020      2019  
    

(dollars in thousands,

except share and per share information)

 

Consolidated Statements of Operations Data:

           

Revenues:

           

Franchise (Related party: $45 and $97 for the three months ended March 31, 2021 and 2020, and $340 and $883 for 2020 and 2019, respectively)

   $ 13,156      $ 13,638      $ 52,555      $ 42,897  

Equipment and merchandise (Related party: $0 for the three months ended March 31, 2021 and 2020, and $116 and $122 for 2020 and 2019, respectively)

     5,035        11,204        29,758        49,793  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     18,191        24,842        82,313        92,690  

Costs and operating expenses:

           

Cost of franchise revenue (Related party: $0 and $12 for the three months ended March 31, 2021 and 2020, and $0 and $140 for 2020 and 2019, respectively)

     1,214        3,184        7,937        11,310  

Cost of equipment and merchandise (Related party: $941 and $1,051 for the three months ended March 31, 2021 and 2020, and $4,067 and $2,702 for 2020 and 2019, respectively)

     3,181        6,331        21,713        26,678  

 

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     Three Months Ended March 31,     Year Ended December 31,  
     2021     2020     2020     2019  
    

(dollars in thousands,

except share and per share information)

 

Selling, general and administrative expenses

     16,828       13,991       57,827       41,126  

Forgiveness of loans to directors

     -         -         -         22,263  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     21,223       23,506       87,477       101,377  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (3,032     1,336       (5,164     (8,687

Loss on derivative liabilities, net

     25,505       -         8,818       -    

Interest expense, net

     8,415       378       9,399       414  

Other (income) expense, net

     291       1,681       (1,154     384  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (37,243     (723     (22,227     (9,485

(Benefit) provision for income taxes

     (398     10       3,062       3,117  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (36,845   $ (733   $ (25,289   $ (12,602
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (loss) on interest rate swap, net of tax

     71       (850     (533     (127

Foreign currency translation adjustment, net of tax

     (32     1,281       92       (682
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (36,806   $ (302   $ (25,730   $ (13,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share

        

Basic and diluted

   $ (1.26   $ (0.01   $ (0.50   $ (0.22

Weighted average shares outstanding

        

Basic and diluted

     29,281,514       58,000,000       50,434,598       58,000,000  

Pro forma net loss per share, basic and diluted(1)

   $ (0.12     $ (0.78  

Pro forma weighted average common shares outstanding, basic and diluted

     87,276,822         107,949,141    

 

(1) 

The unaudited pro forma net loss per share for the three months ended March 31, 2021 and for the year ended December 31, 2020 have been computed to give effect to: (i) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 25,805,602 shares of our common stock upon completion of this offering, (ii) the conversion of all of the outstanding convertible notes into an aggregate of 14,847,066 shares of our common stock upon completion of this offering and the $25.5 million and $8.8 million reversal of the loss on derivative liabilities, net, respectively, from the conversion of the outstanding convertible notes for the three months ended March 31, 2021 and for the year ended December 31, 2020, (iii) incremental shares issued with proceeds used as repayment of $169.6 million of indebtedness, including repayment of our Term Facility, Revolving Facility, Subordinated Term Facility and PPP loan, the corresponding elimination of the interest expense of $8.4 million and $9.4 million, respectively, for the three months ended March 31, 2021 and for the year ended December 31, 2020, and the $9.3 million interest expense prepayment penalty incurred for the year ended December 31, 2021, (iv) $7.7 million and $40.2 million of stock-based compensation expense, respectively, that will be


 

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  recognized upon the vesting and settlement of RSUs for which the performance and market conditions will be satisfied in connection with an initial public offering for the three months ended March 31, 2021 and for the year ended December 31, 2020, (v) compensation expense of $0.3 million and $1.0 million, respectively, to be incurred in relation to the promotional services of certain nonemployees for the three months ended March 31, 2021 and for the year ended December 31, 2020, and (vi) $26.5 million from the acceleration of debt discount from convertible notes recognized in interest expense for the year ended December 31, 2020.

The following table sets forth the computation of the Company’s unaudited pro forma basic and diluted net loss per share (in thousands, except share data), including antidilutive securities that were excluded in the calculation of pro forma net loss per share:

 

     Three months ended
March 31, 2021
    Year ended
December 31, 2020
 

Numerator:

    

Net loss attributable to common stockholders, basic and diluted

   $ (36,845   $ (25,289

Elimination of the interest expense resulting from the payoff of the outstanding debt

     8,415       9,399  

Reversal of the loss on derivative liabilities, net, resulting from the conversion of the outstanding convertible notes

     25,505       8,818  

Interest expense prepayment penalty

     -         (9,300

Stock-based compensation expense related to RSUs and option grants(1)

     (7,692     (40,172

Compensation expense for promotional services

     (261     (1,045
  

 

 

   

 

 

 

Acceleration of debt discount on convertible notes recognized in interest expense

     -         (26,507

Pro forma net loss attributable to common shareholders, basic and diluted

   $ (10,878   $ (84,096

Denominator:

    

Weighted average common shares outstanding, basic and diluted

     29,281,514       50,434,598  

Adjustments:

    

Conversion of redeemable convertible preferred stock to common stock

     25,805,602       25,805,602  

Conversion of outstanding convertible notes to common stock

     14,847,066       14,847,066  

RSUs and options vested

     5,655,140       5,174,375  

Common stock issued to cover repayment of debt

     11,375,000       11,375,000  

Common stock issued related to promotional services

     312,500       312,500  
  

 

 

   

 

 

 

Pro forma weighted average common shares outstanding, basic and diluted

     87,276,822       107,949,141  

Pro forma net loss per share, basic and diluted

   $ (0.12   $ (0.78

Anti-dilutive securities excluded from diluted net loss per share:

    

Unvested RSUs

     806,250       1,221,094  

Unvested stock options

     131,842       197,763  

Common stock to be issued related to promotional services

     1,779,421       1,779,421  

 

  (1) 

Expense related to the vesting of RSUs and option grants made to certain employees, executives and directors in connection with the IPO.


 

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     March 31, 2021  
     Actual     Pro
forma(1)
    Pro forma
adjusted(2)
 
     (dollars in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 25,333     $ 25,333     $ 80,650  

Total assets

     84,765       84,765       198,197  

Deferred revenue

     17,650       17,650       17,650  

Total liabilities

     363,118       284,153       114,560  

Convertible preferred stock

     98,544       -         -    

Total stockholders’ (deficit) equity

     (376,897     (199,388     50,522  

 

(1) 

The pro forma column gives effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 25,805,602 shares of our common stock upon completion of this offering, (ii) the conversion of all of our outstanding convertible notes into an aggregate of 14,847,066 shares of our common stock upon completion of this offering and (iii) the filing and effectiveness of our restated certificate of incorporation.

(2)

The pro forma as adjusted column gives effect to (i) the pro forma adjustments described in footnote (1) above, (ii) our receipt of estimated net proceeds from the sale and issuance of shares of our common stock in this offering, at an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (iii) repayment of $169.6 million of indebtedness, including repayment of our Term Facility, Revolving Facility, Subordinated Term Facility, and PPP loan, (iv) $25.0 million to pay the purchase price for our acquisition of certain assets of the Flywheel indoor cycling studio business, and (v) $5.6 million of other expenses incurred in connection with this offering and approximately $2.5 million to pay cash bonuses to certain of our employees and executive officers.

 

     Three Months Ended March 31,     Year Ended December 31,  
     2021     2020     2020     2019  
     (dollars in thousands)  

Other Data:

        

EBITDA(1)

   $ (28,176   $ 209     $ (10,180   $ (7,529

Adjusted EBITDA(1)

   $ 5,270     $ 2,614     $ 25,473     $ 30,678  

Adjusted EBITDA margin(1)

     29.0     10.5     30.9     33.1

Same store sales growth(2)

     (21.2 )%      3.0     (31.2 )%      13.3

Total Franchises Sold(3)

               2,247                 1,959               2,244               1,892  

Total Studios(4)

     1,487       1,242       1,437       1,140  

 

(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


 

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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 consolidated financial statements and related notes included elsewhere in this prospectus.

The following table reconciles net income to EBITDA and Adjusted EBITDA:

 

    Three Months Ended March 31,     Year Ended December 31,  
        2021             2020             2020             2019      
    (dollars in thousands)  

Net loss

  $ (36,845   $ (733   $ (25,289   $ (12,602

Net interest expense

    8,415       378       9,399       414  

Provision for income taxes

    (398     10       3,062       3,117  

Depreciation and amortization

    204       228       1,090       623  

Amortization of deferred costs

    448       326       1,558       919  
 

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ (28,176   $ 209     $ (10,180   $ (7,529
 

 

 

   

 

 

   

 

 

   

 

 

 

Sales tax reserve(a)

    100       503       515       322  

Transaction expenses(b)

    1,582       1,442       15,688       10,960  

Loss on derivative liability(c)

    25,505       -         8,818       -    

Certain legal costs and professional fees(d)

    2,537       430       4,741       4,440  

Development costs(e)

    1,171       -         -         -    

Forgiveness of loans to directors(f)

    -         -         -         22,263  

Recruitment(g)

    -         -         119       131  

Inventory write-off(h)

    -         -         329       -    

COVID concessions(i)

    2,482       -         5,365       -    

Relocation(j)

    69       30       78       91  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 5,270     $ 2,614     $ 25,473     $ 30,678  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) 

Represents the impact of one-time sales tax liability arising from a change in timing of enforceability of certain contractual terms in arrangements with franchisees.


 

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  (b) 

Represents transaction costs incurred as a part of a reorganization and the issuance of preferred shares, including legal, tax, accounting and other professional services.

  (c)

Represents loss on derivative liability associated with convertible note.

  (d) 

Represents legal costs related to litigation activities and legal settlements.

  (e) 

Represents one time non-recurring costs incurred with launch of new brand.

  (f) 

Represents the one-time forgiveness of loans to our directors.

  (g) 

Represents one-time recruitment expense of department leaders.

  (h) 

Represents inventory written off.

  (i) 

Represents concessions made to studios impacted by COVID, including one time COVID-19 related write-offs.

  (j) 

Represents costs incurred as a part of the relocation of our corporate headquarters.

 

(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, 2021 and December 31, 2020, there were 1,010 and 940 studios, respectively, in our comparable base of franchise studios. We view same store sales as a helpful measure to assess performance of our franchise studios.

(3) 

Total Franchises Sold is defined as (i) the total number of signed franchise agreements in place as of any specified date for which an establishment fee has been paid and (ii) the total number of franchises committed in a multi-studio agreement in place as of such date for which an upfront payment has been made, in each case that have not been terminated, as of such date. Each new franchise is included in the number of Total Franchises Sold from the date on which such franchise first satisfies the condition in clause (i) or (ii) above, as applicable. Total Franchises Sold includes franchise arrangements in all stages of development after signing a franchise agreement, and includes franchises associated with Total Studios. Franchises are removed from Total Franchises Sold upon termination of the franchise agreement.

(4)

Total Studios is defined, 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. We classify a studio as open as of the month in which the studio first generates monthly revenue of at least $4,500.


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes appearing elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. In reviewing these risk factors, you should also consider the ongoing COVID-19 pandemic and its consequences, which implicate, and may amplify, the risks and uncertainties facing us, and their potential impact on our business, financial position and results of operations. Given the unpredictable, unprecedented, and fluid nature of the pandemic and its particular impact on our business, it may materially and adversely affect us in ways that are not anticipated by or known by us or that we do not consider to present material risk. The risks and uncertainties described below are not the only ones we face. Additional risks, events and uncertainties that we are unaware of or that we deem immaterial may also become material factors that adversely affect our business. If any of the following risks actually occur, our business, results of operations and financial condition could be materially and adversely affected. In that event, the trading price of our common stock could decline and you might lose part or all of your investment in our common stock.

Risks Related to the Ongoing COVID-19 Pandemic

The ongoing novel coronavirus COVID-19 pandemic and governmental restrictions intended to prevent its spread have had, and are expected to continue to have, a material and adverse effect on our business, financial condition and results of operations, and the nature and extent of such impact is highly uncertain and unpredictable.

On March 11, 2020, the World Health Organization designated the global outbreak of a new strain of coronavirus, COVID-19, a pandemic. The global and domestic response to the COVID-19 pandemic by both governments and businesses has been unprecedented and continues to evolve. Many countries, including the United States and Australia, have declared national emergencies and implemented preventive measures.

These responsive measures have included mandates from federal, state, provincial and/or local authorities that restrict movement and travel, such as quarantines and shelter in place requirements, and restrict or require closure of some or all commercial and business activity. These measures became more severe over time and may continue indefinitely depending on the continued evolution of the outbreak, which remains unpredictable due to the potential for resurgences in certain geographies. We or our employees, franchisees, members, suppliers and other partners have been and may continue to be prevented from conducting business and other activities in the ordinary course for an indefinite period of time, including due to shutdowns, travel restrictions, social distancing requirements, stay at home orders and advisories and other restrictions that may be suggested or mandated by governmental authorities.

Our business has been materially adversely affected by the COVID-19 pandemic and the global response. At the initial peak of the pandemic, nearly all of our studios closed due to COVID-19. While some of our studios have reopened, in some locations resurgences of the pandemic have led some state and local governments to return to stricter regulations on businesses, and certain studios that reopened have had to re-close and additional studios may again be closed in the future, pursuant to such local regulations. These ongoing restrictions have had and may continue to have a material adverse effect on the number of studios open as well as pending and future sales to franchisees. Certain governments require, and more may begin to require, stringent guidelines with respect to the operation of fitness studios, including a reduced number of class participants, increased spacing requirements between participants and restrictions on sharing gym equipment. These requirements

 

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and any associated compliance costs have had and may continue to have an adverse impact on our operations, including our franchisees’ ability to retain members.

Considerable uncertainty still surrounds the COVID-19 virus, as well as the responses taken on a local, national and global level. The pandemic may continue to be widespread, and that could accelerate or magnify one or more of the risks described above or elsewhere in this prospectus. While we expect the pandemic and related events will continue to have a negative effect on our business, the full extent and scope of the impact on our business and industry as well as on national, regional and global markets and economies is highly uncertain and cannot be predicted. Any future developments concerning COVID-19 are outside our control and cannot be accurately predicted at this time, such as the duration and spread of the pandemic, the extent and effectiveness of governmental action to contain the disease, and the impact of these and other factors on our franchisees, employees, members and suppliers. The prolonged economic disruption due to COVID-19 has had and could continue to have a material negative impact on our business, financial condition, and results of operations. For additional information on the impact of COVID-19 on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of the COVID-19 Pandemic.”

COVID-19 has subjected our business, operations and financial condition to a number of risks, including, but not limited to, the following:

Risks Related to Revenue.    COVID-19 has adversely impacted our revenue in a number of respects. For the year ended December 31, 2020, as compared with the same period in 2019, our revenue decreased by 11% due to temporary studio closures associated with the COVID-19 pandemic. Throughout the pandemic, some franchisees were unable to pay the required monthly franchise fees due to the temporary closure of studios, and as a result, our franchise fee revenue was reduced. In addition, due to temporary studio closures, we did not realize the anticipated benefits from our variable franchise fee structure due to the operational and financial results of our franchisees being adversely impacted by the pandemic.

Risks Related to Operations.    The COVID-19 pandemic and related shelter-in-place restrictions and other containment efforts have had and continue to have a significant impact on our operations, including mandated studio closures, stringent guidelines with respect to the operation of our studios, including reduced number of class participants, increased spacing requirements between participants and restrictions on sharing gym equipment. These requirements and any associated compliance costs have had and may continue to have an adverse impact on our operations, including our franchisees’ ability to retain members.

Risks Related to Growth.    Our growth has been and may continue to be harmed by COVID-19. A number of franchisees have ceased, and may in the future elect to cease, studio development due to the COVID-19 pandemic. In addition, we have experienced a decline in the number of new franchises sold during the COVID-19 pandemic. For example, new franchises sold decreased to 352 for the year ended December 31, 2020, from 618 for the year ended December 31, 2019. Similarly, new franchises sold decreased to 3 for the three months ended March 31, 2021, from 67 for the three months ended March 31, 2020. In addition, due to COVID-19, our studios experienced membership declines.

Risks Related to Funding.    There is no guarantee that debt financings will be available in the future to fund our obligations, or will be available on terms consistent with our expectations. Additionally, the impact of COVID-19 on the financial markets is expected to adversely impact our ability to raise funds through equity financings. We also obtained in April an approximately $2.1 million loan under the Paycheck Protection Program. While the Company believes that it qualifies for full forgiveness of the loan, the Company will withdraw its forgiveness application and repay the loan in full in the event the Company consummates this offering.

 

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Risks Related to Our Business

Risks Related to Operating in the Health Club and Fitness Industry

If we are unable to anticipate and satisfy consumer preferences and shifting views of health and fitness and successfully develop and introduce new, innovative and updated fitness services, our business may be adversely affected.

The fitness industry is highly susceptible to changes in consumer preferences. Our success depends on our ability to identify and originate trends as well as to anticipate and react to changing consumer demands in a timely manner. If we are unable to introduce new services and products in a timely manner, or before our competitors do, or our new services and products are not accepted by our customers, our growth and profitability could be negatively affected. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower membership and utilization rates. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality health and fitness services. Our failure to effectively introduce new health and fitness services that are accepted by consumers could result in a decrease in revenue. In addition, developments or shifts in research or public opinion on the types of workouts and products we provide could negatively impact our business. Failure to predict and respond to changes in public opinion, public research and consumer preferences could materially and adversely impact our business.

The high level of competition in the health club and fitness industry could materially and adversely affect our business.

We operate in a highly competitive market, with multiple industry segments competing for consumers’ share of the wallet allocated to fitness spend. While we operate specifically within the studio fitness category, we consider companies in the following key industry segments as potential competition: other studio fitness concepts; full-service health clubs; racquet, tennis, country and other athletic clubs; value-focused health clubs; and at-home fitness offerings, including digital fitness content. We also compete for qualified franchisees, management, fitness training professionals and other personnel. Our franchisees also compete for qualified fitness trainers. We may not be able to compete effectively in the regions in which we currently operate or those in which we may operate in the future. Competitors may attempt to copy our business model, or portions thereof, which could erode our market share and brand recognition and impair our growth rate and profitability. Competitors, including companies that are larger and have greater resources than us, may compete with us to attract members and qualified fitness trainers in our regions. Other studio fitness concepts may lower their prices or create lower-priced brand alternatives within our markets. Furthermore, due to the increased number of low-cost studio fitness alternatives, we may face increased competition if our membership pricing increases or if discretionary spending declines. In addition, as we expand into new markets, we may face competitive challenges penetrating those markets due to, among other factors, competitors who may already have a significant presence in those markets, consumer unfamiliarity with our brand and our own unfamiliarity with the health and fitness market in such regions. Current and future competition may limit our and our franchisees’ ability to attract new members and retain existing members, may limit our ability to attract and retain new and existing franchisees and may hinder our franchisees’ ability to attract and retain qualified fitness trainers, which in each case could materially and adversely affect our business, results of operations and financial condition.

The continued growth of on-demand fitness classes could adversely affect our business, results of operations and financial condition.

At home on-demand fitness classes offer the benefit of a user-selected workout at home where users have the ability to vary the types of workouts they do on a daily basis, if desired. Many

 

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on-demand fitness classes can also be live streamed, allowing real-time interactions, including coaching cues from the class instructor. As the availability and variety of on-demand fitness classes (including live streaming classes) continue to grow, our members’ preferences may shift away from the in-studio experience, which is central to our business model, to at-home on-demand classes. Millennials, who represent one of the largest, most active demographic groups, in particular, may exhibit a shift in preference to on-demand fitness classes as they enter new life phases, such as parenthood, and, as a result, find new constraints placed on their free time. As such, on-demand workouts may become better suited for their lifestyles. In addition, the COVID-19 pandemic has accelerated the growth of and demand for at-home fitness classes, which may extend beyond the pandemic. If we fail to timely identify and effectively respond to any such shift in consumer preference, our business, results of operations and financial condition could be adversely affected.

We rely on consumer discretionary spending, which may be adversely affected by economic downturns and other macroeconomic conditions or trends.

Our business and results of operations are subject to global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment, higher consumer debt levels, reductions in net worth, declines in asset values and related market uncertainty, home foreclosures and reductions in home values, fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices, and general uncertainty regarding the overall future of the political and economic environment. Consumer purchases of discretionary items, such as memberships and workout packs at our studios, generally decline during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. If consumer purchases of memberships and workout packs at our studios decline, our franchise fee revenue may be adversely affected. In addition, during an economic downturn, existing franchisees may elect not to renew their franchise agreements with us, and prospective franchisees may opt not to enter into a franchise agreement with us, each of which could have a material and adverse effect on our business, results of operations and financial condition.

We and our franchisees may be unable to attract and retain members, which would materially and adversely affect our business, results of operations and financial condition.

The success of our business depends on our and our franchisees’ ability to attract and retain members. Our and our franchisees’ marketing efforts may not be successful in attracting members to studios, and membership levels may materially decline over time, especially at studios in operation for an extended period of time. Members may cancel their memberships at any time after giving proper advance written notice, subject to an initial minimum term applicable to certain memberships. Our franchisees may also cancel or suspend memberships if a member fails to provide payment for an extended period of time. In addition, we experience attrition and we and our franchisees must continually engage existing members and attract new members in order to maintain membership levels. It is possible that a portion of our member base may not regularly use our studios and may cancel their memberships. Some of the factors that could lead to a decline in membership levels include, among other factors:

 

   

changing desires and behaviors of consumers or their perception of our brand;

 

   

government shutdowns, social distancing requirements, stay at home orders and advisories or any other restrictions or suggestions adopted my governmental authorities;

 

   

changes in discretionary spending trends;

 

   

market maturity or saturation;

 

   

a decline in our ability to deliver quality service at a competitive price;

 

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a failure to introduce new features, products or services that members find engaging;

 

   

the introduction of new products or services, or changes to existing products and services, that are not favorably received;

 

   

technical or other problems that affect the member experience;

 

   

an increase in monthly membership dues due to inflation;

 

   

direct and indirect competition in our industry;

 

   

a decline in the public’s interest in health and fitness; and

 

   

a general deterioration of economic conditions or a change in consumer spending preferences or buying trends.

In order to increase membership levels, our franchisees may from time to time offer promotions or lower monthly dues or annual fees. If our franchisees are not successful in optimizing pricing or finding other ways to add memberships in new and existing studios, our membership levels may decrease, and in turn growth in monthly membership dues or annual fees may suffer, which will have an increasing impact on our financial results as we continue to move to a percentage of gross monthly studio revenue based franchise fee model. Any decrease in our average dues or fees or higher membership costs may materially and adversely impact our results of operations and financial condition. Additionally, further expansion into international markets may create new challenges in attracting and retaining members that we may not successfully address, as these markets carry unique risks as discussed below. As a result of these factors, we cannot be certain that our membership levels will be adequate to maintain or permit the expansion of our operations. A decline in membership levels would have an adverse effect on our business, results of operations and financial condition.

Risks Related to Our Franchisee Business Model and Strategy

Our financial results are affected by the number of franchises sold and studios we open and by the operating and financial results of such studios, which impact will become more significant as we continue to implement a variable franchise fee structure.

Under the terms of our franchise agreements, each of our franchisees is required to pay us an establishment fee upon signing a new franchise agreement, and monthly franchise and related fees throughout the term of the franchise agreement. A substantial portion of our revenue comes from such fees. For the years ended December 31, 2019 and 2020, we derived 46.3% and 63.8% of our revenue, respectively, from franchise revenue. As a result, our financial results depend on the number of franchises sold and number of studios. If we are unable to sell new franchises that eventually open studios, or renew existing franchise agreements, our financial results would be adversely affected.

Prior to July 2019, our monthly franchise fees were generally a flat monthly fee. Since then, we have transitioned our model in the United States for new franchisees to a franchise fee based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue. In select markets outside of the United States, and for renewals of existing franchisees in the United States, we are in the process of developing a strategy for transitioning to a similar model. There can be no assurance that we will be successful in implementing this model with new franchisees or in transitioning existing franchisees to this model in our markets. We anticipate that monthly franchise fee payments by our franchisees, whether in the form of a flat fee or variable fee, will continue to represent a substantial portion of our revenue in the future. Accordingly, we are reliant on the performance of our franchisees in successfully operating their studios and generating sufficient revenue to enable them to pay monthly franchise fees and other fees to us on a timely basis. If our franchisees are not successful in operating their studios, they may not be able to pay required monthly franchise fees to us, which

 

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could harm our operating results through reduced franchise fee revenue. Throughout the COVID-19 pandemic, some franchisees have been unable to pay the required monthly franchise fees due to the temporary closure of studios, and as a result, our franchise fee revenue has been reduced. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of the COVID-19 Pandemic.” As we continue to implement the variable franchise fee structure, our financial results will become even more dependent on the operational and financial results of our franchisees. Further, such shift in franchise fee structure will likely result in greater variability in our results from year to year and from quarter to quarter because our franchise fee revenue will be directly impacted by the sales performance of our franchisees. As a result, as this structure continues to be implemented, we expect period-to-period comparisons of our operating results to be less reliable as an indication of our performance for any future period.

If we fail to identify, recruit and contract with qualified franchisees, our ability to open new franchised studios and increase our revenue could be materially and adversely affected.

The opening of additional franchised studios depends, in part, upon the availability of prospective franchisees who meet our criteria. We may not be able to identify, recruit or contract with suitable franchisees in our target markets on a timely basis or at all. Although we have developed criteria to evaluate and screen prospective franchisees, our franchisees may not ultimately have the business acumen or be able to access the financial or management resources that they need to open and successfully operate the studios contemplated by their franchise agreements with us. Franchisees have ceased, and may in the future elect to cease, studio development for other reasons, including the COVID-19 pandemic and applicable franchise laws may limit our ability to terminate or modify these franchise agreements. For example, we experienced a significant decrease in new franchises sold for the year ended December 31, 2020 and the three months ended March 31, 2021, in each case as compared to the respective comparative period, due to the COVID-19 pandemic. If we are unable to recruit suitable franchisees or if franchisees are unable or unwilling to open new studios as planned, our growth may be slower than anticipated, which could materially and adversely affect our ability to increase our revenue and materially and adversely affect our business, results of operations and financial condition.

If we are unable to renew our franchise agreements with our existing franchisees, our business, results of operations and financial condition would be materially and adversely affected.

Our business and results of operations depend on maintaining franchise agreements with our existing franchisees. Our typical franchise agreement has an initial five-year term. Upon the expiration of the initial term, we or the franchisee may, or may not, elect to renew the franchise agreement. Whether or not a franchise agreement is renewed is contingent on:

 

   

the franchisee’s execution of the then-current form of franchise agreement, which may include increased or different franchise fee revenue, marketing fees and other fees and costs;

 

   

the satisfaction of certain conditions, including re-equipment and remodeling of the studio and other requirements;

 

   

the payment of a renewal fee; and

 

   

other conditions which are outside our control, including those that impact our franchisees, such as economic conditions, their financial situation, the success of their studio, their other commitments and their ability to renew their studio lease on acceptable terms or to find a suitable alternative location.

Our franchisees’ ability to negotiate favorable terms on an expiring lease or to negotiate favorable terms on leases with renewal options, or conversely for a suitable alternative location, could depend on conditions in the real estate market, competition for desirable properties and our franchisees’ relationships with current and prospective landlords or may depend on other factors that are not within our or our franchisees’ control. As of December 31, 2020, the initial franchise term in respect of 129

 

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and 353 franchise studios will expire during the remainder of 2021 and 2022, respectively. If we are unable to renew our franchise agreements in respect of such studios or a significant portion thereof, our business, results of operations and financial condition would be materially and adversely affected.

The timing of the opening of franchises sold may differ materially from historical experience, and the number of new franchised studios that actually open in the future may differ materially from the number of signed commitments we currently have or anticipate from existing and new franchisees.

As of December 31, 2020, a significant number of franchises sold did not yet have operating studios. Generally, each new studio will open approximately nine months after we have signed the franchise agreement with the franchisee outside of the period of the COVID-19 pandemic. The timing of the opening of each new studio, however, is subject to many factors outside of our control, including those discussed below in “We have grown rapidly in recent years and have limited operating experience at our current scale of operations. If we fail to successfully implement our growth strategy, which includes new studio development by existing and new franchisees, our brand and ability to increase our revenue and operating profits could be materially and adversely affected,and accordingly the timing of the opening of new studios may differ materially from historical experience. Further, as we continue to expand our business into new international markets, the risks our franchisees may face in such markets, such as political and economic instability, local laws and regulations and inadequate brand infrastructure, may result in longer periods for opening new studios.

A portion of our franchises sold may not ultimately open as new franchised studios. Approximately 0.2% and 3.0% of the franchises sold at the beginning of the period in the years ended December 31, 2019 and December 31, 2020, respectively, were subsequently terminated. The historic conversion rate of signed commitments to new franchised studios may not be indicative of the conversion rates we will experience in the future and the total number of new studios actually opened in the future may differ materially from the number of signed commitments disclosed at any point in time. To the extent our franchisees are unable to open new studios as we anticipate, we will not realize the revenue growth that we expect. Our failure to add a significant number of new studios would adversely affect our ability to increase our revenue and income from operations.

We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business, and our franchisees are impacted by factors that are beyond our control.

Franchisees are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of their studios. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised studios may be diminished by any number of factors beyond our control. Franchisees may not successfully operate studios in a manner consistent with our standards and requirements, including those relating to our marketing strategy, applicable laws or regulations, or may not hire and train qualified trainers and other personnel. Further, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate successful franchises in their approved locations. Applicable state franchise laws may limit our ability to terminate or modify franchise agreements with non-complying or unsuccessful franchisees. If franchisees do not operate to our expectations or if consumers have negative perceptions or experiences with our franchised studios, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide membership could decline significantly, which could reduce our franchise fees and other revenue.

As small business owners, some of our franchisees may be negatively and disproportionately impacted by capital requirements, negative economic conditions, including the COVID-19 pandemic,

 

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recession, inflation and increased unemployment levels, or other issues. Furthermore, franchisees’ business obligations may not be limited to the operation of our studios, making them subject to business and financial risks unrelated to the operation of our studios. These unrelated risks, and the effect of decreased consumer confidence or changes in consumer behavior, could materially harm our franchisees’ financial condition, which would cause our franchise fees and other revenue to decline and materially and adversely affect our business, results of operations and financial condition as a result.

Moreover, disputes with franchisees could damage our brand image and reputation and our relationships with our franchisees, generally.

The success of our business strategy depends on our ability to effectively manage and support our franchise system.

We operate under a nearly 100% franchise model. As such, the success of our business strategy depends on our franchise network, which requires ongoing support and oversight from us, including comprehensive training on membership marketing and day-to-day operations, business support systems, marketing support, management information systems and support with other systems and procedures. Failure to provide our franchisees with adequate training, support and resources could materially and adversely affect both our new and existing franchisees, as well as cause disputes between us and our franchisees. Any of the foregoing could materially and adversely affect our business, results of operations and financial condition.

We have grown rapidly in recent years and have limited operating experience at our current scale of operations. If we fail to successfully implement our growth strategy, which includes new studio development by existing and new franchisees, our brand and ability to increase our revenue and operating profits could be materially and adversely affected.

We have expanded our operations rapidly and have limited operating experience at our current size. For example, we sold some of our first franchises to members of our original studio, and opened nearly 200 studios over the following 30 months. In less than eight years, we have scaled our global footprint to 2,801 Total Franchises Sold in 63 countries, including 1,555 Total Studios, of which 1,415 had re-opened following closures due to the COVID-19 pandemic, as of June 30, 2021. In addition, we have increased our employee headcount as our operations have expanded, and we expect headcount growth to continue for the foreseeable future. Our growth strategy relies substantially upon new studio openings by existing and new franchisees, and we are continuously seeking to identify target markets where we can enter or expand, taking into account numerous factors such as the location of our current studios, demographics and traffic patterns. Our franchisees face many challenges in opening new studios, including:

 

   

availability and cost of financing;

 

   

selection and availability of suitable studio locations;

 

   

competition for studio sites;

 

   

negotiation of acceptable lease and financing terms;

 

   

securing required domestic or foreign governmental permits and approvals, including zoning approvals;

 

   

health and fitness trends in new geographic regions and acceptance of our offerings;

 

   

employment, training and retention of qualified personnel in local markets;

 

   

ability to open new studios during the timeframes we and our franchisees expect;

 

   

the general legal and regulatory landscape in which their studios operate;

 

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actual or perceived threats to public health due to the COVID-19 pandemic;

 

   

determining and setting appropriate membership fees to ensure the success of their studios; and

 

   

general economic and business conditions.

In particular, because new studio development is funded entirely by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. Franchisees of new studios may have difficulty securing adequate financing, particularly while the COVID-19 pandemic continues to persist, as well as in new markets, where there may be a lack of adequate history and brand familiarity. If our franchisees or prospective franchisees are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of new studios, and our future growth could be materially and adversely affected.

In addition, our franchisees’ ability to successfully open and operate new studios in new or existing markets may be adversely affected by a lack of awareness or acceptance of our brand, as well as a lack of existing marketing efforts and operational execution in these new markets. To the extent that we are unable to implement effective marketing and promotional programs and foster recognition and affinity for our brand in new markets, our franchisees’ new studios may not perform as expected, and our growth may be significantly delayed or impaired. In addition, new studios may not be successful or our average studio membership sales may not increase at historical rates, which could materially and adversely affect our business, results of operations and financial condition.

If we and our franchisees are unable to identify and secure suitable sites for new franchise studios, our revenue growth rate and operating profits may be negatively impacted.

To successfully expand our business, we, along with our franchisees, must identify and secure sites for new franchise studios that meet our established criteria. In addition to finding sites with the right demographic and other measures we employ in our selection process, we also evaluate the penetration of our competitors in the market. We and our franchisees face significant competition for sites that meet our criteria, and as a result we and our franchisees may lose those sites, our competitors could copy our format or our franchisees could be forced to pay significantly higher lease payments for those sites. If we and our franchisees are unable to identify and secure sites for new studios in suitable locations, our revenue growth rate and operating profits may be negatively impacted. Additionally, if our or our franchisees’ analysis of the suitability of a studio site is incorrect, our franchisees may not be able to recover the capital investment in developing and building the new studio and in turn may not be able to pay required royalties to us.

As we increase our number of studios, our franchisees may also open studios in higher-cost geographies, which could entail greater lease payments and construction costs, among others. The higher level of invested capital at these studios may require higher operating margins and higher net income per studio to produce the level of return our franchisees and potential franchisees expect. Failure to provide this level of return could materially and adversely affect our business, results of operations and financial condition.

Opening new studios in close proximity may negatively impact our existing studios’ revenue and profitability.

As of June 30, 2021, we had 2,801 Total Franchises Sold in 63 countries, and we plan to open many new studios in the future, some of which will be in existing markets. We intend to continue opening new franchise studios in our existing markets as part of our growth strategy, some of which

 

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may be located in close proximity to studios already in those markets. Opening new studios in close proximity to existing studios may attract some memberships away from those existing studios, which may lead to diminished revenue and profitability for us and our franchisees rather than increased market share, especially as we continue to move to a percentage of gross monthly studio revenue based franchise fee model. In addition, as a result of new studios opening in existing markets and because older studios will represent an increasing proportion of our studio base over time, our same store sales increases may be lower in future periods than they have been historically.

Our franchisees may incur rising costs related to construction of new studios and maintenance of existing studios, which could materially and adversely affect the attractiveness of our franchise model, and in turn our business, results of operations and financial condition.

Our studios require both upfront and ongoing investments, including periodic remodeling and equipment replacement. If our franchisees’ costs are greater than expected, franchisees may not achieve their expected targeted return. In addition, increased costs may result in lower profits to the franchisees, which may cause them to terminate their franchise agreement or make it harder for us to attract new franchisees, which in turn could materially and adversely affect our business, results of operations and financial condition.

In addition, if a franchisee is unwilling or unable to acquire the necessary financing to invest in the maintenance and upkeep of its studios, including periodic remodeling and replacement of equipment, the quality of its studios could deteriorate, which may have a negative impact on our brand image and our ability to attract and maintain members, which in turn may have a negative impact on our business, results of operations and financial condition.

If we are unable to sustain pricing levels for our establishment fees, World Pack and franchise fees, our business could be adversely affected.

If we are unable to sustain pricing levels for our establishment fees, World Pack and franchise fees, whether due to competitive pressure or otherwise, our revenue and operating profit could be significantly reduced. Further, our decisions around the development of new ancillary products and services are grounded in assumptions about eventual pricing levels. If there is price compression in the market after these decisions are made, it could have a negative effect on our business.

If our relations with existing or potential franchisees deteriorate, our business could be adversely affected.

Our growth depends on maintaining good relations with our franchisees. Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under our franchise agreements, including with respect to alleged breaches of contract or wrongful termination under the franchise arrangements. Disagreement may lead to disputes with our franchisees, and we expect such disputes to occur from time to time. Disputes between us and our franchisees, whether in court or otherwise, could relate to either party’s violation of its contractual obligations. We may also engage in litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as we determine necessary to protect our brand, the consistency of our studios and the customer experience or to enforce our contractual indemnification rights if we are brought into a matter involving a third party due to the franchisee’s alleged acts or omissions. In addition, we may be subject to claims by our franchisees relating to our franchise disclosure document, or FDD, including claims based on financial information contained in our FDD. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship. Unfavorable judgments or settlements relating to franchisee disputes could

 

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result in monetary or injunctive relief against us, including the voiding of non-compete, territorial exclusivity or other development-related provisions upon which we rely. Any negative outcome in such disputes could materially and adversely affect our results of operations as well as our ability to expand our franchise system and may damage our reputation and brand. To the extent that we have disputes with our franchisees, the attention, time and financial resources of our management and our franchisees will be diverted from the operation of our business, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Even our success in franchisee disputes could damage our franchisees’ finances or operations, or our relationships with them or our ability to attract new franchisees.

Our business is subject to various franchise laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, and other legal developments that impact franchising could materially and adversely affect our business.

As a franchised business, we are subject to the FTC Franchise Rule, which is a trade regulation imposed on franchising promulgated by the FTC that regulates the offer and sale of franchises in the United States and that requires us to provide to all prospective franchisees certain mandatory disclosure in an FDD. In addition, we are subject to state franchise registration and disclosure laws in a number of states that regulate the offer and sale of franchises by requiring us, unless otherwise exempt, to register our franchise offering in those states prior to our making any offer or sale of a franchise in those states and to provide an FDD to prospective franchisees in accordance with such laws. We are also subject to franchise registration and disclosure laws in other countries in which we operate, including Australia, Canada, China, France, French Polynesia, Indonesia, Malaysia, Mexico, New Caledonia, Russia, South Africa, South Korea, Spain, Taiwan and the United States, that regulate the offer and sale of franchises by requiring us, unless otherwise exempt, to register a franchise disclosure document in a prescribed format and to provide that franchise disclosure document to prospective franchisees, in accordance with such laws, and that regulate certain aspects of the franchise relationship. We are currently subject to similar laws in other countries in which we currently offer franchises, and we may also become subject to laws in additional countries in the future. We are not currently, and in the past we have not been, in compliance with certain applicable franchise registration and disclosure laws in certain jurisdictions. Further, as we expand into new markets outside of our more significant markets of Australia, New Zealand, Canada, the United States, the United Kingdom and Singapore, we may have limited knowledge of local franchise laws and regulations and may take time to apprise ourselves of such laws and regulations. Failure to comply with applicable franchise registration and disclosure laws may result in a franchisee’s right to rescind its franchise agreement and damages, pursuant to the terms of its franchise agreement, and may result in investigations or actions from federal, state or local franchise authorities, civil fines or penalties and stop orders, among other remedies.

We are also subject to franchise relationship laws in a number of jurisdictions that regulate many aspects of the franchise relationship including, depending upon the jurisdiction, renewals and terminations of franchise agreements, franchise transfers, the applicable law and venue in which franchise disputes may be resolved, discrimination and franchisees’ right to associate, among others. Our failure to comply with such franchise relationship laws could result in fines, damages and our inability to enforce franchise agreements where we have violated such laws. Any non-compliance on our part could result in liability to franchisees and regulatory authorities, inability to enforce our franchise agreements and a reduction in our anticipated franchise fee revenue, which in turn may materially and adversely affect our business and results of operations.

We and our franchisees are also subject to the U.S. Fair Labor Standards Act of 1938, as amended, and various other laws in the United States, Canada, Australia and other foreign jurisdictions governing such matters as minimum-wage requirements, overtime and other working conditions. A

 

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number of our franchisees’ employees may be paid at rates related to the U.S. federal or state minimum wage, and the U.S. federal and/or state minimum wage may increase. Any increases in labor costs might result in our franchisees inadequately staffing studios. In addition, such increases in labor costs and other changes in labor laws could affect studio performance and quality of service, decrease franchise fee revenue and adversely affect our brand.

We and our franchisees’ operations and properties are subject to extensive federal, international, state, provincial and local laws and regulations, including those relating to environmental, building and zoning requirements. Failure to comply with these legal requirements could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability, which could materially and adversely affect our business.

We and our franchisees are responsible for compliance with applicable laws that regulate the relationship between studios and their members. Many jurisdictions have consumer protection regulations that may limit the collection of membership dues or fees prior to opening, require certain disclosures of pricing information, mandate the maximum length of contracts and “cooling off” periods for members (after the purchase of a membership), set escrow and bond requirements for studios, govern member rights in the event of a member relocation or disability, provide for specific member rights when a studio closes or relocates, or preclude automatic membership renewals. Our franchisees’ failure to comply fully with these rules or requirements may subject us or our franchisees to fines, penalties, damages and civil liability, or result in membership contracts being void or voidable. In addition, any changes to such laws or in their interpretation could individually or in the aggregate cause us to change or limit our business practices, which may make our business model less attractive to our franchisees or our members.

Uncertainty in the law with respect to the assignment of liabilities in the franchise business model could adversely impact our profitability.

One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not responsible for the acts, omissions, or liabilities of its franchisees, whether with respect to the franchisees’ employees or otherwise. In the last several years, this principle has been the subject of differing and inconsistent interpretations at the National Labor Relations Board and in the courts, and the question of whether a franchisor can be held liable for the actions or liabilities of a franchisee under a vicarious liability theory, sometimes called “joint employer,” has become highly fact dependent and generally uncertain. A determination that we are a “joint employer” with our franchisees or that our franchisees are part of one unified system subject to joint and several liability could subject us and/or our franchisees to liability for employment-related and other liabilities of our franchisees and could cause us to incur other costs that have a material adverse effect on our results of operations. Additionally, in certain jurisdictions, including Australia, we may be liable if our franchisees fail to comply with employment and work health safety legislation. Any finding that we are liable for such non-compliance could adversely affect our business, results of operations and financial condition.

We are subject to a variety of additional risks associated with our franchisees.

Our franchise business model subjects us to all of the risks described above and a number of other risks, any one of which may impact our franchise fee revenue collected from our franchisees, may harm the goodwill associated with our brand and may materially and adversely impact our business and results of operations. Additional risks include the following:

Franchisee litigation; effects of regulatory efforts.    We and our franchisees are subject to a variety of litigation risks, including, but not limited to, member claims, personal injury or wrongful death

 

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claims, vicarious liability claims, litigation with or involving our relationship with franchisees, litigation alleging that the franchisees are our employees or that we are the co-employer of our franchisees’ employees, employee allegations against the franchisee or us of improper termination, sexual harassment or hostile work environment allegations, discrimination or employee classification, landlord/tenant disputes and intellectual property claims, among others. Each of these claims may increase costs, reduce the execution of new franchise agreements and affect the scope and terms of insurance or indemnifications we and our franchisees may have. In addition, we and our franchisees are subject to various regulatory efforts to enforce employment laws, such as efforts to categorize franchisors as the co-employers of their franchisees’ employees, legislation to categorize individual franchised businesses as large employers for the purposes of various employment benefits, and other legislation or regulations that may have a disproportionate impact on franchisors and/or franchised businesses. Any of these changes could impose greater costs and regulatory burdens on franchising and negatively affect our ability to sell new franchises.

Franchisee insurance.    Our franchise agreements require each franchisee to maintain certain insurance types and levels of coverage. Losses arising from certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks, or franchisees may fail to procure the required insurance. Moreover, any loss incurred could exceed policy limits and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material adverse effect on a franchisee’s ability to satisfy its obligations under its franchise agreement or other contractual obligations, which could cause a franchisee to terminate its franchise agreement and, in turn, negatively affect our operating and financial results.

Franchise agreements and franchisee relationships.    Our franchisees develop and operate their studios under terms set forth in our franchise agreements. These agreements give rise to long-term relationships that involve a complex set of mutual obligations and mutual cooperation. We have a standard agreement that we typically use with our franchisees, but various franchisees have negotiated specific terms in these agreements. Furthermore, we may from time to time negotiate terms of our franchise agreements with individual franchisees or groups of franchisees. We seek to have positive relationships with our franchisees, based in part on our common understanding of our mutual rights and obligations under our agreements, to enable both the franchisees’ business and our business to be successful. However, we and our franchisees may not always maintain a positive relationship or always interpret our agreements in the same way. Our failure to have positive relationships with our franchisees could individually or in the aggregate (including as a result of franchisees forming an independent association of franchisees) cause us to change or limit our business practices, which may make our business model less attractive to our franchisees or our members.

While revenue from franchisees are not concentrated among one party or a small number of parties, the success of our business does depend in large part on our ability to maintain contractual relationships with franchisees in profitable studios. A typical franchise agreement has a five-year term. As of December 31, 2020, our largest franchisee group accounted for approximately 1% of our franchisees sold. If we fail to maintain or renew our contractual relationships on acceptable terms, or if one or more of these significant franchisees were to become insolvent or otherwise were unwilling to pay amounts due to us, our business, reputation, results of operations and financial condition could be materially and adversely affected.

Franchise agreement termination.    Each franchise agreement is subject to termination by us, as the franchisor, in the event of a default, generally after expiration of applicable cure periods, although, under certain circumstances, a franchise agreement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise agreements are drafted broadly to provide that we may terminate the agreement in the event of a breach. Such breach may include,

 

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among other things, any failure by the franchisee to meet operating standards and franchisee actions that may threaten the licensed intellectual property. In some regions in which we operate, a franchisee may have a right to terminate its franchise agreement under certain circumstances.

Franchisee turnover.    There can be no guarantee of the retention in the future of any franchisees, including the top performing franchisees, or that we will maintain the ability to attract, retain and motivate sufficient numbers of franchisees of the same caliber. The quality of existing franchisee operations may be diminished by factors beyond our control, including franchisees’ failure or inability to hire or retain qualified managers and other personnel. Training of managers and other personnel may be inadequate. These and other such negative factors could materially and adversely affect our business.

Bankruptcy of franchisees.    A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise agreement(s). In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise agreement(s), development area(s) and/or franchisee lease/sublease pursuant to Section 365 under the U.S. bankruptcy code or similar laws in other countries, in which case there would be no further franchise fee payments from such franchisee, and we may not ultimately recover those payments in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.

Franchisee changes in control.    Our franchises are operated by independent business owners. Although we have the right to approve franchise owners, and any transferees, it can be difficult to predict in advance whether a particular franchise owner will be successful. If an individual franchise owner is unable to successfully establish, manage and operate the studio, the performance and quality of service of the studio could be adversely affected, which could reduce memberships and negatively affect our franchise fee revenue and brand image. Although our agreements prohibit “changes in control” of a franchisee without our prior consent as the franchisor, a franchise owner may desire to transfer a studio to a transferee franchisee. In addition, our franchise agreements in several regions, including the United States, provide that in the event of the death or disability of a franchisee (if a natural person) or a principal of a franchisee entity, the executors and representatives of the franchisee are required to transfer the relevant franchise agreements to a successor franchisee approved by the franchisor. In any transfer situation, the transferee may not be able to perform the former franchisee’s obligations under the franchise agreement and successfully operate the applicable studio. In such a case, the performance and quality of service of such studio could be adversely affected, which could also reduce memberships and negatively affect our franchise fee revenue and brand image.

Some of our franchisees are operating entities.    Franchisees may be natural persons or legal entities. Our franchisees that are operating companies (as opposed to limited purpose entities) are subject to business, credit, financial and other risks, which may be unrelated to the operation of their studios. These unrelated risks could materially and adversely affect a franchisee that is an operating company and its ability to service its members and maintain studio operations while making franchise fee payments, which in turn may materially and adversely affect our business and results of operations.

Risks Related to our Brand and Strategy

Our success depends substantially on the value of our brand.

Our success is dependent in large part upon our ability to maintain and enhance the value of our brand, including our studio members’ connection to our brand. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Our reliance on social media as a marketing strategy makes us particularly susceptible to widespread negative publicity.

 

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Incidents which could damage our brand may relate to our policies, the way we manage our relationships with our franchisees, our growth strategies, our development efforts or the ordinary course of our or our franchisees’ businesses. Other incidents that could be damaging to our brand may arise from events that are or may be beyond our control, such as:

 

   

actions taken (or not taken) by one or more franchisees or their employees relating to health (including responses to the COVID-19 pandemic), safety, welfare or otherwise;

 

   

data security breaches or fraudulent activities associated with our and our franchisees’ electronic payment systems;

 

   

litigation and legal claims;

 

   

third-party misappropriation, dilution or infringement or other violation of our intellectual property;

 

   

illegal activity targeted at us or others; or

 

   

conduct by individuals affiliated with us which could violate ethical standards or otherwise harm the reputation of our brand.

Consumer demand for our studios and our brand’s value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our studios, which would likely result in fewer memberships sold or renewed. If studio memberships decline, prospective franchisees may not open new studios, existing franchisees may not renew their franchise agreements and studio sales may decline, all of which would lower franchise fee revenue, which in turn could materially and adversely affect our business, results of operations and financial condition.

Our marketing strategy relies on the use of social media platforms and any negative publicity on such social media platforms may adversely affect the public perception of our brand which in turn could have a material and adverse effect on our business, results of operations and financial condition and the market price of shares of our common stock. In addition, our use of social media could subject us to fines or other penalties.

We rely on social media marketing, through Instagram, YouTube and Facebook, as a means to engage with our existing members as well as attract new members. Existing and new members alike interact with the brand both organically, through posts by the F45 Training community, as well as through dedicated F45 Training social media accounts. While the use of social media platforms allows us access to a broad audience of consumers and other interested persons, our use of, and reliance on, social media as a key marketing tool exposes us to significant risk of widespread negative publicity. Social media users generally have the ability to post information to social media platforms without filters or checks on accuracy of the content posted. Information concerning us or our brand may be posted on such platforms at any time. Such information may be adverse to our interests or may be inaccurate, each of which can harm our reputation and value of our brand. The harm may be immediate without affording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action against our studios, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well as physical damage to our studios. Social media platforms may be used to attack us, our information security systems and our reputation, including through use of spam, spyware, ransomware, phishing and social engineering, viruses, worms, malware, distributed denial of service attacks, password attacks, “Man in the Middle” attacks, cybersquatting, impersonation of employees or officers, abuse of comments and message boards, fake reviews, doxing and swatting. As such, the dissemination of information on social media platforms and other online platforms could materially and adversely affect our business, results of operations and financial condition, regardless of the information’s accuracy.

 

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In addition, our use of social media platforms as a marketing tool could also subject us to fines or other penalties. As laws and regulations, including those from the Federal Trade Commission, or FTC, and enforcement rapidly evolve to govern the use of these platforms, the failure by us, our employees, our franchisees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could materially and adversely impact our and our franchisees’ business, results of operations and financial condition or subject us to fines or other penalties.

If we fail to obtain and retain high-profile strategic partnership arrangements, or if the reputation of any of our partners is impaired, our business may suffer.

A principal component of our marketing program has been to collaborate with high-profile marketing partners, such as Mark Wahlberg, to help us extend the reach of our brand. We have entered into partnerships with several additional high profile individuals. Although we have collaborated with several well-known partners in this manner, we may not be able to attract and collaborate with new marketing partners in the future, including those who we are in current discussions with. In addition, if the actions of our partners were to damage their or our reputation, our partnerships may be less attractive to our current or prospective members. These relationships are also dependent on a positive working relationship between us and our partners. If a dispute arises between us and any of our partners, or if the relationship becomes damaged, the partnership may not be successful and could threaten our ability to continue entering into successful high-profile collaborations in the future. Further, we invest part of our marketing spend to attract these high-profile partners, and we anticipate that securing such partnerships will require significant equity grants, as is contemplated by partnerships that we are currently pursuing. Even after such significant investment, these partnerships may prove ineffective and fail to extend the reach of our brand. They may also have varying effects, if any, on the perception of the brand. Any of these failures by us or our partners could materially and adversely affect our business and revenue.

Our ability to continue to expand our ancillary product offerings is uncertain, and these new business lines are subject to risks.

 

We currently plan to continue the long-term growth of our business by, in part, capitalizing on member engagement by enhancing our offering of health and fitness related-related products, such as footwear and apparel, prepared meal plans, nutrition and supplements, and wearables, such as our patented LionHeart heart rate monitor, across our global network of studios. Because all of these offerings are currently in the planning stages or relatively new, it is difficult for us to anticipate the level of sales they may generate. Further, the market for such products is highly saturated and subject to consumer preferences, which may change from time to time. Certain product offerings, like prepared meals, nutrition and supplements, are also subject to unique risks like contamination and food-borne illnesses, and require certain food safety programs and compliance with food and health regulatory regimes. Such risks and added compliance could have a material impact on our business. There is no guarantee that our members will embrace our expanded ancillary product offerings or that we will be able to execute this growth strategy.

 

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Risks Related to Intellectual Property

We depend upon third-party licenses for the use of music to supplement our workouts and workout tutorials. An adverse change to, loss of, or claim that we or our franchisees do not hold necessary licenses may have an adverse effect on our business, results of operations and financial condition.

We use music to supplement our workouts. To secure the rights to use music to supplement our workouts and workout tutorials, we or our franchisees generally must obtain licenses from rights holders such as record labels, music publishers, performing rights organizations, collecting societies, artists and other copyright owners or their agents.

The process of obtaining licenses involves identifying and negotiating with many rights holders, some of whom are unknown or difficult to identify, and implicates a myriad of complex and evolving legal issues across many jurisdictions, including open questions of law as to when and whether particular licenses are needed and by whom. Rights holders also may attempt to take advantage of their market power to seek onerous financial terms from us. Our relationship with certain rights holders may deteriorate. Artists and/or artist groups may object and may exert public or private pressure on rights holders to discontinue or to modify license terms. Additionally, there is a risk that aspiring rights holders, their agents, or legislative or regulatory bodies will create or attempt to create new rights that could require us to enter into new license agreements with, and pay royalties to, newly defined groups of rights holders, some of which may be difficult or impossible to identify.

We require our franchisees to secure certain music licenses to use music in our studios and to supplement our workouts. Any failure to secure such licenses or to comply with the terms and conditions of such licenses may lead to third party claims or lawsuits and/or have an adverse effect on our business.

We or our franchisees generally need to obtain public performance licenses for the use of musical compositions in our studios and to supplement our workouts. In the United States, public performance rights for musical compositions are secured from music publishers, individual artists, or, more typically, through intermediaries known as performing rights organizations, or PROs, which (a) issue blanket licenses to copyright users for the public performance of compositions in their repertory, (b) collect royalties under those licenses, and (c) distribute such royalties to copyright owners. We require our franchisees to enter into and maintain requisite licenses for their use of musical compositions with our workouts from the appropriate PROs. We currently do not maintain such licenses. The royalty rates available from PROs today may not be available in the future. Licenses provided by two PROs, ASCAP and BMI, currently are governed by consent decrees, which were agreements between each of the two PROs, on the one hand, and by the U.S. Department of Justice, on the other hand, in an effort to curb anti-competitive conduct. Removal of, or changes to the terms or interpretation of, these agreements, could affect our franchisees’ ability to obtain licenses from these PROs on current and/or otherwise favorable terms, which could harm our business, results of operations and financial condition.

Additionally, licenses with PROs and collecting societies may not provide full coverage for performance of all of the musical compositions which we use in our studios in the countries in which we operate or which we may operate in the future. Some publishers, songwriters and other rights holders choose not to be represented by PROs or collecting societies, adversely affecting our ability to secure licensing arrangements for musical compositions that such rights holders own or control.

 

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In addition to public performance licenses, we generally may need to obtain additional music licenses in connection with the musical ‘daily mixes’ that we share with our franchisees. Any failure to obtain such licenses or to comply with the terms and conditions of such licenses may lead to third party claims or lawsuits and/or have an adverse effect on our business.

In addition to the licenses secured by our franchisees, we generally may need to obtain additional licenses from rights holders of musical compositions and sound recordings, which may include individual artists, record labels, PROs and/or music publishers and administrators. We note that we cannot compel any such rights holders to license their music to us, and the licenses we are able to obtain may not cover every right that we need. We also note that identifying all rights holders for a given musical work can be challenging and, given the high level of content concentration in the music industry, the market power of a few licensors and the lack of transparent ownership information for compositions and sound recordings, we may be unable to license a large amount of music or the music of certain popular artists, which could harm our business, results of operations and financial condition.

We received a demand letter alleging possible infringement of certain compositions and recordings from Universal Music Group, with whom we have entered into a tolling agreement and have ongoing discussions. We have previously received demand letters from the Australasian Performing Right Association and the Australian Mechanical Copyright Owners-Society, or APRA AMCOS, and the Phonographic Performance Company of Australia Ltd., or the PPCA, and entered into licensing arrangements with these rights holders. There can be no assurance that we will not have to go through a similar process with other rights holders. Further, there can be no assurance that any licensing arrangements entered into with APPRA AMCOS, PPCA or any other rights holder will address or eliminate potential liability for prior infringements or violations of rights.

Although we seek to comply with the statutory, regulatory and judicial frameworks with respect to the use of music in our studios and to supplement our workouts and workout tutorials, we cannot guarantee that we or our franchisees currently hold, or will always hold, every necessary right to use all of the music that is used in connection with our workouts and workout tutorials, and we cannot assure you that neither we nor our franchisees are infringing or violating any third-party intellectual property rights or that we or our franchisees will not do so in the future.

These challenges, and others concerning the use of music in connection with our workouts and workout tutorials, may subject us to significant music royalty payments and significant liability for copyright infringement, breach of contract or other claims, which may materially and adversely affect our business.

Our intellectual property rights, including patents, trademarks and trade names, may be infringed, misappropriated or challenged by others.

Our brand and related intellectual property are important to our continued success. We seek to protect our patents, trademarks, trade names, copyrights and other intellectual property by exercising our rights under applicable state, provincial, federal and international laws. Policing unauthorized use and other violations of our intellectual property rights is difficult and the steps we take may not prevent misappropriation, infringement or other violations of our intellectual property. In November 2019, we filed a statement of claim against BodyFit Training Company Pty Ltd. in Federal Court of Australia, New South Wales, for infringement of our technology patents. BodyFit Training Company Pty Ltd filed a counter claim to invalidate certain of our patents. We also filed in September 2020, a complaint against BodyFit Training USA Inc. in United States District Court for the District of Delaware for patent infringement. If we are unable to successfully protect such patents or our other intellectual property rights for any reason, or if any third party (including BodyFit Training or its affiliates) misappropriates, dilutes or infringes our intellectual property, the value of our brand may be harmed, which could have

 

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an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could cause membership levels to decline or make it more difficult to attract new members.

We may also from time to time be required to initiate litigation, as is the case with BodyFit Training and its affiliates to enforce our patents, trademarks, service marks and other intellectual property. Third parties may also assert that we have infringed, misappropriated or otherwise violated their intellectual property rights, which could lead to litigation against us. Litigation is inherently uncertain and could divert the attention of management, result in substantial costs and diversion of resources and negatively affect our membership sales and profitability regardless of whether we are able to successfully enforce or defend our rights.

We face risks, such as unforeseen costs and potential liability in connection with content we produce, license and distribute through our content delivery platform.

As a producer and distributor of content, we face potential liability for negligence, copyright and trademark infringement, or other claims based on the nature and content of materials that we produce, license and distribute. We also may face potential liability for content used in promoting our studios and workouts, including marketing materials. We may decide to remove content from our workouts, not to place certain content in our studios, or to discontinue or alter our production of certain types of content if we believe such content might not be well received by our members or could be damaging to our brand and business.

To the extent we do not accurately anticipate costs or mitigate risks, including for content that we obtain but ultimately does not appear on or is removed from our studios, or if we become liable for content we produce, license or distribute, our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our results of operations. We may not be indemnified against claims or costs of these types and we may not have insurance coverage for these types of claims, which may materially and adversely affect our business.

Risks Related to Technology and Privacy

We and our franchisees rely heavily on information systems, and any material failure, interruption or weakness may prevent us from effectively operating our business and damage our reputation.

We and our franchisees increasingly rely on information systems, including our technology-enabled platform through which we distribute workouts to our global franchisee base, point-of-sale processing systems and other information systems managed by third parties, to interact with our franchisees and members, book workouts and collect, maintain and store member information, billing information and other personally identifiable information, including for the operation of studios, collection of cash, legal and regulatory compliance, management of our supply chain, accounting, staffing, payment of obligations, ACH transactions, credit and debit card transactions and other processes and procedures. Our and our franchisees’ ability to efficiently and effectively manage our respective businesses depends significantly on the reliability and capacity of these systems, and any potential failure of third parties to provide quality uninterrupted service is beyond our control.

Our and our franchisees’ operations depend upon our ability, and the ability of our franchisees and third-party service providers (as well as their third-party service providers), to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, denial-of-service attacks and other disruptions. The failure of these systems to operate effectively, stemming from maintenance problems, upgrading or transitioning to new platforms, expanding our

 

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systems as we grow, a breach in security or other unanticipated problems, could result in interruptions to or delays in our business and member service and reduce efficiency in our operations. In addition, the implementation of technology changes and upgrades to maintain current and integrate new systems may also cause service interruptions, operational delays due to the learning curve associated with using a new system, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. If our information systems, or those of our franchisees and third-party service providers (as well as their third-party service providers), fail and our or our partners’ third-party back-up or disaster recovery plans are not adequate to address such failures, our revenue and profits could be reduced and the reputation of our brand and our business could be materially and adversely affected.

The failure to successfully implement our new enterprise resource planning, or ERP, system could adversely impact our business and results of operations.

We are currently in the process of implementing a new ERP system to handle the business and financial processes within our operations and corporate functions. The ERP system is a system of integrated applications used to manage our business and automate many functions related to financial reporting, human resources and other services. We expect the implementation to be completed in 2021. ERP implementations are complex and time-consuming projects that require transformations of business and finance processes, and any such transformations involve risks inherent in conversion to a new system. These risks include loss of information, the compromise of data integrity and control systems and the potential disruption to our normal business operations and financial reporting processes. The implementation process may be disruptive if the ERP system does not work as planned or if we experience issues relating to the implementation. We also may need to hire consultants or additional personnel for the implementation and post-implementation activities, which can continue for multiple years.

Following implementation of the ERP system, we may experience periodic or prolonged disruption to its financial functions arising out of the system conversion, general use of the system, other periodic upgrades or updates, or other external factors that are outside of our control. Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected and our ability to assess those controls adequately could be delayed. If we experience interruptions in service or operational difficulties as a result of the implementation, and are unable to effectively manage our business during or following the implementation of the ERP system, our business, financial condition and results of operations could be harmed.

If we or our franchisees fail to properly maintain the confidentiality and integrity of our data, our reputation and business could be materially and adversely affected.

In the ordinary course of business, we and our franchisees transmit and collect studio member and employee data, including home address, gender, dates of birth and other highly sensitive personally identifiable information in information systems that we maintain and in those maintained by franchisees and third parties with whom we contract to provide services. We also collect personal member information through the use of our LionHeart heart rate monitors. Some of these data are sensitive and could be an attractive target of a criminal attack by malicious third parties with a wide range of motives and expertise, including lone wolves, organized criminal groups, “hacktivists,” disgruntled current or former employees and others. The integrity and protection of member and employee data are critical to us.

Despite the security measures we have in place to comply with applicable laws and rules, our facilities and systems, and those of our franchisees and third-party service providers (as well as their

 

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third-party service providers), may be vulnerable to security breaches, acts of cyber terrorism or sabotage, vandalism or theft, computer viruses, loss or corruption of data or programming or human errors or other similar events. Furthermore, the size and complexity of our information systems, and those of our franchisees and our third-party vendors (as well as their third-party service providers), make such systems potentially vulnerable to security breaches from inadvertent or intentional actions by our employees, franchisees or vendors, or from attacks by malicious third parties. Because such attacks are increasing in sophistication and change frequently in nature, we, our franchisees and our third-party service providers may be unable to anticipate these attacks or implement adequate preventative measures, and any compromise of our systems, or those of our franchisees and third-party vendors (as well as their third-party service providers), may not be discovered and remediated promptly. Changes in consumer behavior following a security breach or perceived security breach, act of cyber terrorism or sabotage, vandalism or theft, computer virus, loss or corruption of data or programming or human error or other similar event affecting a competitor, large retailer or financial institution may materially and adversely affect our business.

Additionally, the handling of personally identifiable information by our or our franchisees’ businesses is regulated at the federal, state and international levels. Federal, state and international agencies may also consider and implement from time to time new privacy and security requirements that apply to our businesses. Compliance with contractual obligations and evolving privacy and security laws, requirements and regulations may result in cost increases due to necessary systems changes, new limitations or constraints on our business models and the development of new administrative processes. They also may impose further restrictions on our handling of personally identifiable information that are housed in one or more of our or our franchisees’ databases, or those of our third-party service providers. Actual or perceived noncompliance with privacy laws or an actual or perceived security breach involving the misappropriation, loss or other unauthorized disclosure of personal, sensitive or confidential information, whether by us or by one of our franchisees or vendors, could have material adverse effects on our and our franchisees’ business, operations, brand, reputation and financial condition, including decreased revenue, material fines and penalties, litigation, increased financial processing fees, compensatory, statutory, punitive or other damages, adverse actions against our licenses to do business and injunctive relief by court or consent order. Despite our efforts, the handling of personally identifiable information may not be in compliance with applicable law, or this information could be disclosed or lost due to a hacking event or unauthorized access to our information system, or through publication or improper disclosure, any of which could affect the value of our brand.

The occurrence of cyber incidents, or a deficiency in cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of confidential information, and/or damage to our employee and business relationships and reputation, all of which could harm our brand and our business.

We could be subject to a cyber-incident or other adverse event that threatens the confidentiality, integrity or availability of information resources, including intentional attacks or unintentional events where parties gain unauthorized access to systems to disrupt operations, corrupt data or steal confidential information about customers, franchisees, vendors and employees. A number of retailers and other companies have recently experienced serious cyber incidents and breaches of their information technology systems. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. The three primary risks that could directly result from the occurrence of a cyber-incident include operational interruption, damage to the relationship with members and franchisees and private data exposure, which each in turn could create additional risks and exposure.

In the ordinary course of business, we and our franchisees transmit and collect personally identifiable data regarding our members. We also maintain important internal company data, such as

 

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personally identifiable information about our employees and franchisees and information relating to our operations. Our use of personally identifiable information is regulated by foreign, federal and state laws, as well as by certain third-party agreements. As privacy and information security laws and regulations and contractual obligations with third parties evolve, we may incur additional costs to ensure that we remain in compliance with those laws and regulations and contractual obligations. If our security and information systems are compromised or if our employees or franchisees fail to comply with these laws, regulations, or contract terms, and this information is obtained by unauthorized persons or used inappropriately, it could materially and adversely affect our reputation and could disrupt our operations and result in costly litigation, judgments, or penalties arising from violations of federal and state laws and payment card industry regulations.

Under certain laws, regulations and contractual obligations, a cyber-incident could also require us to notify customers, employees or other groups of the incident or could result in adverse publicity, loss of sales and profits, or an increase in fees payable to third parties. We could also incur penalties or remediation and other costs that could materially and adversely affect the operation of our business and results of operations.

We are subject to payment processing risk.

We and our franchisees use third parties to process payments from our members for our products and services. In addition, we use third parties to process payments from our franchisees. To the extent there are disruptions in the payment processing systems that we and our franchisees use, such as delays in receiving payments from payment processors, or changes to rules or regulations concerning payment processing, our revenue and results of operations could be adversely impacted. Further, if the third party processors we and our franchisees use become unwilling or unable to continue processing payments on our or their behalf, we and our franchisees would have to find alternative methods of collecting payments, which could adversely impact member retention. In addition, from time to time, we encounter fraudulent use of payment methods, which could impact our results of operation and, if not adequately controlled and managed, could create negative consumer perceptions of our service.

Some of our products and services contain open source software, which may pose particular risks to our proprietary software, technologies, products and services in a manner that could harm our business.

We use open source software in our products and services and anticipate using open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of the source code to such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license, or cease offering the implicated products or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require us to expend significant additional research and development resources, and we cannot guarantee that we will be successful.

Additionally, the use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or

 

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controls on the origin of software. There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have processes to help alleviate these risks, including a review process for screening requests from our developers for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our products and services. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Our Suppliers and Supply Chain

Our dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and could materially and adversely affect our revenue and gross profit.

Equipment and certain products and services used in our studios, including our exercise equipment, components of our tech packs and point-of-sale software and hardware, are sourced from third-party suppliers. We purchase substantially all of our gym equipment from a single supplier in China. In addition, we rely on third-party suppliers to manage and maintain our websites and online membership processes. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate our business efficiently and consistently meet our business requirements. The ability of these third-party suppliers to successfully provide reliable and high-quality supplies and services is subject to technical and operational uncertainties that are beyond our control, including, for our overseas suppliers, vessel availability and port delays or congestion. Any disruption to our suppliers’ operations could impact our supply chain and our ability to service our existing studios and open new studios on time or at all and thereby generate revenue. If we lose such suppliers or our suppliers encounter financial hardships unrelated to the demand for our equipment or other products or services, we may not be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to new suppliers would be time consuming and expensive and may result in interruptions in our operations. If we should encounter delays or difficulties in securing the quantity of equipment we or our franchisees require to open new and refurbish existing studios, our suppliers encounter difficulties meeting our and our franchisees’ demands for products or services, our websites experience delays or become impaired due to errors in the third-party technology or there is a deficiency, lack or poor quality of products or services provided, or there is damage to the value of one or more of our vendors’ brands, our ability to serve our members and grow our brand would be interrupted. If any of these events occurs, it could have a material adverse effect on our business and operating results.

Increases in tariffs and trade restrictions on equipment we source from China could have an adverse impact on our business, results of operations and financial condition.

We purchase substantially all of our gym equipment from a single supplier in China. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain goods and materials. For example, the United States has imposed tariffs on specified products imported from China following the U.S. Trade Representative Section 301 Investigation. These tariffs have had and may have an even greater impact on the cost of our gym equipment depending on the outcome of the current trade negotiations, which have been protracted and recently resulted in increases in U.S. tariff rates on specified products from China, including our gym equipment and equipment included in our World Packs. Increases in the cost of our gym equipment, including that

 

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included in our World Packs, could have a material effect on our gross margins as we may not be able to pass such costs onto our franchisees. In addition, if trade tensions between the United States and China continue to escalate, we may experience delays or disruptions in the delivery of our gym equipment to our franchisees, which could adversely impact our business, results of operations and financial condition.

We have limited control over our suppliers, manufacturers and logistics partners, which may subject us to significant risks, including the potential inability to produce or obtain quality products on a timely basis or in sufficient quantity.

We have limited control over our suppliers, manufacturers and logistics partners, which subjects us to risks, such as the following:

 

   

inability to satisfy demand for our World Pack products or other products or services that we currently offer in studios or may offer in the future;

 

   

reduced control over delivery timing and product reliability;

 

   

reduced ability to monitor the manufacturing process and components used in our World Pack products and other products;

 

   

limited ability to develop comprehensive manufacturing specifications that take into account any materials shortages or substitutions;

 

   

variance in the manufacturing capability of our third-party manufacturers;

 

   

price increases;

 

   

failure of a significant supplier, manufacturer, or logistics partner to perform its obligations to us for technical, market or other reasons;

 

   

difficulties in establishing additional supplier, manufacturer, or logistics partner relationships if we experience difficulties with our existing suppliers, manufacturers or logistics partners;

 

   

shortages of materials or components;

 

   

misappropriation of our intellectual property;

 

   

exposure to natural catastrophes, political unrest, terrorism, labor disputes and economic instability resulting in the disruption of trade from foreign countries in which our World Pack products and other products are manufactured or the components thereof are sourced;

 

   

changes in local economic conditions in the jurisdictions where our suppliers, manufacturers and logistics partners are located;

 

   

the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, tariffs, taxes and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds; and

 

   

insufficient warranties and indemnities on components supplied to our manufacturers or performance by our partners.

Risks Related to Our Indebtedness

We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which would adversely affect our results of operations and financial condition.

Our ability to make scheduled payments on, or to refinance our obligations under, our indebtedness will depend on our subsidiaries’ and our franchisees’ future operating performance and

 

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on economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We can provide no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to satisfy our obligations under our indebtedness or to fund our other needs. In order for us to satisfy our obligations under our indebtedness, we must continue to execute our business strategy. If we are unable to do so, we may need to refinance all or a portion of our indebtedness on or before maturity. We can provide no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

The terms of our indebtedness could adversely affect our business.

We are party to (i) a senior secured Credit Agreement, dated as of September 18, 2019, or, as amended by the First Amendment to Credit Agreement dated June 23, 2020 and the Second Amendment to Credit Agreement dated October 6, 2020, 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 $7 million revolving credit facility, or the Revolving Facility, and a $35 million term loan facility, or the Term Facility, (ii) a Subordinated Credit Agreement, or the Subordinated Credit Agreement, with Alter Domus (US) LLC, as Administrative Agent and Australian Security Trustee, and the lenders party thereto, consisting of a $125.0 million term loan facility, or the Subordinated Term Facility and (iii) a Subordinated Convertible Credit Agreement, or the Convertible Credit Agreement, with certain holders party thereto, pursuant to which we issued $100.0 million of convertible notes. The Secured Credit Agreement, the Subordinated Credit Agreement and the Convertible Credit Agreement contain restrictive covenants that, among others, limit our ability to:

 

   

pay dividends and make distributions and repurchase stock;

 

   

engage in transactions with affiliates;

 

   

create liens;

 

   

incur indebtedness not under the Secured Credit Agreement;

 

   

engage in sale-leaseback transactions;

 

   

make investments;

 

   

make loans and guarantee obligations of other persons;

 

   

enter into swap agreements;

 

   

amend material agreements and organizational documents and enter into agreement affecting ability to pay dividends;

 

   

maintain or contribute to a defined employee benefit plan or arrangement that is not subject to the laws of the U.S.; and

 

   

sell or dispose of all or substantially all of our assets and engage in specified mergers or consolidations.

In addition, the Secured Credit Agreement and the Subordinated Credit Agreement contain certain financial covenants, including the maintenance of a consolidated total leverage ratio and a consolidated fixed charge coverage ratio. Our ability to borrow under the Revolving Facility depends on our compliance with these financial covenants. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet these financial covenants. We cannot assure you that we will meet these financial covenants in the future, or that the lenders will waive any failure to meet these financial covenants.

 

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Our obligations to the holders of our Senior Credit Agreement and Subordinated Credit Agreement are secured by a security interest in substantially all of our assets, if we default on those obligations, the holders of such indebtedness could foreclose on our assets.

Our obligations under the Secured Credit Agreement and the related transaction documents are secured on a first lien basis by a security interest in substantially all of our assets, and our obligations under the Subordinated Credit Agreement are secured on a second lien basis by a security interest in substantially all of our assets. As a result, if we default on our obligations under the Senior Credit Agreement or the Subordinated Credit Agreement, the collateral agent on behalf of the lenders could foreclose on the security interests and liquidate some or all of our assets, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations and you may lose all or part of your investment.

Risks Related to Our Common Stock and This Offering

There is currently no public market for shares of our common stock and an active trading market for our common stock may never develop following this offering.

Prior to this offering, there has been no market for shares of our common stock. Although we have applied to list our common stock on the NYSE under the symbol “FXLV” an active trading market for our common stock may never develop or, if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for our common stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of common stock; or

 

   

the price that our stockholders may obtain for their common stock.

If an active market for our common stock with meaningful trading volume does not develop or is not maintained, the market price of our common stock may decline materially below the offering price and you may not be able to sell your shares.

In addition, we currently anticipate that up to 3% of the shares of common stock offered hereby by us will, at our request, be offered to retail investors through Robinhood Financial, LLC, or Robinhood, as a selling group member, via its online brokerage platform. Robinhood is a platform that has only recently been used for initial public offerings, and there may be risks associated with the use of the Robinhood platform that we cannot foresee, including risks related to the technology and operation of the platform, and the publicity and the use of social media by users of the platform that we cannot control.

Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We, the selling stockholder and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

   

additional impacts on our business from the COVID-19 pandemic;

 

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market conditions in the broader stock market;

 

   

actual or anticipated fluctuations in our quarterly financial and operating results;

 

   

introduction of new products or services by us or our competitors;

 

   

issuance of new or changed securities analysts’ reports or recommendations;

 

   

results of operations that vary from expectations of securities analysis and investors;

 

   

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

   

strategic actions by us or our competitors;

 

   

announcement by us, our competitors or our vendors of significant contracts or acquisitions;

 

   

sales, or anticipated sales, of large blocks of our stock;

 

   

additions or departures of key personnel;

 

   

regulatory, legal or political developments;

 

   

public response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

litigation and governmental investigations;

 

   

changing economic conditions;

 

   

changes in accounting principles;

 

   

default under agreements governing our indebtedness;

 

   

exchange rate fluctuations; and

 

   

other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

Our current major stockholders will continue to have significant control over our company after this offering, which could limit your ability to influence the outcome of matters subject to stockholder approval, including a change of control.

Our current major stockholders will continue to have significant control over our company after this offering, which could limit your ability to influence the outcome of matters subject to stockholder approval, including a change of control. These stockholders, including certain of our directors and executive officers, will beneficially own approximately 72.4% of our outstanding common stock after this offering (or approximately 69.3% if the underwriters exercise in full their option to purchase additional shares of common stock). As a result, after this offering, such stockholders, if they act

 

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together, will be able to influence or control matters subject to stockholder approval, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions, and would have the ability to control the management and affairs of our company. They may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their shares of our common stock as part of a sale of our company and could affect the market price of our common stock.

We are an “emerging growth company” and a “smaller reporting company” and as a result of the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and a “smaller reporting company,” as defined under the Exchange Act. As an emerging growth company and a smaller reporting company, we may follow reduced disclosure requirements and do not have to make all of the disclosures that public companies that are not emerging growth companies or smaller reporting companies do. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (c) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC, which means the market value of our voting and non-voting common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th (and we have been a public company for at least 12 months and have filed at least one annual report on Form 10-K). For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

presenting only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

reduced disclosure about our executive compensation arrangements;

 

   

exemption from the requirements to hold non-binding stockholder advisory votes on executive compensation or golden parachute arrangements;

 

   

extended transition periods for complying with new or revised accounting standards;

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and

 

   

exemption from complying with any requirement that may be adopted by the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis).

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards; and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We are also a “smaller reporting company,” as defined in the Exchange Act, and we will remain a smaller reporting company until the fiscal year following the determination that our voting and

 

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non-voting common stock held by non-affiliates is more than $250 million measured on the last business day of our second fiscal quarter, or our annual revenue is more than $100 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter. Similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosure and have certain other reduced disclosure obligations, including, among other things, being required to provide only two years of audited financial statements and not being required to provide selected financial data, supplemental financial information or risk factors.

We may choose to take advantage of some, but not all, of the available exemptions for emerging growth companies and smaller reporting companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our shares price may be more volatile.

The offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

Prior to this offering, there has been no market for our common stock. The offering price per share of our common stock offered by this prospectus was negotiated among the selling stockholder, the underwriters and us. Factors considered in determining the price of our common stock include:

 

   

the history and prospects of companies whose principal business is similar;

 

   

market valuations of those companies;

 

   

our capital structure;

 

   

general conditions of the securities markets at the time of this offering; and

 

   

other factors that we and they deemed relevant.

The offering price may not accurately reflect the value of our common stock and may not be realized upon any subsequent disposition of the shares.

Participation in this offering by one or more funds affiliated with Caledonia could reduce the public float for our shares of common stock.

One or more funds affiliated with Caledonia have indicated an interest in purchasing an aggregate of up to $100.0 million in shares of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, one or more funds affiliated with Caledonia could determine to purchase more, less or no shares in this offering or the underwriters could determine to sell more, less or no shares to one or more funds affiliated with Caledonia. The underwriters will receive the same discount on any of our shares of common stock purchased by one or more funds affiliated with Caledonia as they will from any other shares of common stock sold to the public in this offering.

If one or more funds affiliated with Caledonia are allocated all or a portion of the shares in which it has indicated an interest in this offering or more, and purchase any such shares, such purchase could reduce the available public float for our shares if such entities hold these shares long term.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts.

 

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Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the trading price of our shares would likely be negatively impacted. In the event securities or industry analysts initiated coverage, and one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $16.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, you will experience immediate dilution of $15.20 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. See “Dilution” for more detail.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our certificate of incorporation and bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

Future sales of our common stock in the public market could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 90,246,682 shares of common stock. This includes 18,750,000 shares that we are selling in this offering, as well as the 1,562,500 shares that the selling stockholder is selling, which may be resold in the public market immediately, and assumes no exercises of outstanding options and no exercise of the underwriters’ option to purchase additional shares from us. Substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under agreements executed in connection with this offering. These shares will, however, be able to be resold after the expiration of the lock-up agreement as described in the “Shares Eligible for Future Sale” section of this prospectus.

We also intend to file one or more registration statements on Form S-8 under the Securities Act of 1933, as amended, or the Securities Act, to register all shares of common stock that we may issue under our 2021 Plan, as well as the resale of 2,738,648 shares of common stock underlying RSUs held by Mr. Wahlberg. We expect that the initial registration statement on Form S-8 will cover 7,738,648 shares. In addition, we are party to a stockholders agreement with certain investors that provides for demand registration rights that could require us in the future to file registration statements in connection with sales of our stock by such investors. Such sales could be significant. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting (Conflicts of Interest)” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

 

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Since we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We have never declared or paid cash dividends on our capital stock, and we do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

Our ability to raise capital in the future may be limited.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. However, the lapse or waiver of the lock up restrictions discussed above or any sale or perception of a possible sale by our stockholders, and any related decline in the market price of our common stock, could impair our ability to raise capital. Separately, additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

We are a holding company and depend on the cash flow of our subsidiaries.

We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets and intellectual property. Consequently, our cash flow and our ability to meet our obligations and pay any future dividends to our stockholders depends upon the cash flow of our subsidiaries and their ability to make payments, directly or indirectly, to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, results of operations and financial condition.

Our management will have broad discretion in the use of the net proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion in the application of the net proceeds we receive in this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations, financial condition and prospects could be harmed, and the market price for our common stock could decline.

 

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Risks Related to Provisions in Our Charter Documents

Provisions of our organizational documents could make an acquisition of our business more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Our amended and restated certificate of incorporation and bylaws that will be in effect on the closing of this offering will contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include:

 

   

a classified board of directors, with members of each class serving staggered three-year terms, and the ability of stockholders to remove directors only for cause;

 

   

advance notice requirements for stockholder proposals and director nominations;

 

   

the ability of the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

   

the ability of our board of directors to issue new series of, and designate the terms of, preferred stock, without stockholder approval, which could be used to, among other things, institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors;

 

   

no cumulative voting in the election of directors;

 

   

limitations on the ability of stockholders to call special meetings and to take action by written consent; and

 

   

supermajority vote for stockholders to amend our amended and restated certificate of incorporation or amended and restated bylaws.

In addition, Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.”

Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description of Capital Stock.”

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation which will become effective prior to the closing of this offering will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum, to the fullest extent permitted by law, for:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a claim of breach of a fiduciary duty by any of our directors, officers, employees or agents or our stockholders;

 

   

any action asserting a claim arising pursuant to any provision of the DGCL;

 

   

any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or bylaws;

 

   

any action asserting a claim governed by the internal affairs doctrine.

 

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shall be the Court of Chancery of the State of Delaware (or another state court or the federal court located within the State of Delaware if the Court of Chancery does not have or declines to accept jurisdiction), in all cases subject to the court’s having jurisdiction over indispensable parties named as defendants. In addition, our amended and restated certificate of incorporation provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act but that the forum selection provision will not apply to claims brought to enforce a duty or liability created by the Exchange Act. Although we believe these provisions benefit us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against us or our directors and officers. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and operating results. For example, under the Securities Act, federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to this exclusive forum provision, but will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

Risks Related to Our Global Operations

Economic, political and other risks associated with our international operations could adversely affect our profitability and international growth prospects.

As of June 30, 2021, we had 2,801 Total Franchises Sold in 63 countries around the world. Our international operations are subject to a number of risks inherent to operating in foreign countries, and any expansion of our international operations will increase the impact of these risks. These risks include, among others:

 

   

inadequate brand infrastructure within foreign countries to support our international activities;

 

   

inconsistent regulation or sudden policy changes by foreign agencies or governments;

 

   

the collection of royalties from foreign franchisees;

 

   

difficulty of enforcing contractual obligations of foreign franchisees;

 

   

increased costs in maintaining international franchise and marketing efforts;

 

   

problems entering international markets with different cultural bases and consumer preferences;

 

   

political and economic instability of foreign markets;

 

   

compliance with laws and regulations applicable to international operations, such as the Foreign Corrupt Practices Act and regulations promulgated by the Office of Foreign Asset Control;

 

   

actual or perceived threats to public health due to the COVID-19 pandemic;

 

   

fluctuations in foreign currency exchange rates; and

 

   

operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations relating to contract and intellectual property rights.

As a result, new studios facing these risks in international markets may be less successful than studios in our existing markets. Further, effectively managing growth can be challenging, particularly as

 

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we continue to expand into new international markets where we must balance the need for flexibility and a degree of autonomy for local management against the need for consistency with our mission and standards.

Fluctuations in currency exchange rates could negatively impact our business.

We transact business in various currencies other than the U.S. dollar and have significant royalties and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. A substantial portion of our international royalties and expenses are denominated in local currencies, including Australian dollars, euros, British pounds, Canadian dollar and Singaporean dollar, which fluctuate against the U.S. dollar. Since we derive significant royalties from our international operations, but incur the majority of our costs in the United States, the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact on our business.

We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.

The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain technologies. Our products may be subject to U.S. export controls, which may require submission of a product classification and annual or semi-annual reports. Compliance with applicable regulatory requirements regarding the export of our products and services may create delays in the introduction of our products and services in international markets, prevent our international members from accessing our products and services, and, in some cases, prevent the export of our products and services to some countries altogether.

Furthermore, U.S. export control laws and economic sanctions prohibit the provision of products and services to countries, governments and persons targeted by U.S. sanctions. Even though we take precautions to prevent our products from being provided to targets of U.S. sanctions, our products and services, including our firmware updates, could be provided to those targets or provided by our members. Any such provision could have negative consequences, including government investigations, penalties, reputational harm. Our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our revenue.

We could be subject to future enforcement action with respect to compliance with governmental export and import controls and economic sanctions laws that result in penalties, costs and restrictions on export privileges that could have an adverse effect on our business, results of operations and financial condition.

Failure to comply with anti-corruption and anti-money laundering laws, including the Foreign Corrupt Practices Act and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.

We operate a global business and may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We are subject to the Foreign Corrupt Practices Act, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act and possibly other anti-bribery and anti- money laundering laws in countries in which we conduct activities. These laws that prohibit companies and their employees and third-party intermediaries from corruptly promising, authorizing, offering, or providing, directly or indirectly, improper payments or anything of value to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. In many foreign countries, including countries in

 

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which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. We face significant risks if we or any of our directors, officers, employees, agents or other partners or representatives fail to comply with these laws and governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, results of operations and financial condition.

Our employees, contractors and agents, and companies to which we outsource certain of our business operations, may take actions in violation of our policies or applicable law. Any such violation could have an adverse effect on our reputation, business, operating results and prospects. Any violation of the FCPA, other applicable anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have a materially adverse effect on our reputation, business, results of operations and prospects. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

General Risks

We have identified certain material weaknesses in our internal control over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.

In the course of preparing our financial statements, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses related to a failure to properly design our financial closing and reporting process to record, review and monitor compliance with generally accepted accounting principles for transactions on a timely basis. This includes an inadequate level of precision in management’s reviews of accounting documentation and journal entries, including a lack of evidence to support that a review had been performed. In addition, a lack of segregation of duties existed in certain key financial reporting processes, including a lack of separation between the preparer and reviewer of journal entries; individual users with administrative access to the general ledger, billing and payroll systems also having access to post journal entries; and insufficient implementation of the automated approval hierarchy for invoices in our billing system to ensure reviews were being performed by the appropriate personnel. Lastly, a lack of formal documentation of policies and internal controls being followed by us existed, including, but not limited to, entity-level controls involving risk assessment procedures and conclusions, tools to prevent a cybersecurity breach and controls designed to prevent or detect fraud. We have concluded that these material weaknesses in our internal control over financial reporting occurred because, prior to this offering, we were a private company and did not have the necessary business processes, systems, personnel and related internal controls necessary to satisfy the accounting and financial reporting requirements of a public company.

We believe we have taken the necessary actions to substantially address each of the material weaknesses discussed above, and we plan to take additional steps to improve our accounting function. However, we may not be able to fully remediate these material weaknesses until it can be confirmed that such remedial measures have been operating effectively for a sufficient period of time. Further, we cannot assure you that any such actions will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or that they will prevent or

 

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avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

Our planned growth could place strains on our management, employees, information systems and internal controls, which may materially and adversely impact our business.

Over the past several years, we have experienced significant growth in our business activities and operations, including an increase in the number of system-wide studios. Our past expansion has placed, and our planned future expansion may place, significant demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively could seriously harm our business. To be successful, we will need to continue to implement and improve our management information systems and our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, legal, human resources, risk management, marketing, technology, sales and operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management attention, and we may not realize a return on our investment. In addition, we believe the culture we foster at our studios is an important contributor to our success. However, as we expand, we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our expanded operations. These risks may be heightened as our business continues to scale. Our failure to successfully keep pace with our planned expansion of studios could materially and adversely impact our business.

We and our franchisees could be subject to claims related to health and safety risks to members that arise at our studios.

Use of our studios poses potential health and safety risks to members or guests through physical exertion and use of our services and facilities, including exercise equipment. Certain of such risks have been exacerbated as a result of COVID-19. Claims have been and in the future might be asserted against our franchisees and us for injuries suffered by or death of members or guests while exercising and using the facilities at a studio. We may not be able to successfully defend such claims, and any such claims could materially damage our brand and the public perception of our brand. We also may not be able to maintain our general liability insurance on acceptable terms in the future or maintain a level of insurance that would provide adequate coverage against such potential claims. In the past, we may not have maintained the level of general liability insurance coverage appropriate for a business of our scale, and historical claims may be brought against us. Depending upon the outcome of any such

 

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claims, whether historical or not, these matters may have a material adverse effect on our business, results of operations and financial condition.

We depend on our senior management team and other key employees, and the underperformance or loss of one or more key personnel or an inability to attract, hire, integrate and retain highly skilled personnel could have an adverse effect on our business, results of operations and financial condition.

Our success depends largely upon the continued services and performance of our senior management team and other key employees. We rely on our executives in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying growth opportunities and leading general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. Our training professionals and sports scientists in our F45 Athletics Department are also imperative to our success, and we rely on them to develop safe, effective and fun workouts for our members based on our algorithm. If we are unable to attract or retain creative and experienced training professionals and sports scientists, we may not be able to generate workout content on a scale or of a quality sufficient to retain or grow our membership base. The underperformance or loss of one or more of our executive officers or other key employees, including any of our training professionals or scientists, could have a serious adverse effect on our business. The replacement of one or more of our executive officers or other key employees would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

To continue to execute our growth strategy, we also must identify, hire and retain highly skilled personnel. We might not be successful in maintaining our corporate culture and continuing to attract and retain qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material adverse effect on our business, results of operations and financial condition.

We have a limited operating history with which to evaluate and predict membership retention rates.

The majority of our members may cancel their subscriptions at any time. We have limited historical data with respect to rates of member membership renewals, so we may be unable to accurately predict customer renewal rates. Additionally, prior renewal rates may not accurately predict future member renewal rates for a variety of reasons, such as members’ dissatisfaction with our offerings and the cost of our subscriptions, macroeconomic conditions, or new offering introductions by us or our competitors. If our members do not renew their memberships, our revenue may decline and our business will suffer.

Furthermore, in the future, we may replace or modify current membership models, which could result in additional costs. It is unknown how our members will react to new membership models and whether the costs or logistics of implementing these models will adversely impact our business. If the adoption of new membership models adversely impacts our member relationships, then member retention, member growth, our business, results of operations and financial condition could be harmed.

Acquisitions may expose us to significant risks and additional costs.

Acquisitions involve risks that the businesses acquired will not perform as expected and that judgments concerning the value, strengths and weaknesses of acquired businesses will prove wrong. We may not accurately assess the value, strengths, weaknesses or potential profitability of an acquisition target, and our acquisition strategy for a particular business may prove to be unsuccessful or expose us to additional risks. We may become liable for certain unforeseen pre-acquisition liabilities of an acquired business, including, among others, tax liabilities, environmental liabilities, contingent liabilities and liabilities for employment practices, and these liabilities could be significant. In addition, an acquisition could result in the impairment of client relationships and other acquired assets such as goodwill. We may also incur costs and experience inefficiencies to the extent an acquisition expands the industries, products, markets or geographies in which we operate due to our limited exposure to

 

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and experience in a given industry, market or region. Acquisitions may require that we incur additional debt to finance the transaction, which could be substantial and limit our operating flexibility or, alternatively, acquisitions may require that we issue stock as consideration, which could dilute share ownership. Acquisitions can also involve post-transaction disputes regarding a number of matters, including a purchase price or working capital adjustment, earn-out or other contingent payments, environmental liabilities or other obligations. Any acquisition strategy will place significant demands on our management’s time, which may divert their attention from our day-to-day business operations, and may lead to significant due diligence and other expenses regardless of whether we pursue or consummate any acquisition. We may also not be able to manage our growth through acquisitions due to the number and the diversity of the businesses we acquire or for other reasons. If any of these risks were to occur, our business, financial condition and results of operations may be adversely affected.

Any inability to successfully integrate acquisitions, or realize their anticipated benefits, could have a material adverse effect on us.

Acquisitions will require that we integrate into our existing operations separate companies that historically operated independently or as part of another, larger organization, and had different systems, processes and cultures. Acquisitions may require integration of finance and administrative organizations and involve exposure to different legal and regulatory regimes in jurisdictions in which we have not previously operated.

We may not be able to successfully integrate any business we acquire, or may not be able to do so in a timely, efficient or cost-effective manner. Our inability to effectively complete the integration of new businesses on schedule and in an orderly manner could increase costs and lower profits. Risks involved with the successful integration of an acquired business include, but are not limited to:

 

   

diverting the attention of our management and that of the acquired business;

 

   

merging or linking different accounting and financial reporting systems and systems of internal controls and, in some instances, implementing new controls and procedures;

 

   

merging computer, technology and other information networks and systems, including enterprise resource planning systems;

 

   

assimilating personnel, human resources and other administrative departments and potentially contrasting corporate cultures;

 

   

incurring or guaranteeing additional indebtedness;

 

   

disrupting relationships with or losses of key clients and suppliers of our business or the acquired business;

 

   

interfering with, or loss of momentum in, our ongoing business or that of the acquired company;

 

   

failure to retain our key personnel or that of the acquired company; and

 

   

delays or cost-overruns in the integration process.

Our inability to manage our growth through acquisitions, including the integration process, and to realize the anticipated benefits of an acquisition could have a material adverse effect on our business, financial condition and results of operations.

Changes in legislation in U.S. and foreign taxation of international business activities or the adoption of other tax reform policies, as well as the application of such laws, could adversely impact our business, results of operations and financial condition.

Recent or future changes to U.S., UK, Australian and other foreign tax laws could impact the tax treatment of our foreign earnings. We generally conduct our international operations through wholly

 

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owned subsidiaries, branches, or representative offices and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Further, we are in the process of implementing an international structure that aligns with our financial and operational objectives as evaluated based on our international markets, expansion plans and operational needs for headcount and physical infrastructure outside the United States. The intercompany relationships between our legal entities are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Although we believe we are compliant with applicable transfer pricing and other tax laws in the United States, the United Kingdom and other relevant countries, due to changes in such laws and rules, we may have to modify our international structure in the future, which will incur costs, may increase our worldwide effective tax rate, and may adversely affect our results of operations and financial condition. In addition, significant judgment is required in evaluating our tax positions and determining our provision for income taxes.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views with respect to, among other things, the manner in which the arm’s-length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property.

If U.S., UK, Australian or other foreign tax laws further change, if our current or future structures and arrangements are challenged by a taxing authority, or if we are unable to appropriately adapt the manner in which we operate our business, we may have to undertake further costly modifications to our international structure and our tax liabilities and operating results may be adversely affected.

We are subject to obligations to collect and remit sales tax and other taxes, and we may be subject to additional obligations in other jurisdictions or to tax liability for past sales, which could adversely harm our business.

State and local jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our trainings in various jurisdictions is unclear. While we do not believe we are currently required to collect and remit sales or similar taxes on our equipment in any jurisdiction in which we are not already collecting such tax, we could face the possibility of tax assessments and audits. A successful assertion that we should be collecting sales, use, value added or other taxes on our equipment in those jurisdictions where we do not do so or have not historically done so, or that we have not collected the correct amount with respect to past taxes, could result in substantial tax liabilities and related penalties for past sales, discourage customers from purchasing our services or otherwise harm our business, results of operations and financial condition.

Our business is subject to the risk of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as terrorism.

Our headquarters is in Austin, Texas, and we have two additional global offices in Paddington, Australia and London, England. Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. The third-party systems and operations and manufacturers we rely on are subject to similar risks. For example, a significant natural disaster, such as an earthquake, fire, or flood, could have an adverse effect on our business, results of operations and financial condition, and our insurance coverage

 

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may be insufficient to compensate us for losses that may occur. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could also cause disruptions in our or our suppliers’ and manufacturers’ businesses or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting locations that store significant inventory for us, including equipment and World Pack offerings, that house our servers, or from which we generate content. These disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt suppliers’ and manufacturers’ businesses, which could have an adverse effect on our business, results of operations and financial condition.

Our business faces various risks related to health epidemics, pandemics and similar outbreaks, which may materially and adversely affect our business, financial position, results of operations and cash flows.

Our business and financial results have been, and could be in the future, adversely affected by health epidemics, pandemics, and similar outbreaks impacting the markets and communities in which we and our customers, suppliers and franchisees operate. Despite our efforts to manage these matters, their ultimate effects also depend on factors beyond our knowledge or control, including the duration, severity, and recurrence of any outbreak and actions taken to contain its spread and mitigate its public health effects.

Our management team has limited experience managing a public company.

Most members of our management team, including our executive officers, have limited experience managing a publicly traded company, interacting with public company investors and analysts, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to increased pressure from the investment community, significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. If our management team fails to successfully manage these aspects of public company operations, such failure could have a material adverse effect on our business, investor confidence and the price of our shares.

These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.

The requirements of being a public company, including maintaining adequate internal control over our financial and management systems, may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. We will be subject to reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the rules subsequently implemented by the SEC, the rules and regulations of the listing standards of the NYSE, and other applicable securities rules and regulations. Compliance with these rules and regulations will likely strain our financial and management systems, internal controls and employees.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. Moreover, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures, and internal control, over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures, and internal control over, financial reporting to meet this standard, significant resources and management oversight may be required. In the course of preparing our financial statements for

 

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2020, we identified three material weaknesses in our internal control over financial reporting. See “We have identified three material weaknesses in our internal control over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.” If, in the future, we have material weaknesses or deficiencies in our internal control over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. Effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud.

In addition, we will be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act when we cease to be an emerging growth company. We expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, results of operations and financial condition. Although we have already hired additional employees to assist us in complying with these requirements, our finance team is small and we may need to hire more employees in the future, or engage outside consultants, which will increase our operating expenses.

We also expect that being a public company and complying with applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain and maintain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and qualified executive officers.

Furthermore, as a result of disclosure of information in this prospectus and in our Exchange Act and other filings required of a public company, our business and financial condition will become more visible, which we believe may give some of our competitors who may not be similarly required to disclose this type of information a competitive advantage. In addition to these added costs and burdens, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory actions and civil litigation, any of which could negatively affect the price of our common stock.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and stockholders’ equity/deficit, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue related reserves, fair value measurements including common stock valuations, useful lives of property plant and equipment, product warranty, goodwill and finite-lived intangible assets, accounting for income taxes, stock-based compensation expense and commitments and contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws. 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 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;

 

   

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;

 

   

the increased expenses associated with being a public company; and

 

   

the other factors identified under the heading “Risk Factors” beginning on page 24 of this prospectus.

 

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You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, results of operations, financial condition and prospects. Our current expectations and projections about future events are based, in part, on the results of a survey that we conducted of our franchisees in July 2019 which only reflects data from prior to the outbreak of COVID-19. This survey was provided to the franchisees of all studios at the time that the survey was conducted and generated responses from franchisees representing approximately 57% of studios across our global network of studios. In generating the data, estimates and calculations derived from the information provided by these respondents, we excluded certain responses that were incomplete or that we determined to be significant outliers. As a result, while we believe that the data and other information related to our franchisees presented in this prospectus are accurate and reliable, such data and other information are based on responses provided by a limited respondent pool, which may not represent the broader network of franchisees, and that have not been independently verified by us or any independent sources. Such data also does not reflect any impacts on our business or franchisees from COVID-19 or otherwise after July 2019.

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 prospectus. 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 prospectus. 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.

The forward-looking statements made in this prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus 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 prospectus, 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.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $275.9 million (or approximately $285.2 million if the underwriters exercise in full their option to purchase additional shares from us), assuming an initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The selling stockholder will receive approximately $23.3 million in net proceeds from this offering (or approximately $59.3 million if the underwriters exercise in full their option to purchase additional shares from the selling stockholder), assuming an initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions. We will not receive any proceeds from the sale of our common stock by the selling stockholder. We have agreed to pay certain expenses in connection with this offering on behalf of the selling stockholder.

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our net proceeds from this offering by $17.4 million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase or decrease of 1,000,000 in the number of shares offered by us in this offering would increase or decrease our net proceeds from this offering by $14.9 million, assuming the initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders.

We currently intend to use the net proceeds we receive from this offering as follows:

 

   

approximately $190.7 million to repay indebtedness, including repayment of our Term Facility, Revolving Facility, Subordinated Term Facility and PPP loan;

 

   

approximately $25.0 million to pay the purchase price for our acquisition of certain assets of the Flywheel indoor cycling studio business (see “Certain Relationships and Related Party Transactions — Flywheel Transaction”);

 

   

approximately $2.5 million to pay cash bonuses to certain of our employees, including certain of our executive officers, in connection with this offering (see “Certain Relationships and Related Party Transactions — IPO Bonuses” and “Executive Compensation — IPO Bonuses”);

 

   

approximately $5.6 million to pay expenses incurred in connection with this offering; and

 

   

the remainder for working capital and general corporate purposes.

The Term Facility bears interest in quarterly installments at 3.75% of the principal amount until September 30, 2021. Starting December 31, 2021 until the maturity date, the Term Facility bears quarterly interest at 5.00% of the principal amount. The Term Facility principal and interest payments are due quarterly in accordance with an amortization schedule with a maturity date of September 18, 2022. The Revolving Facility bears interest at our option at a floating rate of LIBOR plus 1.5 percent or

 

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an alternate base rate plus 0.5 percent. We have currently elected to bear interest at LIBOR plus 1.5 percent. We are required to pay to the lenders a quarterly commitment fee of 0.25% per annum on the daily unused amount of the Revolving Facility and fees relating to the issuance of letters of credit. The Subordinated Term Facility carries a PIK Interest rate of 13.00% that accrues over the term, which matures on October 5, 2025. The PPP loan has an interest rate of 1% over a period of 1.5 years, beginning November 2020 with a final installment due in April 2025.

Until we use the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

Affiliates of J.P. Morgan Securities LLC are lenders under the Term Facility and Revolving Facility. As described in the section entitled “Use of Proceeds,” a portion of the net proceeds from this offering will be used to repay borrowings under the Term Facility and Revolving Facility. Because we expect that more than 5% of the proceeds of this offering will be received by affiliates of J.P. Morgan Securities LLC, each of which is a lender under the Term Facility and Revolving Facility, this offering is being conducted in compliance with Rule 5121, as administered by the Financial Industry Regulatory Authority, or FINRA. Goldman Sachs & Co. LLC has agreed to act as the “qualified independent underwriter” with respect to this offering and has performed due diligence investigations and participated in the preparation of this registration statement. See the section entitled “Underwriting (Conflicts of Interest)—Conflicts of Interest.”

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, the terms of our secured credit facility contain restrictions on our ability to declare and pay cash dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Transactions.” In addition, under Delaware law, our board of directors may declare dividends only to the extent of our surplus, which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or, if there is no surplus, out of our net profits for the then current and immediately preceding year.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2021, on:

 

   

an actual basis (after giving effect to the 2-for-1 forward stock split of the Company’s common stock that occurred on July 6, 2021);

 

   

a pro forma basis, to give effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 27,368,102 shares of our common stock upon completion of this offering, (ii) the conversion of all of our outstanding convertible notes into an aggregate of 14,847,066 shares of our common stock upon completion of this offering, and (iii) the filing and effectiveness of our restated certificate of incorporation; and

 

   

a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above, (ii) our receipt of estimated net proceeds from the sale and issuance of shares of our common stock in this offering, at an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) repayment of $190.7 million of indebtedness, including repayment of our Term Facility, Revolving Facility, Subordinated Term Facility and PPP loan, including associated prepayment penalties of $3.99 million and accelerated interest of $12.7 million, (iv) $25.0 million to pay the purchase price for our acquisition of certain assets of the Flywheel indoor cycling studio business, and (v) $5.6 million of other expenses incurred in connection with this offering and approximately $2.5 million to pay cash bonuses to certain of our employees and executive officers.

The information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” “Selected Historical Consolidated Financial and Other Data,” our interim unaudited condensed consolidated financial statements as of March 31, 2021, and for the three months ended March 31, 2021 and 2020 and our audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 and related notes included elsewhere in this prospectus.

 

     As of March 31, 2021  

(in thousands, except share and per share data)

   Actual      Pro
Forma
     Pro Forma
As
Adjusted
 

Cash and cash equivalents

   $ 25,333      $ 25,333      $ 80,650  
  

 

 

    

 

 

    

 

 

 

Debt:

        

Convertible notes

     78,965        -          -    

Term loan facility

     32,078        32,078        -    

Revolver credit facility

     6,950        6,950        -    

Subordinated term facility

     128,502        128,502        -    

PPP loan

     2,063        2,063        -    
  

 

 

    

 

 

    

 

 

 

Total debt

     248,558        169,593        -    
  

 

 

    

 

 

    

 

 

 

Convertible preferred stock, USD $0.0001 par value; 9,854,432 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     98,544        -          -    

 

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     As of March 31, 2021  

(in thousands, except share and per share data)

   Actual     Pro
Forma
    Pro Forma
As
Adjusted
 

Stockholders’ deficit:

      

Common stock, $0.00005 par value per share; 108,000,000 shares authorized, 29,281,514 shares issued and oustanding, actual; 108,000,000 shares authorized, 69,934,182 shares issued and oustanding, pro forma; 108,000,000 shares authorized, 88,684,182 shares issued and oustanding, pro forma as adjusted

   $ 1     $ 3     $ 4  

Additional paid-in capital

     11,456       214,095       487,480  

Accumulated other comprehensive loss

     (943     (943     (943

Accumulated deficit

     (212,691     (237,823     (261,299

Less: Treasury stock

     (174,720     (174,720     (174,720

Total stockholders’ (deficit) equity

     (376,897     (199,388     50,522  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (29,795   $ (29,795   $ 50,522  
  

 

 

   

 

 

   

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, working capital, total assets and total stockholders’ equity and total capitalization by approximately $17.4 million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of 1,000,000 in the number of shares offered by us in this offering would increase or decrease the amount of our cash, total assets and total stockholders’ equity by approximately $14.9 million, assuming the initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of our common stock to be outstanding immediately after this offering is based on 90,246,682 shares of common stock outstanding as of March 31, 2021, assuming (i) the conversion of all of our outstanding shares of convertible preferred stock as of March 31, 2021 into an aggregate of 27,368,102 shares of our common stock upon the completion of this offering and (ii) the conversion of all of our convertible notes into an aggregate of 14,847,066 shares of our common stock upon the completion of this offering, and excludes 1,145,416 shares that will become available for future issuance under the 2021 Plan upon the effectiveness of the registration statement of which this prospectus forms a part (which includes 3,854,584 shares of our common stock issuable upon the settlement of RSUs and exercise of stock options to be granted in connection with this offering under the 2021 Plan to certain of our employees (including certain executive officers), with the stock options to have an exercise price per share equal to the initial public offering price in this offering).

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book deficit as of March 31, 2021 was $378.8 million, or $(12.94) per share of common stock. Our net tangible book deficit per share represents total tangible assets (total assets less intangible assets and deferred offering costs) less total liabilities and convertible preferred stock, divided by the number of shares of common stock outstanding as of March 31, 2021.

Our pro forma net tangible book deficit at March 31, 2021 would have been $201.3 million, or $(2.82) per share of our common stock. Our pro forma net tangible book deficit per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding, after giving effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 27,368,102 shares of our common stock upon completion of this offering and (ii) the conversion of all of our outstanding convertible notes into an aggregate of 14,847,066 shares of our common stock upon completion of this offering.

After giving effect to (i) the pro forma adjustments set forth above, (ii) our sale in this offering of 18,750,000 shares of our common stock at an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) our use of proceeds from the offering, including repayment of $190.7 million of indebtedness under our Term Facility, Revolving Facility, Subordinated Term Facility and PPP loan, which includes associated prepayment penalties of $3.99 million and accelerated interest of $12.7 million our pro forma as adjusted net tangible book value as of March 31, 2021 would have been $51.1 million, or $0.57 per share. This represents an immediate increase in pro forma net tangible book value of $3.45 per share to our existing stockholders and an immediate dilution of $15.42 per share to investors in this offering. Net tangible book value dilution per share to new investors in this offering represents the difference between the amount per share paid by new investors purchasing shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

   $ 16.00  

Historical net tangible book value (deficit) per share as of March 31, 2021

     (12.94

Pro forma increase in net tangible book value per share attributable to conversion of convertible preferred stock

     10.12  

Pro forma net tangible book deficit per share as of March 31, 2021 before giving effect to this offering

     (2.82

Increase in net tangible book value per share attributable to new investors purchasing shares in this offering

     3.38  

Pro forma as adjusted net tangible book value per share after giving effect to this offering

     0.57  

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

     15.43  

The dilution information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $17.4 million, or approximately $0.77 per share, and dilution per share to new investors in this offering by $0.20, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 1,000,000 in the number of shares offered by us in this offering would increase our pro forma as adjusted net tangible book value by

 

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approximately $14.9 million, or approximately $0.74 per share, and would decrease dilution per share to new investors in this offering by approximately $0.16 per share, and each decrease of 1,000,000 in the number of shares offered by us in this offering would decrease our pro forma as adjusted net tangible book value by approximately $14.9 million, or approximately $0.41 per share, in each case assuming the initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table shows, as of March 31, 2021, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share by (i) existing stockholders and (ii) new investors acquiring our common stock in this offering at an assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Share ownership     Total consideration     Weighted Average
price per share
     Number      Percent     Amount
(in thousands)
     Percent  

Existing stockholders

     69,934,182        77.5   $ 270,000        45.4   $3.62

New investors

     20,312,500        22.5     325,000        54.6   16.00
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     90,246,682        100.0   $ 595,000        100.0   $6.40
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, would increase or decrease, as applicable, total consideration paid by new investors by approximately $17.4 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 in the number of shares offered by us in this offering would increase or decrease, as applicable, total consideration paid by new investors by approximately $14.9 million, assuming the initial public offering price remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise in full their option to purchase additional shares, our existing stockholders would own 74.3% and our new investors would own 25.7% of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock to be outstanding immediately after this offering is based on 90,246,682 shares of common stock outstanding as of March 31, 2021, assuming (i) the conversion of all of our outstanding shares of convertible preferred stock as of March 31, 2021 into an aggregate of 27,368,102 shares of our common stock upon the completion of this offering and (ii) the conversion of all of our outstanding convertible notes into an aggregate of 14,847,066 shares of our common stock upon the completion of this offering, and excludes (a) shares that will become available for future issuance under the 2021 Plan upon the effectiveness of the registration statement of which this prospectus forms a part (which includes 3,854,584 shares of our common stock issuable upon the settlement of RSUs and exercise of stock options to be granted in connection with this offering under the 2021 Plan to certain of our employees (including certain executive officers), at an exercise price per share equal to the initial public offering price in this offering and (b) 2,738,648 RSUs, which were issued to Mr. Wahlberg pursuant to a promotional services agreement that we entered into in connection with the MWIG investment (see “Certain Relationships and Related Party Transactions—Promotional Agreement” for more details regarding the RSUs held by Mr. Wahlberg), which RSUs will vest in connection with offering, but not settle until 2022).

In addition, to the extent that any outstanding options or warrants are exercised, investors in this offering will experience further dilution.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present the selected historical interim unaudited condensed consolidated financial and other data for our business as of March 31, 2021 and for the three months ended March 31, 2021 and 2020, and the selected historical consolidated financial and other data for our business as of and for the years ended December 31, 2020 and 2019. You should read the selected historical consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our interim unaudited condensed consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020, our audited annual consolidated financial statements as of and for the years ended December 31, 2020 and 2019, related notes, and other financial information included elsewhere in this prospectus. The selected historical consolidated financial and other data in this section are not intended to replace consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus. The selected condensed consolidated financial information as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 have been derived from our interim unaudited condensed consolidated financial statements included elsewhere in this prospectus. The selected consolidated historical financial and other data as of December 31, 2020 and for the years ended December 31, 2020 and 2019 has been derived from our audited annual consolidated financial statements included elsewhere in this prospectus. The interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the interim unaudited condensed consolidated financial statements of our business. The results of operations for the periods presented below are not necessarily indicative of the results to be expected in the future.

 

    Three Months Ended
March 31,
    Year Ended
December 31,
 
    2021     2020     2020     2019  
   

(dollars in thousands, except share and per share
information)

 

Consolidated Statements of Operations Data:

       

Revenues:

       

Franchise (Related party: $45 and $97 for the three months ended March 31, 2021 and 2020, and $340 and $883 for 2020 and 2019, respectively)

  $  13,156     $  13,638     $ 52,555     $ 42,897  

Equipment and merchandise (Related party: $0 for the three months ended March 31, 2021 and 2020, and $116 and $122 for 2020 and 2019, respectively)

    5,035       11,204       29,758       49,793  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    18,191       24,842       82,313       92,690  

Costs and operating expenses:

       

Cost of franchise revenue (Related party: $0 and $12 for the three months ended March 31, 2021 and 2020, and $0 and $140 for 2020 and 2019, respectively)

    1,214       3,184       7,937       11,310  

Cost of equipment and merchandise (Related party: $941 and $1,051 for the three months ended March 31, 2021 and 2020, and $4,067 and $2,702 for 2020 and 2019, respectively)

    3,181       6,331       21,713       26,678  

Selling, general and administrative expenses

    16,828       13,991       57,827       41,126  

Forgiveness of loans to directors

    -         -         -         22,263  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

    21,223       23,506       87,477       101,377  
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (3,032     1,336       (5,164     (8,687

Loss on derivative liabilities, net

    25,505       -         8,818       -    

Interest expense, net

    8,415       378       9,399       414  

Other (income) expense, net

    291       1,681       (1,154     384  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (37,243     (723     (22,227     (9,485

(Benefit) provision for income taxes

    (398     10       3,062       3,117  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended
March 31,
    Year Ended
December 31,
 
    2021     2020     2020     2019  
   

(dollars in thousands, except share and per share information)

 

Net loss

  $ (36,845)     $ (733     $ (25,289)     $ (12,602
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

       

Unrealized gain (loss) on interest rate swap, net of tax

    71       (850     (533     (127

Foreign currency translation adjustment, net of tax

    (32     1,281       92       (682
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (36,806   $ (302   $ (25,730   $ (13,411
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share

       

Basic and diluted

  $ (1.26   $ (0.01   $ (0.50   $ (0.22
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

       

Basic and diluted

    29,281,514       58,000,000       50,434,598       58,000,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

     March 31,     As of December 31,  
     2021     2020     2019  
     (dollars in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 25,333     $ 28,967     $ 8,267  

Total assets

     84,765       78,517       49,960  

Deferred revenue

     17,650       14,095       23,941  

Total liabilities

     363,118       320,064       91,055  

Convertible preferred stock

     98,544       98,544       110,000  

Total stockholders’ deficit

     (376,897     (340,091     (151,095

 

     Three Months Ended
March 31,
    Year Ended December 31,  
     2021     2020     2020     2019  
     (dollars in thousands)  

Other Data:

        

EBITDA(1)

   $ (28,176   $ 209     $ (10,180   $ (7,529

Adjusted EBITDA(1)

   $ 5,270     $ 2,614     $ 25,473     $ 30,678  

Adjusted EBITDA margin(1)

     29.0     10.5     30.9     33.1

Same store sales growth(2)

     (21.2 )%      3.0       (31.2 )%      13.3

Total Franchises Sold(3)

     2,247       1,959       2,244       1,892  

Total Studios(4)

     1,487       1,242       1,437       1,140  

 

     Three Months Ended
March 31,
    Year Ended December 31,  
     2021     2020     2020     2019  
     (dollars in thousands)  

Consolidated Statement of Cash Flows Data:

        

Net cash (used in) provided by operating activities

   $ (201   $ (2,863   $ (19,822   $ 8,328  

Net cash used in investing activities

     (179     (680     (1,537     (1,143

Net cash (used in) provided by financing activities

     (1,313     6,912       42,552       (4,198

 

(1) 

For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure and why we consider it useful, and a discussion of material risks and limitations of these measures, see “Prospectus Summary—Summary Consolidated Financial and Other Data.”

(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

 

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  for more than 16 months. As of March 31, 2021 and December 31, 2020, there were 1,010 and 940 studios, respectively, in our comparable base of franchise studios. We view same store sales as a helpful measure to assess performance of our franchise studios.
(3) 

Total Franchises Sold is defined as (i) the total number of signed franchise agreements in place as of any specified date for which an establishment fee has been paid and (ii) the total number of franchises committed in a multi-studio agreement in place as of such date for which an upfront payment has been made, in each case that have not been terminated, as of such date. Each new franchise is included in the number of Total Franchises Sold from the date on which such franchise first satisfies the condition in clause (i) or (ii) above, as applicable. Total Franchises Sold includes franchise arrangements in all stages of development after signing a franchise agreement, and includes franchises with Total Studios. Franchises are removed from Total Franchises Sold upon termination of the franchise agreement.

(4) 

Total Studios is defined, 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. We classify a studio as open as of the month in which the studio first generates monthly revenue of at least $4,500.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction with the “Selected Historical Consolidated Financial and Other Data” section of this prospectus and our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in the “Risk factors” section and elsewhere in this prospectus.

Overview

We are F45 Training, one of the fastest growing fitness franchisors in the United States based on number of franchises sold in the United States, focused on creating a leading global fitness training and lifestyle brand. We 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 and related shelter-in-place restrictions and other containment efforts have had and 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 June 30, 2021, we had approximately 1,415 Open Studios, which represents approximately 91% of our Total Studios. The remaining 9% of our Total Studios are generally located in regions that continue to face restrictions, which we expect to be relaxed over time. The following chart illustrates the number of Open Studios as a percentage of Total Studios at the end of each month for the 18 months ended June 30, 2021.

 

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Open Studios as a Percentage of Total Studios for the 18 Months Ended June 30, 2021

 

LOGO

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. As of June 30, 2021, the median weekly revenue of the 618 studios that have been re-opened the longest since temporary closure exceeded pre-pandemic levels.

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 (which for segment reporting purposes includes our operations in the United States and our 17 studios in Central and South America), Australia and Rest of World. 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 the United States and Australia. 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 intersegment transactions. The tables on the following pages summarize the financial information for our segments for the years ended December 31, 2020 and 2019 and the three months ended March 31, 2021 and 2020. In all other sections of this prospectus 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 2018 and 2020 we grew our Total Franchises Sold at the annual rate of 33% and our Total Studios at the rate of 34%. Between June 30, 2020 and June 30, 2021, our Total Franchises Sold increased by 36% and our Total Studios increased by 22%. For the three months ended March 31, 2021, as compared with the same period in 2020, our revenue decreased by 27% as our network continued to recover.

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 in the United States;

 

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expanding our studio footprint throughout Rest of World;

 

   

growing same store sales and transitioning to a franchise fee based on the greater of a fixed monthly franchise fee or percentage of gross monthly studio revenue model;

 

   

expanding into new channels;

 

   

developing new workout programs to access new target demographics; and

 

   

driving increased member spend through ancillary product offerings.

Key Factors Affecting Our Business

Our financial condition and results of operation 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.

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 (i) the total number of signed franchise agreements in place as of such date for which an establishment fee has been paid and (ii) the total number of franchises committed in a multi-studio agreement in place as of such date for which an upfront payment has been made, in each case that have not been terminated. Each new franchise is included in the number of franchises sold from the date such franchise first satisfies the condition in clause (i) or (ii) above, as applicable. 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.

 

     Year Ended December 31, 2019      Year Ended December 31, 2020      6 Months Ended June 30, 2021  
     U.S.      Australia      ROW      Total      U.S.      Australia      ROW      Total      U.S.      Australia      ROW      Total  

Total Franchises Sold, beginning of period

     430        595        249        1,274        814        643        435        1,892        931        679        634        2,244  

New Franchises Sold, net(a)

     384        48        186        618        117        36        199        352        448        106        3        557  

Total Franchises Sold, end of period

     814        643        435        1,892        931        679        634        2,244        1,379        785        637        2,801  

 

(a)

New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to studio opening. For June 2021, New Franchises Sold includes 300 franchises sold pursuant to a long-term multi-unit studio development agreement with Club Franchise Group LLC. See “Certain Relationships and Related Party Transactions - Franchise Relationships.”

During 2019, we sold a net average of 52 new franchises per month. During the 18 months ended June 30, 2021, we sold a net average of 51 new franchises per month, supported by recent multi-unit club deals. Of the 909 net franchises sold during the 18 months ended June 30, 2021, 253 were sold as part of a limited time offer made by F45 exclusively to existing franchisees to stimulate sales in response to the COVID-19 pandemic. The offer provided for a reduced dollar establishment fee and no franchise fee payments until the earlier of the studio opening and January 1, 2022, as well as deferred equipment purchasing until November 2021. In addition, 300 of the net franchises sold during the 18 months ended

 

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June 30, 2021 were sold pursuant to.ursuant to a long-term multi-unit studio development agreement with Club Franchise Group LLC. See “Certain Relationships and Related Party Transactions - Franchise Relationships.”

Initial Studio Openings and Total Studios

Initial Studio Openings refers to the number of studios that were determined to be first opened during such period. We classify an Initial Studio Opening to occur in the first month in which the studio first generates monthly revenue of at least $4,500. 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.

 

    Year Ended December 31, 2019     Year Ended December 31, 2020     6 Months Ended June 30, 2021  
    U.S.     Australia     ROW     Total     U.S.     Australia     ROW     Total     U.S.     Australia     ROW     Total  

Total Studios, beginning of period

    157       512       131       800       320       581       239       1,140       486       616       335       1,437  

Initial Studio Openings, net

    163       69       108       340       166       35       96       297       70       12       36       118  

Total Studios, end of period

    320       581       239       1,140       486       616       335       1,437       556       628       371       1,555  

Open Studios

Open Studio refers to the number of studios that were open for business as of a certain date. A studio may be classified as an Open Studio regardless of whether or not it generated minimum monthly revenue of $4,500. During the COVID-19 pandemic, a significant portion of our network was forced to temporarily close, which reduced the number of Open Studios. As studios have re-opened in accordance with state and local regulations, they are reflected in the Open Studios figures.

 

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As of June 30, 2021, we had approximately 1,415 Open Studios, which represents approximately 91% of our Total Studios. The remaining 9% of our Total Studios are generally located in regions that continue to face restrictions, which we expect to be relaxed over time. The following table illustrates the number of Total Studios, Open Studios and Open Studios as a percentage of Total Studios at the end of each month for the 18 months ended June 30, 2021.

 

    As of Month End for the 18 Months Ended June 30, 2021  
    JAN     FEB     MAR     APR     MAY     JUNE     JULY     AUG     SEP     OCT     NOV     DEC     JAN     FEB     MAR     APR     MAY     JUN  

United States

                                   

Total Studios

    347       364       376       373       378       396       407       426       451       468       477       486       498       506       518       528       546       556  

Open Studios

    347       364       5       6       167       300       278       301       363       391       380       400       422       428       453       489       512       532  

% Studios Open

    100     100     1     2     44     76     68     71     80     84     80     82     85     85     87     93     94     96

Australia

                                   

Total Studios

    590       592       593       593       594       595       597       600       604       608       614       616       616       616       617       624       627       628  

Open Studios

    590       592       0       0       144       578       493       463       473       495       592       594       595       597       600       605       604       607  

% Studios Open

    100     100     0     0     24     97     83     77     78     81     96     96     97     97     97     97     96     97

ROW

                                   

Total Studios

    249       268       273       275       277       284       296       311       321       328       331       335       338       341       352       363       366       371  

Open Studios

    249       268       44       16       43       135       208       258       286       243       213       161       155       193       233       245       221       276  

% Studios Open

    100     100     16     6     16     48     70     83     89     74     64     48     46     57     66     67     60     74

Total

                                   

Total Studios

    1,186       1,224       1,242       1,241       1,249       1,275       1,300       1,337       1,376       1,404       1,422       1,437       1,452       1,463       1,487       1,515       1,539       1,555  

Open Studios

    1,186       1,224       49       22       354       1,013       979       1,022       1,122       1,129       1,185       1,155       1,172       1,218       1,286       1,339       1,337       1,415  

% Studios Open

    100     100     4     2     28     79     75     76     82     80     83     80     81     83     86     88     87     91

Members

Members refers to the number of paying members who were billed $20 or more in membership fees in a given month.

Our long-term growth will depend in part on our continued ability to attract and retain members to our studios. Our and our franchisees’ efforts to engage with members during the pandemic helped to reduce attrition during an economically challenging and uncertain time. As of June 30, 2021, our total membership stood at 13% higher compared to December 31, 2019. While we cannot predict future membership trends, we believe that as our studios continue to re-open and consumers continue to return to in-person fitness classes, our membership will grow.

 

    YOY Monthly Membership Growth for the 18 Months Ended June 30, 2021  
    JAN     FEB     MAR     APR     MAY     JUNE     JULY     AUG     SEP     OCT     NOV     DEC     JAN     FEB     MAR     APR     MAY     JUN  

United States

    139     113     59     15     14     14     10     14     26     4     6     (2 )%      (1 )%      1     37     88     110     94

Australia

    13       10       (35     (52     (46     (12     (10     (23     (18     (21     (12     (7     (8     (9     59       120       86       12  

ROW

    83       57       23       (23     (26     (25     (20     (18     (9     (18     (39     (42     (49     (41     (7     37       45       44  

Total

    46     36     (7 )%      (33 )%      (30 )%      (8 )%      (7 )%      (13 )%      (5 )%      (13 )%      (13 )%      (12 )%      (14 )%      (12 )%      37     92     87     41

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.

Total System-wide Sales declined by 13% in 2020 as a result of widespread temporary studio closures. We generally experienced sequential improvement between April 2020 (which represented a trough month in terms of Open Studios, Membership, and System-wide Sales) and year-end. In the United States, our System-wide Sales increased by 14% in 2020, which compares favorably versus the broader U.S. health club industry, which is estimated to have experienced a 58% decline in revenue according to IHRSA.

 

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Our System-wide Sales have quickly recovered. As of June 2021, our monthly System-wide Sales were approximately $35 million, which compares to our pre-pandemic monthly peak of $36 million, which was last achieved in February 2020.

 

    Monthly System-wide Sales for the 18 Months Ended June 30, 2021 ($ in millions)  
    JAN     FEB     MAR     APR     MAY     JUNE     JULY     AUG     SEP     OCT     NOV     DEC     JAN     FEB     MAR     APR     MAY     JUN  

United States

  $ 10     $ 10     $ 8     $ 3     $ 4     $ 5     $ 6     $ 7     $ 7     $ 9     $ 9     $ 8     $ 10     $ 9     $ 12     $ 12     $ 14     $ 15  

Australia

    19       19       16       4       5       11       13       14       14       16       17       17       18       16       18       17       17       15  

ROW

    8       7       5       1       1       2       3       5       5       6       5       4       4       3       5       4       4       5  

Total

  $ 36     $ 36     $ 29     $ 9     $ 10     $ 18     $ 23     $ 25     $ 26     $ 30     $ 31     $ 29     $ 31     $ 29     $ 35     $ 33     $ 35     $ 35  

Average Unit Volume and Cohort Performance

Average unit volume, or AUV, refers to average studio-level revenue generated by a group of studios during a particular period of time. Due to the relatively young age of our studio base, we believe it is appropriate to assess AUV for studios that have been open for the full period for which AUV is calculated.

The below chart illustrates global quarterly AUV from Q1 2014 to Q2 2021 for studios that meet the two following criteria: i) studios that were classified as Open Studios during the entirety of Q1 and Q2 2021, and ii) studios that were included in Total Studios as of the beginning of the year for which the AUV data is calculated. For instance, the 2019 cohort includes studios that were classified as Open Studios during Q1 and Q2 2021 and were also included in Total Studios as of January 1, 2019.

Global Quarterly AUV for Open Studios (as of June 30, 2021)

($ in thousands)

 

LOGO

The 2020 cohort includes the studios that were classified as Open Studios during Q1 2021 and Q2 2021, and were also included in Total Studios as of January 1, 2020. The 2021 cohort includes the

 

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studios classified as Open Studios during Q1 2021 and Q2 2021, and were also included in Total Studios as of January 1, 2021. Unlike the other cohorts, these studios were not necessarily classified as Open Studios for the full year of 2020 due to the COVID-19 pandemic. While AUV performance for these studios was materially impacted by the pandemic, we believe the Q1 and Q2 2021 AUV of $75,000 and $76,000, respectively, demonstrates the resiliency of our studios as they quickly recover following temporary closure.

Key Non-GAAP Financial and Operating Metrics

We use a variety of non-GAAP information, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and same store sales.

 

     Three Months Ended
March 31,
    Year Ended
December 31,
 
     2021     2020     2020     2019  
     (dollars in thousands)  

Other Data:

        

EBITDA

   $ (28,176   $ 209     $ (10,180   $ (7,529

Adjusted EBITDA

   $ 5,270     $ 2,614     $ 25,473     $ 30,678  

Adjusted EBITDA margin(1)

     29.0     10.5     30.9     33.1

Same store sales growth(2)

     (21.2 )%      3.0     (31.2 )%      13.3

 

(1)

For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure and why we consider it useful, and a discussion of material risks and limitations of these measures, see “Prospectus Summary—Summary Combined and Consolidated Financial and Other Data.”

(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 December 31, 2020 and 2019, there were 940 and 705 studios, respectively, in our comparable base of franchise studios. As of March 31, 2021 and March 31, 2020, there were 1,010 and 752 studios, respectively in our comparable base of franchise studios.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin

EBITDA is defined as net income before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization and adjusted to exclude the impact of sales tax liability, transaction expenses, certain legal costs and settlements, forgiveness of loans to directors and relocation costs as well as 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 prospectus 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.

The non-GAAP information in this prospectus should be read in conjunction with our audited annual financial statements and the related notes included elsewhere in this prospectus. For a reconciliation to the most directly comparable GAAP measures, and a discussion of material risks and limitations of these measures, see “Prospectus Summary—Summary Historical Combined and Consolidated Financial and Other Data.”

 

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Same Store Sales

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, 2021 and March 31, 2020, there were 1,011 and 752 studios, respectively in our comparable base of franchise studios. As of December 31, 2020 and 2019, there were 940 and 705 studios, respectively, in our comparable base of franchise studios. As of December 31, 2019 and 2018, there were 704 and 428 franchises, respectively, in our comparable base of franchise studios. 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. Historically, monthly franchise fees were structured as fixed payments of $1,000-$3,000 per month per studio. In July 2019, we transitioned our model in the United States for new franchisees to a franchise fee based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue, which we believe will help to further align our interests with those of our franchisees while also providing us with the opportunity to increase franchise revenue. In select markets outside of

 

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the United States, and for renewals of existing franchisees in the United States, we are in the process of developing a strategy for transitioning to a similar model.

 

   

Equipment and Merchandise: Consists 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.

 

   

Selling, General, and Administrative Expenses: Consists of costs associated with wages and salaries and ongoing administrative and franchisee support functions related to our existing franchisees. These costs primarily consist of 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 legal and accounting expenses.

 

   

Forgiveness of Loans to Directors: As described in “Note 2—Summary of Significant Accounting Policies” to the consolidated financial statements included elsewhere in this prospectus, in connection with the MWIG Transaction that closed on March 15, 2019, we forgave loans that were previously extended to certain of our existing stockholders who are executive officers and directors.

 

   

Other Expense, Net: Our other expense, net primarily relates to realized and unrealized gains and losses on foreign currency transactions.

(Benefit) Provision for Income Taxes

Our effective income tax rate differed from the U.S. statutory tax rate of 21% primarily due to the effect of certain nondeductible expenses, permanent differences, foreign jurisdiction earnings taxed at different rates, reserves for uncertain tax positions and a valuation allowance against certain domestic deferred tax assets that are not more likely than not to be realized.

 

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Recent Transactions

On March 15, 2019, MWIG acquired a minority investment in us. Such investment was effectuated through the following transactions:

 

   

on March 12, 2019, F45 Training Holdings was incorporated in the State of Delaware as an ultimate holding company;

 

   

on March 15, 2019, MWIG invested $100 million in F45 Training Holdings in exchange for 10,000,000 shares of convertible preferred stock; and

 

   

immediately following such investment by MWIG, our predecessor’s stockholders, Adam Gilchrist, our Co-Founder and President and Chief Executive Officer, Robert Deutsch, our Co-Founder and former Executive Chairman of our Board of Directors, and 2M Properties Pty Ltd, or 2M Properties, sold all of their existing capital stock in our predecessor, F45 Aus to Flyhalf Acquisition Company Pty Ltd, or Flyhalf Acquisition, an indirect wholly-owned subsidiary of F45 Training Holdings, for an aggregate of (a) $100 million in cash, (b) $50 million in secured promissory notes from Flyhalf Acquisition, or the Initial Stockholder Notes, and (c) 29,000,000 shares of our common stock. In connection with the issuance of the Initial Stockholder Notes, we entered into a guaranty with each of Messrs. Gilchrist and Deutsch and 2M Properties pursuant to which we guaranteed the obligations of Flyhalf Acquisition under their respective Initial Stockholder Notes.

On April 26, 2019, MWIG invested an additional $10 million in us for an additional 1,000,000 shares of convertible preferred stock. Immediately after giving effect to such investment, we became owned, on an as-converted basis (assuming the conversion of our convertible preferred stock into 15,274,808 shares of common stock and assuming all RSUs issued to Mark Wahlberg fully vest (see “Certain Relationships and Related Transactions—Promotional Agreement” for more details regarding the RSUs held by Mr. Wahlberg)) 28.59% by Mr. Gilchrist, 28.59% by Mr. Deutsch, 6.35% by 2M Properties, 33.47% by MWIG and 3.00% by Mr. Wahlberg. For additional details regarding the MWIG Transaction, see “Certain Relationships and Related Party Transactions—MWIG Transaction.”

We contributed the proceeds from the additional MWIG investment to Flyhalf Acquisition, which in turn used such funds to prepay an aggregate of $9.5 million in outstanding principal balance under the Initial Stockholder Notes and to repay $0.5 million of accrued interest.

We entered into a senior Secured Credit Agreement, dated as of September 18, 2019, or 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, or the Revolving Facility, and a $30.0 million term loan facility, or 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 12—Convertible Preferred Stock and Stockholders’ Equity” to the consolidated financial statements included elsewhere in this prospectus, 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 of our operating subsidiaries and secured by a majority of our assets. The original maturity date of the Credit Facility was September 18, 2022. The Revolving Facility may be prepaid and terminated by us at any time without premium or penalty (subject to customary LIBOR breakage fees). On October 6, 2020, we executed a second amendment to the Secured Credit Agreement with JPMorgan Chase Bank, N.A. At the time of execution, Term A Loans outstanding was $35.0 million and Revolving Loan outstanding was $7.0 million.

The Term Facility bears interest in quarterly installments at 3.75% of the principal amount until September 30, 2021. Starting December 31, 2021 until the maturity date, the Term Facility bears

 

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quarterly interest at 5.00% of the principal amount. The Term Facility principal and interest payments are due quarterly in accordance with an amortization schedule with a maturity date of September 18, 2022.

The Revolving Facility bears interest at our option at a floating rate of LIBOR plus 1.5 percent or an alternate base rate plus 0.5 percent. We have currently elected to bear interest at LIBOR plus 1.5 percent. We are required to pay to the lenders a quarterly commitment fee of 0.25% per annum on the daily unused amount of the Revolving Facility and fees relating to the issuance of letters of credit. The outstanding balance and remaining availability of the Revolving Facility as of March 31, 2021 was $7.0 million and $0, respectively.

The terms of the Secured Credit Agreement require that we not permit the Fixed Charge Coverage Ratio, as defined in the Secured Credit Agreement, for any period of four consecutive fiscal quarters to be less than 1.25 to 1.00. We are also required to maintain a Total Leverage Ratio, as defined in the Secured Credit Agreement, for any period of four consecutive fiscal quarters of less than 2.00 to 1.00. The Secured Credit Agreement also contains other customary covenants. As of March 31, 2021, we were in compliance with our financial covenants.

The Secured Credit Agreement permits the payment of dividends to stockholders and share repurchases by us of up to 15% of the equity interests held by our stockholders.

On October 25, 2019, we entered into an interest rate swap agreement, or 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 million in 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% will accrue interest starting on the effective date (October 30, 2019) at a fixed rate of 1.741% on an annualized basis. Our objective in executing the Swap Agreement was to hedge against periodic fluctuations in cash flow due to changes in the LIBOR rates.

On June 23, 2020, we 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 $8.0 million 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 $5.0 million of the principal amount of the Revolving Facility outstanding.

In connection with the second amendment to the Secured Credit Agreement, we modified the existing covenants under the Secured Credit Agreement. The total leverage ratio was modified such that we are required to maintain a total leverage ratio, for any period of four consecutive fiscal quarters, of less than 7.00 to 1.00. Prior to the second amendment to the Secured Credit Agreement, we were required to maintain a total leverage ratio, for any period of four consecutive fiscal quarters, of less than 2.00 to 1.00. Additionally, the second amendment to the Secured Credit Agreement introduced a new covenant, a senior secured leverage ratio, which requires us to maintain a senior secured leverage ratio, for any period of four consecutive fiscal quarters, of less than 2.00 to 1.00.

The interest rate of both Secured Credit Agreement and the Revolving facility were amended to 4.00% and 3.00% for Eurodollar loans and letters of credit, and ABR Loans, respectively.

On June 24, 2020, we entered into a definitive agreement under which Crescent Acquisition Corp would acquire us for an enterprise value of $845 million. On October 5, 2020, we and Crescent Acquisition Corp jointly terminated the agreement because, at that time, a significant number of our studios remained temporarily closed or were closing temporarily again, and there was not yet a clear

 

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path for the re-opening of all of our studios and a return to pre-COVID-19 business levels in October 2020. As of March 31, 2021, 86% of our Total Studios were open.

On October 6, 2020, we entered into agreements with KLIM pursuant to which KLIM invested $225 million into F45 in a mix of a second lien term loan and convertible note. These agreements included a subordinated credit agreement consisting of a $125.0 million term loan facility and subordinated convertible credit agreement pursuant to which we issued $100.0 million of convertible notes. The term loan carries PIK interest of 13.0% with a five year maturity. The convertible notes carry PIK interest of 0.35% and a minimum return on invested capital of 1.5x, maturing in five years and converts at the election of KLIM based on a conversion equity value of $500 million in the event of an initial public offering by us. The convertible notes will convert into an aggregate of 14,847,066 shares of our common stock upon the completion of this offering.

On December 30, 2020, we, GIL SPE, LLC, or GIL, owned by Mr. Gilchrist, and MWIG entered into a Stock Purchase Agreement with the L1 Capital Funds pursuant to which each of GIL and MWIG sold a portion of their shares to the L1 Capital Funds.

In April 2021, we 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 million per year and will terminate upon the closing of the Flywheel IP acquisition described below. Also, on March 31, 2021, we entered into an asset purchase agreement with FW SPV, whereby we can acquire the rights to the Flywheel IP upon the occurrence of certain circumstances for $25.0 million. The acquisition of the Flywheel IP is anticipated to close concurrently with the closing of this offering.

 

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Results of Operations

The following tables summarize key components of our results of operations for the periods indicated:

 

    Three Months Ended March 31,     Year Ended
December 31,
 
        2021             2020         2020     2019  
    (dollars in thousands)  

Revenues:

       

Franchise (Related party: $45 and $97 for the three months ended March 31, 2021 and 2020, and $340 and $883 for 2020 and 2019)

  $ 13,156   $ 13,638   $ 52,555   $ 42,897

Equipment and merchandise (Related party: $0 for the three months ended March 31, 2021 and 2020, and $116 and $122 for 2020 and 2019)

    5,035     11,204     29,758     49,793
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    18,191     24,842     82,313     92,690
Costs and operating expenses:        

Cost of franchise revenue (Related party: $0 and $12 for the three months ended March 31, 2021 and 2020, and $0 and $140 for 2020 and 2019)

    1,214     3,184     7,937     11,310

Cost of equipment and merchandise (Related party: $941 and $1,051 for the three months ended March 31, 2021 and 2020, and $4,067 and $2,702 for 2020 and 2019)

    3,181     6,331     21,713     26,678

Selling, general and administrative expenses

    16,828     13,991     57,827     41,126

Forgiveness of loans to directors

    -         -         -         22,263
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

    21,223     23,506     87,477     101,377
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (3,032     1,336     (5,164     (8,687

Loss on change in value of derivative liabilities

    25,505     -         8,818     -    

Interest expense, net

    8,415     378     9,399     414

Other expense (income), net

    291       1,681     (1,154     384
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (37,243     (723     (22,227     (9,485

(Benefit) provision for income taxes

    (398     10     3,062     3,117
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (36,845   $ (733   $ (25,289   $ (12,602
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of the three months ended March 31, 2021 and 2020

Revenue

Franchise Revenue

 

     Three Months Ended March 31,      Change  
         2021              2020          $     %  
     (dollars in thousands)               

Franchise

          

USA

   $ 7,015    $ 8,248    $ (1,233     (15 )% 

Australia

     3,289      2,751      538     20

ROW

     2,852      2,639      213     8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total franchise revenue

   $ 13,156    $ 13,638    $ (482     (4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 
     Three Months Ended March 31,      Change  
         2021              2020          Stores     %  
     (in units)               

Total franchises sold

          

USA

     941      826      115     14

Australia

     676      653      23     4

ROW

     630      480      150     31
  

 

 

    

 

 

    

 

 

   

 

 

 

Total franchises sold, end of period

     2,247      1,959      288     15
  

 

 

    

 

 

    

 

 

   

 

 

 

The $1.2 million, or 15%, decrease in franchise revenue in the United States for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the decline in number of new studio openings in the United States during the period. The number of new studio openings decreased by 24 from 56 new studio openings for the three months ended March 31, 2020 to 32 new studio openings for the three months ended March 31, 2021. Due to the decline in number of new studio openings, pre-open marketing revenue for the period decreased by $1.2 million. Franchise-related fees and other recurring fixed fees remained relatively consistent for the three months period ended March 31, 2021 and March 31, 2020. The decline in number of new studio openings was primarily as a result of the COVID-19 pandemic which had a minimal impact for the period ended March 31, 2020.

The $0.5 million, or 20%, increase in franchise revenue in Australia for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to increase franchise fees paid by franchisees as a result of an increase in number of open studios. Open studios increased from 593 as of March 31, 2020 to 617 as of March 31, 2021, which is a 4% increase compared to the equivalent period in 2020. As a combination of our mature presence in the Australian market and the fact that the impact of COVID-19 pandemic on studio closures in Australia was relatively low for the three months ended March 31, 2021, our Australia segment continues to see a moderate increase in its franchise revenue.

The $0.2 million, or 8%, increase in franchise revenue in ROW for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the increase in number of studios open for ROW. Open studios increased from 273 as of March 31, 2020 to 352 as of March 31, 2021, which is a 30% increase compared to the equivalent period in 2020. Due to studio growth, establishment fees, monthly franchise fees, and other franchise-related fees increased by $0.6 million during the period. The increase was offset by $0.4 million decrease in marketing and other recurring fixed fees, which was primarily caused by the decrease in number of new studio openings for the three months ended March 31, 2021 as compared to the same period in

 

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2020. The number of new studio openings for the three months ended March 31, 2021 and 2020 was 17 and 34, respectively.

Equipment and Merchandise Revenue

 

     Three Months Ended March 31,      Change  
         2021              2020          $     %  
     (dollars in thousands)               

Equipment and merchandise

          

USA

   $ 2,481    $ 6,079    $ (3,598     (59 )% 

Australia

     839      1,518      (679     (45 )% 

ROW

     1,715      3,607      (1,892     (52 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equipment and merchandise

   $ 5,035    $ 11,204    $ (6,169     (55 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The $3.6 million, or 59%, decrease in equipment and merchandise revenue in the United States for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the decrease of World Pack sales during the first quarter of 2021. World Pack sales decreased by $3.6 million related to only 32 new studio openings during the period, compared to 56 new studio openings during the three months ended March 31, 2020. The decrease in World Pack sales during the three months ended March 31, 2021 was driven by a reduction in studio openings and World Pack deliveries due to the COVID-19 pandemic.

The $0.7 million, or 45%, decrease in equipment and merchandise revenue in Australia for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 in Australia was largely attributable to the decrease of new studio sales during the first quarter of 2021. World Pack sales decreased by $0.7 million from 1 new studio opening during the period, compared to World Pack sales to 12 new studio openings during the three months ended March 31, 2020. The decrease in World Pack sales during the three months ended March 31, 2021 was driven by a reduction in studio openings due to the COVID-19 pandemic.

The $1.9 million, or 52%, decrease in equipment and merchandise revenue for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 in ROW was primarily attributable to the decrease in World Pack sales during the first quarter of 2021. World Pack sales decreased by $1.9 million from 17 new studio openings during the period, compared to World Pack sales to 34 new studio openings during the three months ended March 31, 2020. The decrease in World Pack sales during the three months ended March 31, 2021 was driven by a reduction in studio openings and World Pack deliveries due to the COVID-19 pandemic.

Cost of revenue

Cost of franchise revenue

 

     Three Months Ended March 31,     Change  
         2021             2020         $     %  
     (dollars in thousands)      

Franchise

        

USA

   $ 1,022   $ 2,931   $ (1,909     (65 )% 

Australia

     178     159     19     12

ROW

     14     94     (80     (85 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of franchise revenue

   $ 1,214   $ 3,184   $ (1,970     (62 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of franchise revenue

     9     23    

 

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The $1.9 million, or 65%, decrease in cost of franchise revenue in the United States for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily attributable to $1.9 million decrease related to marketing programs put on hold during the three months ended March 31, 2021 as a result of the COVID-19 pandemic.

The less than $0.1 million, or 12%, increase in cost of franchise revenue in Australia during the three months ended March 31, 2021 as compared to the same period in 2020 was attributable to incremental costs to fulfill contracts with franchisees.

The less than $0.1 million, or 85%, decrease in cost of franchise revenue in ROW during the three months ended March 31, 2021 as compared to the same period in 2020 was primarily attributable to decrease in marketing expenses as most studios were closed due to the COVID-19 pandemic.

Cost of equipment and merchandise

 

     Three Months Ended March 31,     Change  
         2021             2020         $     %  
     (dollars in thousands)              

Equipment and merchandise

        

USA

   $ 1,478   $ 3,026   $ (1,548     (51 )% 

Australia

     807     1,282     (475     (37 )% 

ROW

     896     2,023     (1,127     (56 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equipment and merchandise cost of revenue

   $ 3,181   $ 6,331   $ (3,150     (50 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of equipment and merchandise revenue

     63     57    

The $1.5 million, or 51%, decrease in cost of equipment and merchandise for the United States for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily attributable to a decrease of $1.5 million in equipment costs from the decrease in new studio openings during the period as a result of the COVID-19 pandemic. This decrease was partially offset by a nominal increase in merchandise costs.

The $0.5 million, or 37%, decrease in cost of equipment and merchandise for Australia for the three months ended March 31, 2021 as compared to the same period in 2020 relates to a decrease in equipment costs from the decrease in new studio openings during the period as a result of the COVID-19 pandemic.

The $1.1 million, or 56%, decrease in cost of equipment and merchandise for ROW for the three months ended March 31, 2021 as compared to the same period in 2020 is primarily attributable to a decrease in equipment costs from the decrease in new studio openings during the period as a result of the COVID-19 pandemic.

Selling, general, and administrative expenses

 

     Three Months Ended March 31,     Change  
         2021             2020         $      %  
     (dollars in thousands)               

Selling, general and administrative expenses

   $ 16,828     $ 13,991   $ 2,837        20

Percentage of revenue

     93     56     

 

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The $2.8 million, or 20%, increase in selling, general, and administrative expenses during the three months ended March 31, 2021 as compared to the same period in 2020 was primarily attributable to a $2.6 million increase in salaries and marketing expenses and $1.2 million increase in professional service fees from the continued expansion of our business, our ongoing brand awareness campaigns, and overhead incidental to day-to-day operations across our expanding global footprint. This increase was partially offset by a decrease of $0.5 million in travel expenses due to the COVID-19 pandemic and $0.4 million in other operating expenses, such as sales tax expenses.

Loss on derivative liabilities

 

     Three Months Ended March 31,      Change  
         2021              2020          $      %  
     (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. No such loss was recorded for the three months ended March 31, 2020.

Interest expense, net

 

     Three Months Ended March 31,      Change  
         2021              2020          $      %  
     (dollars in thousands)        

Interest expense, net

   $ 8,415    $ 378    $ 8,037      2126

The increase in interest expense, including the amortization of debt discounts, net for the three months ended March 31, 2021 compared to the same period in 2020 was a result of the new borrowings taken out on October 6, 2020. The borrowings as of March 31, 2020 were $48.5 million, while total debt (including convertible debt) outstanding as of March 31, 2021 increased to $248.6 million.

Other expense, net

 

     Three Months Ended March 31,      Change  
         2021              2020          $     %  
     (dollars in thousands)        

Other expense, net

   $ 291      $ 1,681    $ (1,390     (83 )% 

The $1.4 million increase in other (income) expense, net represents realized and unrealized gains and losses on foreign currency transactions. This increase during the three months ended March 31, 2021, was mostly due to the volatility of foreign exchange rates during the three months ended March 31, 2021 under the COVID-19 pandemic compared to the strengthening of the U.S. dollar relative to the Australian dollar during the same period in prior year.

 

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Provision for income taxes

 

     Three Months Ended March 31,      Change  
         2021             2020          $     %  
     (dollars in thousands)               

(Benefit) provision for income taxes

   $