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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from     to
Commission File Number 001-36773
F45 Training Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
84-2529722
(I.R.S. Employer Identification Number)
3601 South Congress Avenue, Building E
Austin, Texas 78704
(Address of principal executive offices and zip code)
(737) 787-1955
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.00005
Trading Symbol
FXLV
Name of each exchange on which registered
OTC Markets

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
ý
Non-accelerated filer
Smaller reporting company
ý
Emerging growth company
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: Yes
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No
As of November 6, 2023, there were approximately 97,516,791 shares of the registrant's common stock outstanding.
1


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

2



Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words, variations of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:
our history of operating losses and negative cash flow;
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 inability to sell new franchises due to our delayed financial reporting;
our ability to protect our brand and reputation;
our ability to identify, recruit and contract with a sufficient number of qualified franchisees;
our ability to execute our growth strategy, including through development of new studios by new and existing franchisees;
our ability to manage our growth and the associated strain on our resources;
our ability to identify, source and procure components of our inventories on a timely basis and at attractive economics terms;
our ability to raise capital, including potential effects from our delisting from the New York Stock Exchange (“NYSE”) and anticipated deregistration of our common stock from the Securities and Exchange Commission (“SEC”);
our ability to successfully integrate any acquisitions, or realize their anticipated benefits;
the high level of competition in the health and fitness industry;
economic, political and other risks associated with our international operations, including due to international conflicts;
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;
risks related to litigation;
certain health and safety risks to members that arise while at our studios;
our ability to adequately protect our intellectual property;
our ability to adequately ensure that we are not infringing on the intellectual property of others;
risks associated with the use of social media platforms in our marketing;
our ability to obtain and retain high-profile strategic partnership arrangements;
our ability to comply with existing or future franchise laws and regulations;
our ability to anticipate and satisfy consumer preferences and shifting views of health and fitness;
our business model being susceptible to litigation; and
additional factors discussed in our SEC filings, including those identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report, filed with the SEC on October 23, 2023.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q on historical performance, management’s current expectations and projections about future events and trends that management believes may affect our business, results of operations, financial condition and prospects in light of information currently available to us.
3



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” in Part I, Item 1A of our Annual Report, filed with the SEC on October 23, 2023. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward- looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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

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

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements (Unaudited)
1




F45 Training Holdings Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts and share data)
(unaudited)
March 31, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$53,730 $5,265 
Restricted cash68 69 
Accounts receivable, net4,101 9,929 
Due from related parties, net115 1,669 
Inventories43,058 42,497 
Deferred costs1,891 1,886 
Prepaid expenses6,698 7,850 
Other current assets6,485 6,279 
Total current assets116,146 75,444 
Lease right-of-use asset13,905 14,258 
Property and equipment, net9,665 10,035 
Goodwill2,110 2,145 
Intangible assets, net6,269 6,262 
Deferred costs, net of current portion10,601 10,916 
Other long-term assets21,386 23,646 
Total assets$180,082 $142,706 
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses$44,217 $48,485 
Other current liabilities3,298 2,559 
Deferred revenue14,190 15,929 
Interest payable464 384 
Current portion of long-term debt2,096 106 
Income taxes payable4,845 5,102 
Total current liabilities69,110 72,565 
Deferred revenue, net of current portion3,824 2,980 
Long-term derivative liabilities23,532  
Lease liabilities, net of current portion16,855 17,184 
Long-term debt, net of current portion125,060 88,341 
Other long-term liabilities4,502 4,548 
Total liabilities242,883 185,618 
Commitments and contingencies (Note 15)
Stockholders’ deficit
Common stock, $0.00005 par value; 97,063,323 and 96,705,318 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively
6 6 
Additional paid-in capital684,909 681,338 
Accumulated other comprehensive loss(2,233)(1,426)
Accumulated deficit(570,763)(548,110)
Less: Treasury stock(174,720)(174,720)
Total stockholders' deficit(62,801)(42,912)
Total liabilities and stockholders' deficit$180,082 $142,706 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
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F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share amounts and share data)
(unaudited)

Three Months Ended
March 31,
20232022
(As Restated)
Revenues:
Franchise (Related party: $305 and $2,616 for the three months ended March 31, 2023 and 2022, respectively)
$14,609 $19,860 
Equipment and merchandise (Related party: $265 and $7 for the three months ended March 31, 2023 and 2022, respectively)
2,971 9,528 
Total revenues17,580 29,388 
Costs and operating expenses:
Cost of franchise revenue2,324 1,307 
Cost of equipment and merchandise (Related party: $404 and $951 for the three months ended March 31, 2023 and 2022, respectively)
3,528 7,113 
Selling, general and administrative expenses31,504 32,116 
Total costs and operating expenses37,356 40,536 
Loss from operations(19,776)(11,148)
Interest expense, net3,231 126 
Other (income) expense, net(554)622 
Loss before income taxes(22,453)(11,896)
Provision (benefit) for income taxes200 (2,418)
Net loss$(22,653)$(9,478)
Other comprehensive (loss) income
Foreign currency translation adjustment, net of tax(807)1,016 
Comprehensive loss$(23,460)$(8,462)
Net loss per share
Basic and diluted$(0.23)$(0.10)
Shares used in computing net loss per share
Basic and diluted96,884,584 95,709,671 


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

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

Three Months Ended March 31, 2023
Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders'
Deficit
SharesAmount
Balance as of December 31, 202296,705,318 $6 $681,338 $(174,720)$(1,426)$(548,110)$(42,912)
Stock-based compensation— — 4,087 — — — 4,087 
Issuance of common stock upon exercise of stock options1,366 — — — — — — 
Issuance of common stock related to settlement of RSUs415,639   — — —  
Shares withheld related to net share settlement of equity awards(187,205)— (516)— — — (516)
Vested restricted stock awards128,205 — — — — — — 
Net loss— — — — — (22,653)(22,653)
Cumulative translation adjustment, net of tax— — — — (807)— (807)
Balance as of March 31, 202397,063,323 $6 $684,909 $(174,720)$(2,233)$(570,763)$(62,801)

Three Months Ended March 31, 2022
Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance as of December 31, 202195,806,063 $5 $662,946 $(174,720)$1,151 $(369,311)$120,071 
Stock-based compensation— — 487 — — — 487 
Vested restricted stock awards7,739 — — — — — — 
Vested restricted stock units to be issued in association with promotional agreement
914,692 1 2,963 — — — 2,964 
Shares withheld related to net share settlement of equity awards(1,045,661)— (10,991)— — — (10,991)
Net income (As Restated)— — — — — (9,478)(9,478)
Cumulative translation adjustment, net of tax (As Restated)— — — — 1,016 — 1,016 
Balance as of March 31, 2022 (As Restated)95,682,833 $6 $655,405 $(174,720)$2,167 $(378,789)$104,069 



The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
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F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
20232022
(As Restated)
Cash flows from operating activities
Net loss$(22,653)$(9,478)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation336 286 
Amortization of intangible assets529 888 
Amortization of deferred costs933 626 
Amortization of debt issuance costs and debt discount207  
Bad debt expense5,514 1,464 
Stock-based compensation4,087 2,073 
Non-cash lease expense550  
Provision for inventories(17)(52)
In-kind marketing 57 
Unrealized foreign currency transaction gains14 360 
Impairment expense18  
Changes in operating assets and liabilities:
Due from related parties (294)
Accounts receivable, net2,116 (12,498)
Inventories(572)(9,262)
Prepaid expenses1,148 (20,085)
Other current assets(8,433)(6,197)
Deferred costs(685)(806)
Other long-term assets9,580 (5,375)
Accounts payable and accrued expenses(3,774)10,278 
Deferred revenue(1,115)(774)
Interest payable1,280 (104)
Income taxes payable(310)(2,346)
Other long-term liabilities730 5,405 
Lease liabilities(481) 
Net cash used in operating activities$(10,998)$(45,834)
Cash flows from investing activities
Purchases of property and equipment(600)(2,117)
Disposal of property and equipment134  
Purchases of intangible assets(180)(1,296)
Net cash used in investing activities$(646)$(3,413)
Cash flows from financing activities
Deferred financing costs(5,662) 
Borrowings under KLIM Term Loan87,300 — 
Repayments of revolving facility(20,100) 
Borrowings under revolving facility— 31,600 
Taxes paid related to net share settlement of equity awards(516)(10,991)
Net cash provided by financing activities$61,022 $20,609 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(914)626 
Net change in cash, cash equivalents, and restricted cash$48,464 $(28,012)
Cash and cash equivalents at beginning of period5,265 42,004 
Restricted cash at beginning of period69  
Cash, cash equivalents, and restricted cash at beginning of period$5,334 $42,004 
Cash and cash equivalents at end of period53,730 13,992 
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Three Months Ended March 31,
20232022
(As Restated)
Restricted cash at end of period68  
Cash, cash equivalents, and restricted cash at end of period$53,798 $13,992 
Supplemental disclosure of noncash financing and investing activities:
Property and equipment included in accounts payable and accrued expenses$20 $1,008 
Intangible assets included in accounts payable and accrued expenses$453 $184 
Operating lease ROU assets obtained in exchange for operating lease liabilities$164 $ 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
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F45 Training Holdings Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1—Nature of the business and basis of presentation

Organization

F45 Training Holdings Inc. and its subsidiaries (“F45 Training Holdings”, the “Company”, or “F45”) are a global fitness franchisor engaged in franchising and licensing the F45 Training, FS8, and Vive Active brands to fitness facilities in multiple countries across the globe. The Company was incorporated in the State of Delaware on March 12, 2019. The Company is headquartered in Austin, Texas.

Joint Venture with Club Sports Group LLC

On May 16, 2022, the Company announced the formation of a joint venture with Club Sports Group LLC, a Delaware limited liability company (“CSG”), to, among other things, make, hold and monetize certain loans to prospective franchisees of the Company who have prior military service, with such loans secured by first priority senior liens on the equity interests of such franchisees and all or substantially all of the assets of such franchisees and its subsidiaries (if applicable). The joint venture will be conducted through FAFC LLC, a newly-formed Delaware limited liability company (“FAFC”). CSG is wholly owned by Kennedy Lewis Management LP, a significant stockholder of the Company which beneficially owns directly or indirectly through funds it manages, as of the date hereof, in excess of 14% of the Company’s outstanding common stock, and its related affiliates, and has the right to nominate a majority of the Company’s board of directors. As of March 31, 2023, no activity has occurred through FAFC.

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) and applicable regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting, and include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company consolidates variable interest entities (“VIE”) in which it is the primary beneficiary and has a controlling financial interest, which is defined as (i) the power to direct the activities of a VIE that most significantly affect the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company has determined it possesses a variable interest in certain franchisee entities to which the Company provides a lease guaranty or financing (see Note 15—Commitments and contingencies) but lacks the characteristics of having a controlling financial interest. As our franchisee entities provide our franchisee the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. The Company, therefore, is not deemed to be the primary beneficiary for these franchise entities and, as a result, does not include them in the Company’s consolidation.

Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Use of estimates

The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
7



Key estimates and judgments relied upon in preparing these unaudited interim condensed consolidated financial statements include revenue recognition, allowance for credit losses, depreciation of long-lived assets, internally developed software, amortization of intangible assets, valuation of inventory, fair value of derivative instruments, valuation of stock-based compensation, and accounting for income taxes. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable. Actual results could differ from these estimates.

Going Concern

The accompanying unaudited interim condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company currently funds its operations primarily from cash on hand, credit facilities and operating cash flow. The Company has historically incurred losses and negative cash flows from operations. The Company’s forecast for the twelve months from the date of these unaudited interim condensed consolidated financial statements could result in the possibility of insufficient resources to meet its ongoing obligations and maintain compliance with the minimum liquidity requirement of $10 million in its credit agreement. The Company has determined that these circumstances represent conditions regarding the Company’s ability to continue as a going concern before consideration of management’s plans.

In response to these conditions, the Company obtained additional financing and intends to implement the following to reduce the demands on future Company resources: i) eliminate costs associated with being a public registrant with the SEC by the filing of Form-15 as soon as it is able to; and ii) manage the cash flows associated with non-recurring expenditures, including legal fees, certain professional services fees, and others. The NYSE filed a Form 25 with the SEC on August 25, 2023 with respect to the Company to effect the withdrawal of the listing of its common stock from the NYSE and the deregistration of its common stock under Section 12(b) of the Exchange Act (which became effective on September 5, 2023), and the Company intends to file a Form 15 as soon as practicable after the Company’s outstanding filings with the SEC have been filed. Additionally, management believes that they will be successful in limiting the Company’s non-recurring expenditures and managing the timing of such expenditures for at least twelve months from the date these unaudited interim condensed consolidated financial statements are issued. As a result, the Company’s management believes that the Company will be able to continue as a going concern for at least twelve months from the date these unaudited interim condensed consolidated financial statements are issued. The unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Subordinated Credit Agreement

On February 14, 2023, the Company entered into a credit agreement (as amended, the “Subordinated Credit Agreement”) with certain subsidiaries of the Company party thereto as guarantors (the “Guarantors”), Alter Domus (US) LLC, as administrative Agent and Australian security trustee, and the lenders party thereto. The lender group consists of existing stockholders of the Company led by affiliates of Kennedy Lewis Investment Management LP (“KLIM”), the investment manager to significant stockholders of the Company and party to the Company’s Third Amended and Restated Stockholders’ Agreement. The Subordinated Credit Agreement provides for a $90.0 million, five-and-a-half-year term loan facility (the “KLIM Term Loan”) at an original issue discount of 3.00% payable in kind. The proceeds from the KLIM Term Loan were used by the Company to pay down $20.1 million of existing indebtedness and accrued interest and fees on its existing credit facility with JPMorgan Chase Bank, N.A., and to pay down other liabilities of the Company and for general corporate purposes. The obligations under the Subordinated Credit Agreement are secured by substantially all of the assets of the Company and the Guarantors.

Amounts outstanding under the Subordinated Credit Agreement accrue interest at a rate of 12.00% per annum, payable in kind. Upon repayment or acceleration of the KLIM Term Loan (including in connection
8


with a change of control), the Company is required to pay an exit fee equal to: (i) 35% of the then-current principal balance of the KLIM Term Loan during the first 12 months following closing of the KLIM Term Loan; (ii) 25% of the then-current principal balance of the KLIM Term Loan during the next 12 months; and (iii) 10% of the then-current principal balance of the KLIM Term Loan thereafter.

Amendment to Subordinated Credit Agreement

On October 20, 2023, the Company entered into an Amendment to the Subordinated Credit Agreement. Pursuant to the amendment, the lenders agreed to extend credit in the form of an incremental loan in an original aggregate principal amount equal to $40.0 million, upon the same terms as the original loan amount. Approximately $5.0 million of the proceeds were used to pay down a portion of the loan outstanding on the Company’s existing credit facility with JPMorgan Chase Bank, N.A. In addition, the lenders provided the Company with a delayed draw facility of up to $10 million.


Note 2—Restatement of Previously Issued Unaudited Interim Condensed Consolidated Financial Statements
As previously described in Part II Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company restated its consolidated financial statements as of and for the year ended December 31, 2021. The errors underlying the restatement also impacted the unaudited interim condensed consolidated financial statements for each of the interim periods within the year ended December 31, 2022.

Description of Restatement Errors

The errors identified as of and for the three months ended March 31, 2022 are as follows:

Equipment and merchandise revenue - The Company prematurely recognized Equipment and merchandise revenue before the criteria under ASC 606, Revenue from Contracts with Customers (“ASC 606”) had been met. In particular, errors resulted from incorrect conclusions regarding (i) the identification and recognition of performance obligations for customer contracts and (ii) the assessment of criteria of a contract under ASC 606. The restatement resulted in a change in the timing of the recognition of revenue and deferred revenue until such transactions meet all the criteria for revenue recognition.
Cost of equipment and merchandise - The associated Cost of equipment and merchandise for each equipment and merchandise revenue sales order was also recognized in the incorrect period.
Vendor rebate - The Company incorrectly recognized a rebate received from a vendor.
Income taxes - The Company recalculated its income tax expense on an annual and quarterly basis to account for the identified restatement adjustments.
Other errors - There are other restatement errors otherwise not described in the restatement errors listed above. These errors and related restatement adjustments were not material for the three months ended March 31, 2022.


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The following table presents the impact of the restatement to the unaudited interim condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2022:

Three Months Ended
March 31, 2022
As Previously Reported
Restatement AdjustmentsAs Restated
Revenues:
Franchise $19,860 $ $19,860 
Equipment and merchandise30,148 (20,620)9,528 
Total revenues50,008 (20,620)29,388 
Costs and operating expenses:
Cost of franchise revenue1,231 76 1,307 
Cost of equipment and merchandise 10,943 (3,830)7,113 
Selling, general and administrative expenses32,090 26 32,116 
Total costs and operating expenses44,264 (3,728)40,536 
Income (loss) from operations
5,744 (16,892)(11,148)
Interest expense, net126  126 
Other expense, net570 52 622 
Income (loss) before income taxes5,048 (16,944)(11,896)
Provision (benefit) for income taxes
2,536 (4,954)(2,418)
Net income (loss)$2,512 $(11,990)$(9,478)
Other comprehensive income (loss)
Foreign currency translation adjustment, net of tax906 110 1,016 
Comprehensive income (loss)$3,418 $(11,880)$(8,462)
Per share data:
Earnings (loss) per share
Basic and diluted$0.03 $(0.13)$(0.10)
Shares used in computing earnings (loss) per share
Basic95,709,671  95,709,671 
Diluted96,687,283 (977,612)95,709,671 

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The following table presents the impact of the restatement to the unaudited interim condensed consolidated statement of cash flows for the three months ended March 31, 2022:


Three Months Ended
March 31, 2022
As Previously Reported
Restatement AdjustmentsAs Restated
Cash flows from operating activities
Net income (loss)$2,512 $(11,990)$(9,478)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation286  286 
Amortization of intangible assets888  888 
Amortization of deferred costs626  626 
Bad debt expense1,464  1,464 
Stock-based compensation2,073  2,073 
In-kind marketing57  57 
Provision for inventories(52) (52)
Unrealized foreign currency transaction gains381 (21)360 
Changes in operating assets and liabilities:
Due from related parties(294) (294)
Accounts receivable, net(16,413)3,915 (12,498)
Inventories(4,160)(5,102)(9,262)
Prepaid expenses(20,085) (20,085)
Other current assets(12,498)6,301 (6,197)
Deferred costs(1,194)388 (806)
Other long-term assets(8,068)2,693 (5,375)
Accounts payable and accrued expenses1,963 8,315 10,278 
Deferred revenue3,527 (4,301)(774)
Interest payable(104) (104)
Income taxes payable3,149 (5,495)(2,346)
Other long-term liabilities952 4,453 5,405 
Net cash used in operating activities$(44,990)$(844)$(45,834)
Cash flows from investing activities
Purchases of property and equipment(2,117) (2,117)
Purchases of intangible assets(1,296) (1,296)
Net cash used in investing activities$(3,413)$ $(3,413)
Cash flows from financing activities
Borrowings under revolving facility31,600  31,600 
Taxes paid related to net share settlement of equity awards(10,991) (10,991)
Net cash provided by financing activities$20,609 $ $20,609 
Effect of exchange rate changes on cash and cash equivalents(218)844 626 
Net increase (decrease) in cash, cash equivalents, and restricted cash(28,012) (28,012)
Cash and cash equivalents at beginning of period42,004  42,004 
Cash and cash equivalents at end of period$13,992 $ $13,992 

The impacts to the unaudited interim condensed consolidated statement of changes in stockholders’ (deficit) equity during the three months ended March 31, 2022 are an increase to Accumulated deficit of $22.7 million and an increase to Accumulated other comprehensive income of $0.7 million.


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Note 3—Summary of significant accounting policies

There were no changes to the significant accounting policies or recent accounting pronouncements that were disclosed in Note 3—Summary of significant accounting policies to the audited consolidated financial statements of the Company as of and for the years ended December 31, 2022 and 2021, other than as discussed below.

Concentration of credit risk

One of the Company’s customers accounted for approximately 37% of the Company’s Accounts receivable as of March 31, 2023. No customer accounted for more than 10% of the Company’s Accounts receivable as of December 31, 2022. No customer accounted for more than 10% of the Company’s total revenues for the three months ended March 31, 2023 or 2022.

Credit losses

The Company’s accounts and notes receivable are recorded at net realizable value, which includes an allowance for estimated credit losses. The Company estimates credit losses based on historical collections, age of receivable balances, the customer’s financial condition, and current economic trends, all of which are subject to change. The Company’s payment terms on its accounts receivable from franchisees are generally 30 days.

The change in the Company’s allowance for credit losses is as follows (in thousands):

For the Three Months Ended March 31,
20232022
Balance at beginning of period$16,043 $8,132 
Provisions for bad debts, included in Selling, general and administrative5,514 1,464 
Uncollectible receivables written off(2,449)(4,230)
Balance at end of period$19,108 $5,366 

Debt issuance costs and debt discount

The Company records debt issuance costs as a reduction to the carrying value of the related debt on the condensed consolidated balance sheets. Debt issuance costs and debt discount are amortized over the term of the related debt using the straight-line method of amortization, which approximates the effective interest method. Amortization of debt issuance costs are included in Interest expense, net on the unaudited condensed consolidated statements of operations and comprehensive loss.

Derivative instruments

Embedded derivatives

When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative liability. The estimated fair value of the derivative feature is recorded as a liability in the consolidated balance sheets, separate from the carrying value of the host contract. Subsequent changes in the estimated fair value of the embedded derivatives are recorded as a gain or loss in within Loss on derivative liabilities in the Company’s condensed consolidated statements of operations and comprehensive loss.

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The Company estimates the fair value of the embedded derivatives through a “with-and-without method” that isolates the value of the embedded derivatives by measuring the difference between the host contract’s value “with” and “without” the embedded derivatives. This method utilizes the following inputs: (i) the expected term in years, (ii) the probability of a change in control event, (iii) an exit fee, (iv) the make-whole premium discount rate, and (v) the implied discount rate. These inputs are considered Level 3 inputs in the fair value hierarchy. The host contract’s value with the embedded derivatives involves the application of an implied discount rate based on repayment and prepayment scenarios upon the estimated timing and probability weighted expected change in control events. Valuations derived from this method are subject to ongoing internal and external verification review. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

Recently issued accounting pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company (“EGC”). The Company has elected to take advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Topic 326 was subsequently amended by ASU No. 2018-19, Codification Improvements, ASU No. 2019-04, Codification Improvements, ASU No. 2019-05, Targeted Transition Relief; ASU No. 2019-10, Effective Dates, ASU No. 2019-11, Codification Improvements, and ASU No. 2020-02, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC section on Effective Date Related to ASU 2016-02, and ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. The guidance changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current ‘incurred loss’ model with an ‘expected loss’ approach. The adoption of this accounting standard on January 1, 2023 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (“ASU 2020-04”), which provides companies with optional guidance, including expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company is currently evaluating the impact of ASU 2022-06 on its consolidated financial statements; however, the Company does not believe that adoption of ASU 2022-06 will materially impact its consolidated financial statements.



Note 4—Other current assets

Other current assets consists of the following as of March 31, 2023 and December 31, 2022 (in thousands):

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March 31, 2023December 31, 2022
Unbilled receivables, current$4,873 $5,205 
Rebate receivables937 348 
Prepaid taxes407 483 
Other268 243 
Total$6,485 $6,279 

Note 5—Property and equipment, net

Property and equipment, net, consists of the following as of March 31, 2023 and December 31, 2022 (in thousands):
Estimated Useful LifeMarch 31, 2023December 31, 2022
(years)
Vehicles5$112 $246 
Furniture and fixtures71,116 1,105 
Office and other equipment51,199 1,190 
Leasehold improvementsLesser of lease term or useful life8,294 8,272 
Construction in progressn/a1,004 994 
11,725 11,807 
Less: accumulated depreciation(2,060)(1,772)
Total property and equipment, net$9,665 $10,035 

Construction in progress (“CIP”) consists of costs associated with the build-out of corporate-owned FS8 studios.

Depreciation expense related to Property and equipment was approximately $0.3 million for each of the three months ended March 31, 2023 and 2022. Depreciation expense was recorded in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss.

Note 6—Goodwill and intangible assets

The following table summarizes the useful lives and carrying values of intangible assets, including internal-use software (in thousands):

As of March 31, 2023As of December 31, 2022
Useful LifeGross ValueAccumulated AmortizationNet ValueGross ValueAccumulated AmortizationNet Value
(in years)
Goodwilln/a$2,110 $— $2,110 $2,145 $— $2,145 
Internal-use software3$6,179 $3,433 $2,746 $5,852 $3,054 $2,798 
Trade names & trademarksn/a1,926  1,926 1,808  1,808 
Customer contracts7721 59 662 733 30 703 
Acquired software
3 - 6
962 27 935 966 13 953 
Total intangible assets, net$9,788 $3,519 $6,269 $9,359 $3,097 $6,262 

The amortization expense of intangible assets was $0.5 million and $0.9 million for the three months ended March 31, 2023 and 2022, respectively, and was recorded in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss. The weighted average remaining life of internal-use software was 1.9 years and 1.8 years as of
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March 31, 2023 and December 31, 2022, respectively. The weighted average remaining life of acquired software was 2.4 years and 2.3 years as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023, the expected amortization of intangible assets for future periods, excluding assets not yet placed in service of $0.1 million, is as follows (in thousands):

Future Amortization
Remainder of 2023$1,330 
20241,490 
2025942 
2026171 
2027162 
Thereafter99 
Total$4,194 

Note 7—Other long-term assets

Other long-term assets consist of unbilled receivables, right of return asset, debt issuance costs, investments in CLF High Street Limited, long-term accounts receivable and other long-term assets. The Company recorded a right of return asset related to World Packs that were sold to franchisees pursuant to multi-unit development agreements. These agreements did not meet the criteria of a contract with a customer under ASC 606. The Company intends to recover the World Packs that were delivered, for which it has not yet received payment. The amounts for delivered World Packs have been recorded as a right of return asset. The following table summarizes Other long-term assets as of March 31, 2023 and December 31, 2022 (in thousands):

March 31, 2023December 31, 2022
Unbilled receivables, net of current$9,771 $11,112 
Right of return asset8,239 8,224 
Debt issuance costs(1)
 733 
Investment in CLF High Street Limited
606 590 
Long-term accounts receivable1,900 2,135 
Other long-term assets870 852 
Total$21,386 $23,646 

(1)
As of January 1, 2023, debt issuance costs and debt discount, net of accumulated amortization, were recorded as a reduction to the carrying value of the related debt within Long-term debt, net of current portion, on the unaudited interim condensed consolidated balance sheets. See Note 10—Debt for additional information.

Note 8—Accounts payable and accrued expenses

Accounts payable and accrued expenses were comprised of the following (in thousands):
March 31, 2023December 31, 2022
Accounts payable$17,995 $21,767 
Accrued sales tax5,576 6,329 
Accrued payroll and benefits3,207 3,281 
Accrued litigation expenses2,525 9,613 
Accrued professional fees8,312 3,557 
Accrued inventory purchases and storage costs975 3,089 
Other payables5,627 849 
Total$44,217 $48,485 

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Note 9—Deferred revenue

Deferred revenue results from establishment fees paid by franchisees at the outset of the contract term and the value of material rights related to discounted renewal options as well as equipment fees paid by franchisees prior to the transfer of the equipment. During the three months ended March 31, 2023, the Company recognized approximately $4.0 million of revenue that was included in the Deferred revenue balance at the beginning of the period. The following tables reflect the change in Deferred revenue during the three months ended March 31, 2023 and 2022 (in thousands):

Deferred Revenue
Balance at December 31, 2022$18,909 
Net change(895)
Balance at March 31, 2023$18,014 

Deferred Revenue
Balance at December 31, 2021$22,366 
Net change(673)
Balance at March 31, 2022 (As Restated)$21,693 

Deferred revenue expected to be recognized within one year from the balance sheet date is classified as current, and the remaining balance is classified as non-current. Transaction price allocated to remaining performance obligations represents contracted franchise and equipment revenue that has not yet been recognized, which includes deferred revenue recognized as revenue in future periods. As of March 31, 2023, remaining performance obligations were $18.0 million of which the Company expects to recognize approximately $14.2 million as revenue over the next 12 months.


Note 10—Debt

The following table provides a summary of the Company’s outstanding debt as of March 31, 2023 and December 31, 2022 (in thousands):

March 31, 2023December 31, 2022
Term loan$66,000 $ 
Revolving facility2,000 88,100 
Subordinated second lien PIK loan88,530  
Other debt336 347 
Total debt, excluding deferred financing costs and discounts156,866 88,447 
Deferred financing costs, net(6,353)(733)
Discount on debt, net(23,357) 
Total debt$127,156 $87,714 

First Lien Loan

The Company entered into a senior secured credit agreement, dated as of September 18, 2019 (the “Secured Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Australian Security Trustee, Lender, Swingline Lender and Issuing Bank, consisting of a $20.0 million revolving credit facility (the “Revolving Facility”) and a $30.0 million term loan facility (the “Term Facility”).

On June 23, 2020, the Company amended the Secured Credit Agreement to allow it to enter into a definitive agreement with a special purpose acquisition corporation. On October 6, 2020, the Company further amended the Secured Credit Agreement, pursuant to which amendment, the Company agreed to
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convert $8.0 million of the amount outstanding under 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.

On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Term Facility. The Company used proceeds from its IPO to repay the Term Facility and Revolving Facility in the amount of $31.1 million and $7.0 million, respectively.

On August 13, 2021, the Company entered into an amended and restated credit agreement (as the same may be amended, restated, supplemented, or otherwise modified from time to time, the “Senior Credit Agreement”), which amended and restated the Secured Credit Agreement dated September 18, 2019. The Senior Credit Agreement provided for a $90.0 million five-year senior secured revolving facility (“Facility”). The Senior Credit Agreement also provided that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $35.0 million.

On May 13, 2022, the Company entered into a second amendment (the “Second Amendment”) to the Senior Credit Agreement. Pursuant to the Second Amendment, certain terms of the Senior Credit Agreement were amended to permit the execution of the Fortress Credit Agreement (including establishing the securitization of the franchisee loans described below) and the issuance of warrants pursuant to the Warrant Purchase Agreement.

On July 25, 2022, the Company entered into a Waiver Under Credit Agreement (the “Senior Credit Agreement Waiver”) with JPMorgan Chase Bank, N.A., as administrative agent and Australian Security Trustee. Pursuant to the Senior Credit Agreement Waiver, certain lenders party to the Credit Agreement agreed to waive certain defaults under the Senior Credit Agreement related to cross-default provisions associated with required minimum market capitalization thresholds under the Company’s Fortress Credit Agreement.

On February 14, 2023, the Company entered into a third amendment (the “Third Amendment”) to the Senior Credit Agreement. Pursuant to the Third Amendment, certain amendments were made to the terms of the Senior Credit Agreement to permit the execution of a $90.0 million, five-and-a-half-year term loan facility with a lender group consisting of existing stockholders of the Company led by affiliates of Kennedy Lewis Investment Management LP. In addition, a $20.1 million repayment to the Lender was required to facilitate the carve out of a $66.0 million term loan (“Term Loan”) on the Facility, with an interest rate of the Secured Overnight Financing Rate) (“SOFR”) plus 550 basis points per annum and a two-year term, and a $2.0 million revolving credit facility (“New Revolving Facility”) (10.46% as of March 31, 2023).

In connection with the New Revolving Facility, the Lender issued standby letters of credit on behalf of the Company associated with our corporate headquarters. The outstanding commitments under these letters of credit as of March 31, 2023 totaled $1.6 million, all of which have expiration dates in less than one year. The amount of borrowings available at any time under the New Revolving Facility is reduced by the amount of letters of credit outstanding.

As a result of the reduction in borrowing capacity on the Facility with the Third Amendment, the Company, in proportion to the decrease in borrowing capacity, performed a write-off of debt issuance costs of $0.2 million during the three months ended March 31, 2023 which is included in Interest expense, net. Additionally, the Company has capitalized all new lender and third party fees paid and recognizes these fees as part of interest expense over the life of the modified debt in accordance with the effective interest method. The unamortized debt issuance cost in connection to the Facility as of March 31, 2023 and December 31, 2022 was $0.7 million and $0.7 million, respectively. The availability on the Facility as of March 31, 2023 and December 31, 2022 was $0.4 million and $0.3 million, respectively.

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Subordinated Second Lien PIK Credit Agreement

On February 14, 2023, the Company entered into a subordinated credit agreement (the “Subordinated Credit Agreement”) with certain subsidiaries of the Company party thereto as guarantors (the “Guarantors”), Alter Domus (US) LLC, as administrative Agent and Australian security trustee, and the lenders party thereto. The lender group consists of existing stockholders of the Company led by affiliates of Kennedy Lewis Investment Management LP (“KLIM”), the investment manager to significant stockholders of the Company and party to the Company’s Third Amended and Restated Stockholders’ Agreement. The Subordinated Credit Agreement provides for a $90.0 million, five-and-a-half-year term loan facility (the “KLIM Term Loan”) at an original issue discount of 3.00% payable in kind. The proceeds from the KLIM Term Loan were used by the Company to pay down $20.1 million of outstanding amounts owed on the existing credit facility with JPMorgan Chase Bank, N.A., to pay down other liabilities of the Company and for general corporate purposes. The obligations under the Subordinated Credit Agreement are secured by substantially all of the assets of the Company and the Guarantors.

Amounts outstanding under the KLIM Term Loan accrue interest at a rate of 12.00% per annum, payable in kind. The outstanding balance on the loan facility as of March 31, 2023 was $88.5 million, which included $90.0 million of principal, $2.7 million in a paid-in-kind (“PIK”) fee taking the form of original issue discount, and $1.2 million of PIK interest accrued.

Certain features of the Subordinated Credit Agreement, specifically the exit fee and applicable premium, as described below, were identified as embedded derivatives and require bifurcation and separate valuation.

Exit Fee - The terms of the Subordinated Credit Agreement state that upon repayment or acceleration of the KLIM Term Loan, including in connection with a change of control, optional prepayment, or Event of Default, as defined under the Subordinated Credit Agreement, the Company is required to pay an exit fee (“Exit Fee”) equal to: (i) 35% of the then-current principal balance of the Subordinated Credit Agreement during the first 12 months following closing of the Subordinated Credit Agreement; (ii) 25% of the then-current principal balance of the Subordinated Credit Agreement during the next 12 months; and (iii) 10% of the then-current principal balance of the Subordinated Credit Agreement thereafter.

Applicable Premium - The terms of the Subordinated Credit Agreement state that in the event that a change in control shall occur, the Company shall prepay all of the outstanding KLIM Term Loan on the change in control date. The Company is also required to pay the Applicable Premium should the change in control date occur on or prior to the third anniversary of the effective date of the Subordinated Credit Agreement. The Applicable Premium is either a Make-Whole Premium, if the change in control date is prior to or on the first anniversary of the effective date of the Subordinated Credit Agreement, or a Prepayment Premium, if the change in control date occurs after the first anniversary of the effective date through the third anniversary of the effective date of the Subordinated Credit Agreement. The Make-Whole Premium is the present value of all required interest payments from the prepayment date through the first anniversary of the effective date of the Subordinated Credit Agreement. The present value is to be calculated using a discount rate equal to the Treasury Rate plus 50 basis points, plus an additional 2% of the then-current principal amount. The Prepayment Premium is 2% of the then-current principal amount if the prepayment date is after the first anniversary of the effective date but on or prior to the second anniversary of the effective date of the Subordinated Credit Agreement, or 1% of the then-current principal amount if the prepayment date is after the second anniversary of the effective date but on or prior to the third anniversary of the effective date of the Subordinated Credit Agreement, or 0% afterwards.

In accordance with ASC 815, Derivatives and Hedging, the Company identified embedded derivatives relating to the Exit Fee and Applicable Premium requiring bifurcation. See Note 11—Derivative instruments for further discussion on the Company’s accounting for the embedded derivatives.

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In connection with issuing of the KLIM Term Loan, the Company repaid the Lender $20.1 million on the Facility and $5.7 million in third party fees. The Company determined that all fees paid to the lenders and third parties would result in a reduction of the initial carrying amount of the note. The Company is amortizing the debt discount and debt issuance costs into interest expense utilizing the straight-line method of amortization, which approximates the effective interest method.

March 2023 Consents under Credit Agreements

On March 31, 2023, the Company, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and Australian Security Trustee, entered into a Consent Under Amended and Restated Credit Agreement, dated March 31, 2023 (the “JPM Credit Agreement Consent”) under the Senior Credit Agreement. In addition, on March 31, 2023, the Company, as borrower, the lenders party thereto and Alter Domus (US) LLC, entered into a Consent Under Subordinated Credit Agreement, dated March 31, 2023 (collectively with the JPM Credit Agreement Consent, the “March 2023 Consents”) under the Subordinated Credit Agreement (collectively with the Senior Credit Agreement, the “Credit Agreements”). Pursuant to the March 2023 Consents, the parties to the Credit Agreements agreed to waive certain defaults under the Credit Agreements with respect to the Company’s delayed audited financial statements for the year ended December 31, 2022 up until May 15, 2023, subject to the terms and conditions set forth in the March 2023 Consents.

Amendment of Letter Agreement

In connection with the entry into the Subordinated Credit Agreement, the Company and affiliates of KLIM entered into a letter agreement, dated as of February 14, 2023 (the “Side Letter”), as previously disclosed in the Company’s Current Report on Form 8-K, filed with the SEC on February 15, 2023. On April 14, 2023, the Company and such affiliates of KLIM entered into an Amendment to the Side Letter, to extend the time period provided to the Company to identify a permanent Chief Financial Officer candidate.

May 2023 Consents Under Credit Agreements

On May 12, 2023, the Company, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and Australian Security Trustee, entered into a Consent Under Amended and Restated Credit Agreement, dated May 12, 2023 (the “JPM Credit Agreement Consent”) under the Senior Credit Agreement. In addition, on May 12, 2023, the Company, as borrower, the lenders party thereto and Alter Domus (US) LLC, entered into a Consent Under Subordinated Credit Agreement, dated May 12, 2023 (collectively with the JPM Credit Agreement Consent, the “May 2023 Consents”) under the Subordinated Credit Agreements. Pursuant to the May 2023 Consents, the parties to the Credit Agreements agreed to extend the deadlines under the Credit Agreements with respect to delivery of the Company’s audited financial statements for the year ended December 31, 2022 and unaudited interim condensed consolidated financial statements for the quarters ended March 31, 2023 (collectively, the “Financial Statements”), together with the accompanying compliance certificates, subject to the terms and conditions set forth in the May 2023 Consents.

Fourth Amendment to Senior Credit Agreement

On June 30, 2023, the Company, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and Australian Security Trustee, entered into a Fourth Amendment to Amended and Restated Credit Agreement, dated June 30, 2023 (the “Fourth Amendment”), amending the Senior Credit Agreement. Pursuant to the Fourth Amendment, the lenders agreed to extend the deadlines under the Senior Credit Agreement with respect to delivery of the Financial Statements and unaudited interim condensed consolidated financial statements for the quarter ended June 30, 2023, together with the accompanying compliance certificates, and financial projections, to August 31, 2023, subject to the terms and conditions set forth in the Fourth Amendment.

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June 2023 Consent Under Subordinated Credit Agreement

On June 30, 2023, the Company, as borrower, the lenders party thereto and Alter Domus (US) LLC as administrative agent, entered into a Consent Under Subordinated Credit Agreement, dated June 30, 2023 (the “June 2023 Consent”) under the Subordinated Credit Agreement. Pursuant to the June 2023 Consent, the lenders agreed to extend the deadlines under the Subordinated Credit Agreement with respect to delivery of the Company’s Financial Statements and unaudited interim condensed consolidated financial statements for the quarter ended June 30, 2023, together with the accompanying compliance certificates, and financial projections, to August 31, 2023, subject to the terms and conditions set forth in the June 2023 Consent.

Further Amendment of Side Letter Agreement

On July 13, 2023, the Company and affiliates of KLIM further amended the Side Letter to extend the time period provided to the Company to identify a permanent Chief Financial Officer candidate.

Additional Consents Under Credit Agreements

On each of August 31, 2023, September 15, 2023 and September 29, 2023, the Company, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent and Australian security trustee, entered into a Consent under Amended and Restated Credit Agreement (the “JPM Consents”), under the Senior Credit Agreement. Pursuant to the JPM Consents, the lenders agreed to extend the deadlines under the Senior Credit Agreement with respect to delivery of (i) the Company’s audited financial statements for the fiscal year ended December 31, 2022 (the “2022 Financial Statements”), together with the accompanying compliance certificate, to October 20, 2023, and (ii) the Company’s unaudited interim condensed consolidated financial statements for the first and second quarters ended March 31, 2023 and June 30, 2023 (together with the 2022 Financial Statements, the “Financial Statements”) together with the accompanying compliance certificates, to October 24, 2023, in each case subject to the terms and conditions set forth in the JPM Consents.

On each of August 31, 2023, September 15, 2023 and September 29, 2023, the Company as borrower, the lenders party thereto and Alter Domus (US) LLC as administrative agent, entered into a Consent Under Subordinated Credit Agreement (the “Subordinated Credit Agreement Consents”) under the Subordinated Credit Agreement. Pursuant to the Subordinated Credit Agreement Consent, the lenders have agreed to extend the deadlines under the Subordinated Credit Agreement with respect to delivery of (i) the 2022 Financial Statements, together with the accompanying compliance certificate, to October 20, 2023, and (ii) the Company’s unaudited interim condensed consolidated financial statements for the first and second quarters ended March 31, 2023 and June 30, 2023, together with the accompanying compliance certificates, to October 24, 2023, in each case subject to the terms and conditions set forth in the Subordinated Credit Consents.

Amendment to Subordinated Credit Agreement and Senior Credit Agreement

On October 20, 2023, the Company entered into an Amendment to the Subordinated Credit Agreement. Pursuant to the amendment, the lenders agreed, subject to the satisfaction of certain conditions precedent, to extend credit in the form of an incremental loan in an original aggregate principal amount equal to $40.0 million, upon the same terms as the original loan amount, which the Company received on October 23, 2023, provide delayed draw commitments in an aggregate principal amount of up $10 million, and extend the deadline under the Subordinated Credit Agreement with respect to the delivery of the Company’s quarterly financial statements for the first and second fiscal quarters of 2023, together with the accompanying compliance certificate, to November 8, 2023. The delayed draw commitments are available to be drawn until the date that is fifteen months following the effective date of the Amendment to the Subordinated Credit Agreement. The incremental term loans and delayed draw
20


loans will accrue interest at a rate of 12.00% per annum, payable in kind, and will mature on August 13, 2028.

On October 20, 2023, the Company entered into a Fifth Amendment to the Senior Credit Agreement (the “Fifth Amendment”). Pursuant to the Fifth Amendment, the lenders agreed to permit the incremental loans and delayed draw commitments under the Subordinated Credit Agreement, and extend the deadline under the Senior Credit Agreement with respect to delivery of the Company’s quarterly financial statements for the first and second fiscal quarters of 2023, together with the accompanying compliance certificate, to November 8, 2023. In addition, the minimum liquidity covenant was amended to require that, as of the end of each fiscal month, the Company will not permit the sum of (i) Unrestricted Cash (as defined in the Senior Credit Agreement) and (ii) any undrawn commitments under the Specified Secured Subordinated Debt (as defined in the Senior Credit Agreement) to be less than $10 million, provided, however, that at no time shall the sum of (A) Unrestricted Cash and (B) any undrawn commitments under the Specified Secured Subordinated Debt be less than $7.5 million. The Fifth Amendment also required that that $5.0 million in term loans under the Senior Credit Agreement be repaid, which the Company repaid on October 23, 2023.

Interest expense

Interest expense recorded on the debt facilities was $3.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

The weighted-average interest rate on the Company’s outstanding debt as of March 31, 2023 was 11.36%.

Note 11—Derivative instruments

Embedded Derivatives

As discussed in Note 10—Debt, in February 2023, the Company entered into the Subordinated Credit Agreement. The Company has analyzed the embedded features of the Subordinated Credit Agreement and determined that certain of the embedded features should be bifurcated and classified as derivatives. The Company has bifurcated the following embedded derivatives: (i) the Exit Fee and (ii) the Applicable Premium.

The $23.5 million initial fair value of the embedded derivatives for the Subordinated Credit Agreement has been recorded as a debt discount along with a corresponding liability on the Company’s condensed consolidated balance sheets. The initial debt discount is not subsequently revalued and is being amortized using the straight-line method, which approximates the effective interest method over the life of the Subordinated Credit Agreement. The derivative liabilities are classified in the condensed consolidated balance sheets as non-current as the Company is not required to net cash settle within 12 months of the balance sheet date and are marked-to-market at each reporting period with changes in fair value recorded within Loss on derivative liabilities in the Company’s unaudited interim condensed consolidated statements of operations and comprehensive loss.

The Company valued the embedded derivatives using a “with-and-without method” where the value of the KLIM Term Loan including the embedded derivatives were defined as the “with” and the value of the KLIM Term Loan excluding the embedded derivatives were defined as the “without.” This method estimates the fair value of the embedded derivatives as the difference between the KLIM Term Loan value with and without the embedded derivatives. The fair value of the embedded derivative liabilities associated with the KLIM Term Loan was estimated using a probability weighted discounted cash flow model to measure the fair value. This involves significant Level 3 inputs and assumptions including an (i) estimated probability and timing of a change in control and (ii) our risk-adjusted discount rate.

The following table sets forth the inputs to the “with-and-without method” that was used to value the embedded derivatives based on potential change in control scenarios with different probabilities and a maturity scenario that would not result in a change in control event:
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As of March 31, 2023
Expected term in years
1.13
Exit fee “with” the embedded derivatives
10.00% - 35.00%
Make-whole premium discount rate(1)
5.49%
Implied discount rate
45.00%
(1)
The make-whole premium discount rate is the 1-year constant maturity Treasury rate plus 50 basis points as of March 31, 2023 and would not be applicable if the loan fully matures without a change in control event.

Note 12—Fair value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are based on a fair value hierarchy, based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted market prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amount of Cash and cash equivalents, Restricted cash, Accounts receivable, Inventory, and Accounts payable and accrued expenses, as reflected on the unaudited interim condensed consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments. These estimated fair values may not be representative of actual values of the financial instruments that could have been realized or that will be realized in the future.

The promotional agreements (see Note 15—Commitments and contingencies) and derivative instruments (see Note 11—Derivative instruments) are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which require determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk-free interest rate, expected dividend yield, expected volatility, and expected vesting date. The Level 3 liabilities generally decrease (increase) in value based upon an increase (decrease) in risk-free interest rate, expected vesting date, and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increases (decreases) if the expected volatility were to increase (decrease).

The inputs for determining fair value of the embedded Exit Fee and Applicable Premium are Level 3 instruments. Refer to Note 11—Derivative instruments for further discussion related to the inputs and accounting for these instruments.

The following table summarizes the Company’s total Level 3 liability activity for the three months ended March 31, 2023 (in thousands):
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Derivative LiabilityTotal Level 3 Liabilities
Fair value as of January 1, 2023$ $ 
Initial measurement on February 14, 202323,532 23,532 
Fair value as of March 31, 2023$23,532 $23,532 

The following table summarizes the Company’s total Level 3 liability activity for the three months ended March 31, 2022 (in thousands):

Promotional AgreementsTotal Level 3 Liabilities
Fair value as of January 1, 2022$4,474 $4,474 
  Change in valuation of promotional agreements1,588 1,588 
  Issuance of common stock pursuant to promotional agreement awards(2,963)(2,963)
Fair value as of March 31, 2022$3,099 $3,099 


Note 13—Income taxes

The effective income tax rate was a provision rate of negative 0.9% and positive 20.3% for the three months ended March 31, 2023 and 2022, respectively. The income tax expense for the interim period was computed using the effective tax rate estimated to be applicable for the full year. The effective tax rate reflects the tax effect of the establishment of a valuation allowance against the Company’s deferred tax assets in the second quarter of tax year 2022, and the effect of not recognizing the benefit of the losses incurred in 2023 and 2022 in jurisdictions where the Company concluded it is more likely than not that such benefits would not be realized.

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. As a result of this assessment during the second quarter of 2022, the Company concluded that it was more likely than not that the Company would not realize its deferred tax assets. For the period ended March 31, 2023, the Company considered cumulative losses as a significant source of negative evidence and maintained the valuation allowance against the Company’s deferred tax attributes in the U.S. and foreign jurisdictions.

As of March 31, 2023, the Company had $15.2 million of gross unrecognized tax benefits primarily related to marketing service awards that are not more-likely-than-not to be realized due to insufficient evidence to support payment of the service awards.

Note 14—Related party transactions

During each of the three months ended March 31, 2023 and 2022, the Company recognized less than $0.1 million of Franchise revenue and Equipment and merchandise revenue from studios owned by Mark Wahlberg, Chief Brand Officer and Director of the Company, and Michael Raymond, Director of the Company. With respect to these transactions, the Company has presented the revenue recognized during these periods in Franchise revenue in the unaudited interim condensed consolidated statements of operations and comprehensive loss. As of March 31, 2023 and December 31, 2022, the Company had no outstanding receivables from these studios. These amounts are included in Due from related parties on the unaudited interim condensed consolidated balance sheets.

During each of the three months ended March 31, 2023 and 2022, the Company recognized less than $0.1 million of Franchise revenue from studios owned by an entity in which an existing stockholder that is an executive officers. With respect to these transactions, the Company has presented the revenue recognized during these periods in Franchise revenue in the unaudited interim condensed consolidated
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statements of operations and comprehensive loss. As of each of March 31, 2023 and December 31, 2022, the Company had less than $0.1 million outstanding receivables from these studios. These amounts are included in Due from related parties on the unaudited condensed consolidated balance sheets.

During the three months ended March 31, 2023 and 2022, the Company incurred expenses totaling approximately $0.4 million and $1.0 million, respectively, in connection with certain shipping and logistic services from a third-party vendor that is owned by an immediate family member of a former executive officer of the Company (who was an executive officer of the Company during this time period). The Company has presented the expenses incurred during these periods in Cost of equipment and merchandise in the unaudited interim condensed consolidated statements of operations and comprehensive loss. As of March 31, 2023 and December 31, 2022, the Company had approximately $2.3 million and $2.2 million, respectively, of outstanding payables to the third-party vendor. These amounts are included in Accounts payable and accrued expenses on the unaudited interim condensed consolidated balance sheets.

During the first quarter of 2022, the Company entered into a development agreement with an existing multi-unit franchisee to open approximately 87 studios. Following the execution of this agreement, the Company entered into an employment agreement and contractor agreement with two individuals who hold an equity ownership in the franchisee entity. As a result of the employment agreements, the Company determined the development agreement and studios operating under ownership of its franchisee now represent related party transactions. During the three months ended March 31, 2023, the Company recognized Franchise revenue and Equipment and merchandise revenue totaling $0.1 million from studios under the development agreement. The Company has presented the expenses incurred during these periods in Cost of equipment and merchandise in the unaudited interim condensed consolidated statements of operations and comprehensive loss.

The development agreement required payment for equipment delivered during the first quarter of 2022 to be made at the earlier of opening of the underlying studio or 12 months from the date of the purchase of the equipment. The Company is currently assessing alternatives to the current agreement, including potentially amending the agreements to provide for no further development of studios or termination of the agreements; however, it cannot be certain that a solution will be reached. As of March 31, 2023 and December 31, 2022, the Company had receivables outstanding related to amounts due under the development agreement of $0.2 million and $0.6 million, respectively. These amounts are included in Due from related parties on the unaudited interim condensed consolidated balance sheets.

U.S. Development Agreement Transaction with Club Franchise Group LLC

On June 15, 2021, the Company entered into a long-term multi-unit studio agreement, with Club Franchise Group LLC (“Club Franchise”), an affiliate of KLIM, the investment manager to significant stockholders of the Company, an affiliate of lenders under the Company’s KLIM Credit Agreement and party to the Company’s Third Amended and Restated Stockholders’ Agreement. Pursuant to the term multi-unit studio agreement, the Company granted to Club Franchise the right to, and Club Franchise agreed to, open at least 300 studios in certain territories in the U.S. over 36 months, with the first 150 studios to be open within 18 months of the date of the multi-unit studio agreement, or December 15, 2022. Club Franchise had 24 studios opened as of March 31, 2023 under the multi-unit studio agreement.

Club Franchise is obligated to pay to the Company the same general fees as other franchisees in the U.S., and to enter into a franchise agreement in respect of each studio upon approval by the Company of the studio site. Consistent with some of the franchise agreements in the United States entered into since July 2019, Club Franchise is required to pay the Company a monthly franchise fee based on the greater of a fixed monthly franchise fee of $2,500 per month or 7% of gross monthly studio revenue regardless of whether such studios are open. Club Franchise has also agreed to pay the Company an upfront establishment fees of $7.5 million as follows: (i) $1.9 million upon execution of the multi-unit studio agreement (which amount had been paid as of December 31, 2021); (ii) $1.9 million by June 2022; (iii) $1.9 million by December 2022; and (iv) $1.9 million by December 2023. Club Franchise is required to pay monthly franchise fees to the Company in respect of additional studios with monthly franchise fees for
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150 studios being payable by December 2022. With respect to the remaining 150 studios, the Company and Club Franchise have agreed to negotiate a payment schedule that provides for the monthly franchise fees in respect of such studios to commence no later than 12 months after the opening date of the relevant studio. Like other franchisees, Club Franchise is also obligated to pay the Company other fees, including fees related to marketing and equipment and merchandise, some of which the Company has agreed to provide at a discounted rate.

During the fourth quarter of 2022, the Company determined that Club Franchise was no longer in compliance with the multi-unit studio agreement as a result of outstanding franchise fee invoices as well as delays related to required studio openings in accordance with development schedules. As a result of the non-compliance and subsequent discussions with Club Franchise management, the Company determined that collections related to approximately 280 studios under the agreement were no longer probable based on their expected opening date.

The Company recognized $0.2 million and $2.3 million, respectively, of Franchise revenue and Equipment and merchandise revenue in conjunction with the transaction with Club Franchise Group LLC during the three months ended March 31, 2023 and 2022. There was less than $0.1 million and $3.2 million outstanding receivable balance owed by Club Franchise as of March 31, 2023 and December 31, 2022, respectively.

European Master Franchise Agreement Transaction with Club Sports Group, LLC

On October 26, 2022, the Company entered into a Master Franchise Agreement (“MFA”) with Club Sports Group, LLC (“Club Sports”), an affiliate of KLIM, pursuant to which the Company granted Club Sports the master franchise rights to sell F45 licenses to franchisees in certain territories as defined in the agreement, including Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. In exchange, the Company will receive certain fees and royalties, including a percentage of the revenue generated by franchise agreements signed under the MFA. In accordance with the MFA, F45 will assign existing franchise agreement rights to approximately 103 studios previously signed by the Company. Subsequent to the original signing of the MFA, the MFA was modified to include an additional 71 franchise agreements. The term of the MFA provides for a ten-year period for Club Sports to sell licenses to franchisees with the option to renew the MFA for two additional ten-year periods at the then current master franchise fee rate. The MFA expires at the expiration or termination of the last franchise agreement sold by Club Sports.

At signing of the MFA, Club Sports was required to make an upfront master franchise fee payment of $1.5 million on the effective date of the MFA as well as purchase 40 equipment packs to be sold to sub-franchisees under the MFA. The Company recognized Equipment and merchandise revenue of less than $0.1 million during the three months ended March 31, 2023 as a result of these orders. No franchise revenues were recognized under the MFA during the three months ended March 31, 2023 as it was determined that Club Sports had not taken over master franchising activities, including marketing of sale of new franchise agreements and general and administrative activities over the franchise agreements as of March 31, 2023.

Related party franchise arrangements were transacted at arm’s length pricing with standard contractual terms.

Note 15—Commitments and contingencies
Litigation
Where appropriate, the Company establishes accruals in accordance with FASB guidance over loss contingencies in accordance with ASC 450, Contingencies. As of March 31, 2023 and December 31, 2022, the Company had established a litigation accrual of $2.5 million and $9.6 million, respectively, in Accounts payable and accrued expenses for claims brought against the Company in the ordinary course
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of business. Subsequent to year end 2022, the Company resolved certain legal claims for approximately $6.6 million, which was included in the litigation accrual as of December 31, 2022, and paid during the first half of 2023. Our accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. The Company does not presently believe that the ultimate resolution of the matters for which accruals have been established will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations.

Lease commitments

The Company lease portfolio consists of office buildings, a company-owned studio, and warehouse space in the United States, England, and Australia. Certain lease agreements contain options that allow the Company to extend the lease agreement. All of the Company’s leases are classified as operating leases on the unaudited interim condensed consolidated balance sheets.

As of March 31, 2023, the Company had outstanding guaranties of $2.6 million for lease payments related to 8 franchisee studio leases in the states of California, Maryland, and Virginia. These leases have non-cancelable remaining lease periods ranging from 1 to 10 years.

Promotional agreements

Liability-classified awards

On October 15, 2020, the Company entered into a promotional agreement with ABG-Shark, LLC (“ABG-Shark”). Pursuant to this agreement, Greg Norman agreed to provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, ABG-Shark became entitled to receive additional performance-based cash compensation based on the Company’s enterprise value. On the same date, Malibu Crew, Inc., a subsidiary of the Company, also entered into a promotional agreement with Greg Norman, whereby, he agreed to provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 15% of the fair market value of Malibu Crew, Inc. (“Malibu Crew”). Both of these promotional agreements expire on October 14, 2025.

On November 24, 2020, the Company entered into a promotional agreement with DB Ventures Limited (“DB Ventures”). Pursuant to this agreement, David Beckham agreed to provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, DB Ventures became entitled to receive the greater of 1% of the Company’s issued and outstanding common stock or $5.0 million on the six- and 12-month anniversaries of the Company becoming publicly traded. This agreement expires on December 5, 2025. The Company has been recognizing expenses related to the promotional activities and image rights under this agreement ratably over the five-year contractual term. As part of the agreement, the Company is obligated to create two F45 studios for DB Ventures who will then have the option to take ownership of the studios upon termination of the agreement for no additional service or consideration. In December 2021, the Company invested in a joint venture with 75% ownership in the newly incorporated CLF High Street Limited that operates the DB studios and provided $0.5 million of cash for equipment and other studio opening costs. For the three months ended March 31, 2022, the Company recorded $1.4 million in expense related to this agreement. During the three months ended March 31, 2022, 914,692 of common shares vested under this agreement as a result of meeting the six-month anniversary of the Company becoming publicly traded.

On October 19, 2022, DB Ventures and ABG-Shark filed a complaint (‘the complaint”) against the Company alleging breach of contract in connection with these promotional agreements. Prior to the filing of the complaint, the Company recognized expenses associated with the DB Ventures promotional agreement over the service period which was to run through December 5, 2025. As a result of the
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complaint, the Company determined it was no longer probable that any future services would be provided by the promoters under the agreements and for the year ended December 31, 2022, accelerated recognition of $5.6 million of additional marketing expenses equal to the fair value of 914,692 common shares vested and issued under the promotional agreement with DB Ventures which were previously expected to be recognized over the service period of the promotional agreement. The Company disputes the claims filed under the complaint and intends to vigorously defend itself. As the litigation is preliminary in nature and involves substantial uncertainties, no additional amounts have been accrued as a result of the complaint.

On April 12, 2021, the Company entered into a promotional agreement with Magic Johnson
Entertainment (“MJE”). Pursuant to this agreement, MJE agreed to provide certain promotional services to the Company in exchange for compensation. In connection with the Company becoming publicly traded on July 15, 2021, MJE agreed to a cash payment of $4.0 million in lieu of equity compensation that MJE was entitled to receive as a result of the IPO. The prepayment of $4.0 million was recorded as Prepaid expenses in the condensed consolidated balance sheets and the amount is amortized ratably over the service period. Additionally, in connection with the Company becoming publicly traded on July 15, 2021, the Company became obligated to grant MJE a number of shares of common stock equal to the result of $5.0 million divided by the Average Trading Price upon each occurrence of a vesting event based on increases in the Company’s market capitalization as defined in the agreement. The agreement between the Company and MJE terminates on January 23, 2026.

On June 25, 2021, the Company entered into a promotional agreement with Craw Daddy Productions (“CDP”). Pursuant to this agreement, effective July 1, 2021, Cindy Crawford agreed to provide certain promotional services to the Company in exchange for annual compensation. In connection with the Company becoming publicly traded on July 15, 2021, the Company became obligated to grant CDP a number of shares of common stock equal to the result of $5.0 million divided by the Average Trading Price upon each occurrence of a Vesting Event which is based on increases in the Company’s market capitalization as defined in the agreement. On the same date, Avalon House, a subsidiary of the Company, also entered into a promotional agreement with Cindy Crawford, whereby she agreed to provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 10% of the fair market value of Avalon House. Both of these promotional agreements expire on June 30, 2026. On October 17, 2022, the Company entered into a mutual termination agreement with CDP pursuant to which both promotional agreements were terminated in exchange for a cash payment of $0.3 million.

On September 24, 2021, the Company entered into a promotional agreement with Big Sky, Inc. (“Big Sky”). Pursuant to this agreement, Joe Montana agreed to provide certain promotional services to the Company in exchange for annual compensation. On the same date, Malibu Crew also entered into a promotional agreement with Big Sky, whereby Joe Montana agreed to provide certain promotional and marketing services to the Company in exchange for equity compensation equal to 1% of the fair market value of Malibu Crew. As part of the agreement, the Company is obligated to provide franchise rights to five Malibu Crew studios and cover costs associated with start-up of the studios, subject to the Company’s ability to recoup these start-up costs over a negotiated period of time to be defined in the underlying franchise agreements. On March 13, 2023, the Company entered into a mutual termination agreement with Big Sky in which both promotional agreements were terminated in exchange for a cash payment of $0.2 million.

No stock-based compensation expense was recognized in connection with the aforementioned promotional agreements for the three months ended March 31, 2023 as a result of reductions in the fair value of the liability-classified awards. The Company recognized total stock-based compensation expense of $1.4 million in connection with such promotional agreements for the three months ended March 31, 2022. The Company determined that the common stock to be issued upon settlement of the remaining promotional agreements with ABG-Shark and MJE are liability-classified awards. As of March 31, 2023 and December 31, 2022, the Company recorded less than $0.1 million of stock-based compensation liability in Other long-term liabilities in the condensed consolidated balance sheets.

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The Company estimates the fair value of its liability-classified awards using a Monte-Carlo simulation model at each reporting period until settlement. The other significant assumptions used in the analysis as of March 31, 2023 were as follows:

As of March 31, 2023
Risk-free interest rate
4.20%
Expected dividend yield
Expected term in years
2.04 - 2.31
Expected volatility
26.40% - 42.14%

Equity-classified awards

On December 17, 2021, the Company entered into a promotional agreement with Timothy Kennedy (“TK”). Pursuant to this agreement, effective December 30, 2021, TK agreed to provide certain promotional services to the Company in exchange for annual compensation and $0.1 million of the Company’s Restricted Stock Awards (“RSAs”) for each 12-month period of service. RSAs will vest 100% upon each of the first four one-year anniversaries of the services being provided. The agreement between the Company and TK terminates on December 16, 2026. The Company determined that the RSAs granted to TK are equity-classified awards. The stock-based compensation expense related to the RSAs is recognized ratably over the requisite service period in Selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

See Note 16—Stock-based compensation for discussion on the stock option activities and total stock-based compensation expense for the three months ended March 31, 2023 and March 31, 2022, respectively.

Note 16—Stock-based compensation

2021 Incentive Plan

The Company’s stock-based compensation plan, which became effective at the IPO date, includes equity incentive compensation plans under which three types of share-based compensation plans are granted to the employees, directors and consultants of the Company, which are stock options (“SOs”), restricted stock units (“RSUs”) and restricted stock awards (“RSAs”). The purpose of the plan is to assist the Company in securing and retaining the service of eligible award recipients, to provide incentives to employees, directors and consultants and promote the long-term financial success of the Company and thereby increase stockholder value. In accordance with the 2021 Incentive Plan, subject to adjustment for certain dilutive or related events, the maximum aggregate number of shares that may be subject to stock awards and sold under this plan is 5,000,000 shares, or the share reserve (“Share Reserve”). Beginning on January 1, 2022 and ending on January 1, 2031, the Share Reserve will automatically increase on January 1 of each year during the term of the 2021 Incentive Plan in an amount equal to 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; provided, however, that the Company’s board of directors may provide that there will not be a January 1 increase in the Share Reserve in a given year or that the increase will be less than 5% of the shares of common stock outstanding on the preceding December 31.

Employees meeting certain employment qualifications are eligible to receive stock-based awards. In accordance with the Company’s accounting policy, forfeitures of SOs, RSUs and RSAs are accounted for as they occur.

Stock options

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SOs granted under the incentive equity plans are generally non-statutory stock options, but the incentive equity plans permit some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. SOs generally vest over one to three years from the grant date. The exercise price of a stock option is equal to the closing price of the Company’s stock on the option grant date. The majority of SOs issued by the Company are subject to only service vesting conditions.

A summary of option activity under the employee share option plan as of March 31, 2023, and changes during the period then ended, is presented below:

Shares (in thousands)Weighted - Average Exercise PriceWeighted - Average Remaining Contractual TermAggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 20222,191$4.43 10.42$1,160 
Granted  
Exercised(1)2.02 
Forfeited, expired, or canceled(197)11.32 
Outstanding as of March 31, 20231,993$3.75 10.21$ 
Vested and Exercisable1,272$3.15 9.55$ 
Expected to Vest721$4.80 11.38$ 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the quarter ended March 31, 2023. The aggregate intrinsic value of vested and unvested options as of March 31, 2023 was $0, since the options were out-of-the-money. The total grant date fair value of the options vested during the three months ended March 31, 2023 and 2022 was $0.4 million and $0, respectively.

As of March 31, 2023, the total unrecognized pre-tax stock-based compensation expense related to non-vested stock options was $1.2 million, which is expected to be recognized over a weighted-average vesting period of 1.9 years.

Restricted stock units

RSUs may be granted at any time and from time to time as determined by the Company. The Company will set vesting criteria at its discretion, which, depending on the extent to which the criteria are met, will determine the number of RSUs that will be paid out to the participant. The Company may set vesting criteria based upon the passage of time, the achievement of target levels of performance, or the occurrence of other events or any combination thereof as determined by the Company at its discretion. Dividend equivalents shall not be paid on a RSU during the period it is unvested. The RSUs granted by the Company are subject to service vesting conditions. RSUs also provide for accelerated vesting in certain circumstances as defined in the plans and related grant agreements.

As of March 31, 2023, the total number of shares subject to outstanding RSUs was 2,637,923. The Company withheld 187,205 shares of common stock related to net share settlement of restricted stock units vested during the three months ended March 31, 2023.

The Company uses the closing stock price on the grant date to estimate the fair value of service-based RSUs. The Company estimates the fair value of RSUs subject to performance-adjusted vesting conditions using the closing stock price on the grant date.

A summary of RSUs activity is as follows:
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Shares (in thousands)Weighted - Average Grant Date Fair Value Per Share
Outstanding as of December 31, 20223,088 $5.93 
Granted  
Vested(416)6.97 
Forfeited(34)2.02 
Outstanding as of March 31, 20232,638 $5.81 

The total grant date fair value of RSUs vested during the three months ended March 31, 2023 was $2.9 million. No RSUs vested during the three months ended March 31, 2022. During the three months ended March 31, 2023 and 2022, total recognized pre-tax stock-based compensation expense related to non-vested RSUs was $2.1 million and less than $0, respectively, which was included in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss. As of March 31, 2023, total unrecognized pre-tax stock-based compensation expense related to non-vested RSUs was $13.0 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.16 years. The maximum contractual term of RSUs is approximately 4.0 years.

Restricted stock awards

Subject to the terms and provisions of the plan, the Company, at any time and from time to time, may grant shares of restricted stock to service providers in such amounts as the Company, in its sole discretion, will determine. During the period of restriction, service providers holding shares of restricted stock may exercise full voting rights and will be entitled to receive all dividends and other distributions paid with respect to such shares, unless the Company determines otherwise. If any such dividends or distributions are paid in shares, the shares will be subject to the same restrictions on transferability and forfeitability as the shares of restricted stock with respect to which they were paid. The RSAs granted by the Company are subject to service vesting conditions. As of March 31, 2023, the total number of shares subject to outstanding RSAs was 232,478.

The Company estimates the fair value of RSAs subject to performance-adjusted vesting conditions using the closing stock price on the grant date.

A summary of RSAs activity is as follows:
Shares (in thousands)Weighted - Average Grant Date Fair Value Per Share
Outstanding as of December 31, 2022361 $4.44 
Granted  
Vested(129)4.68 
Forfeited  
Outstanding as of March 31, 2023232 $4.30 

The total grant date fair value of RSAs vested during the three months ended March 31, 2023 and 2022 was $0.6 million and $0.1 million, respectively. For the three months ended March 31, 2023 and 2022, total recognized pre-tax stock-based compensation expense related to non-vested RSAs was $0.4 million and $0.5 million, respectively, which was included in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss. Total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards was $0.3 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.3 years. The maximum contractual term of the RSAs is approximately one year.

Non-employee promotional agreements

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Liability-classified awards

As described in Note 15—Commitments and contingencies, the Company entered into promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP which included RSUs that contain equity-based payments, which have performance, market and service conditions. On October 17, 2022, the Company entered into a mutual termination agreement with CDP in which the promotional agreement was terminated.

The Company determined that the RSUs are liability-classified awards that contain both performance (deemed liquidation event, closing of a financing transaction or the public trading of the Company’s common stock) and market conditions (achievement of prescribed Company equity values) in order for the units to vest. As of March 31, 2023, the market conditions have not been met on the ABG-Shark, DB Ventures, or MJE promotional agreements. The Company began recognizing stock-based compensation expense ratably over the requisite service period when the performance condition was met through the achievement of the IPO on July 15, 2021. The stock-based compensation expense related to the RSUs are recognized ratably over the requisite service period in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss.

Equity-classified awards

The promotional agreement with TK included RSAs that contain equity-based payment, which has a service condition. The Company determined that the RSAs granted to TK are equity based awards that contains a service condition to vest. The stock-based compensation expense related to the RSAs are recognized ratably over the requisite service period in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss.

Note 17—Basic and diluted net loss per share

The computation of net loss per share and weighted average shares of the Company’s common stock outstanding for the periods presented are as follows (in thousands, except share and per share data):

For the Three Months Ended
March 31,
20232022
(As Restated)
Numerator:
Net loss attributable to common stockholders—basic and diluted$(22,653)$(9,478)
Denominator:
Weighted average common shares outstanding—basic and diluted96,884,584 95,709,671 
Net loss per share:
Basic and diluted net loss per share$(0.23)$(0.10)
Anti-dilutive securities excluded from diluted loss per share:
Unvested restricted stock units2,851,416  
Unvested restricted stock awards295,156  
Stock options to purchase common stock2,088,306 662,935 
Total
5,234,878 662,935 

The contingently issuable shares in relation to the promotional agreements with ABG-Shark and MJE are not included in the diluted loss per share computation as the market conditions have not been met to be vested as of March 31, 2023. The contingently issuable shares in relation to the promotional agreements with ABG-Shark, MJE, and CDP were not included in the diluted loss per share computation as the market conditions had not been met to be vested during the three months ended March 31, 2022.

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Note 18—Segment and geographic area information

The Company’s operating segments align with how the Company manages its business and interacts with its franchisees on a geographic basis. F45 is organized by geographic regions based on the Company’s strategy to become a globally recognized brand. F45 has three reportable segments: United States, Australia and Rest of World. The Company refers to “United States” as the operations in the United States and South America. The Company refers to “Australia” as the operations in Australia, New Zealand and the immediately surrounding island nations. The Company refers to “Rest of World” as the operations in locations other than the United States and Australia.

The Company’s Chief Operating Decision Maker (“CODM”) group is comprised of two executive officers, its principal executive officer and principal financial officer. The Company identified changes to the CODM group with the appointments of Robert Madore as Interim Chief Financial Officer and Tom Dowd as Interim Chief Executive Officer on February 13, 2023 and March 29, 2023, respectively. Further, on July 13, 2023, the Board appointed Patrick Grosso as Interim Chief Financial Officer, in light of the vacancy created by Robert Madore’s resignation as Interim Chief Financial Officer on July 9, 2023. There was no change in our operating or reportable segments as a result of the change in CODM. Messrs. Madore and Dowd served as the CODM that reviewed revenue and gross profit for each of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment.

The Company does not allocate assets at the reportable segment level as these are managed on an entity wide group basis.

The following is key financial information by reportable segment which is used by management in evaluating performance and allocating resources (in thousands):

For the Three Months Ended
March 31, 2023
For the Three Months Ended
March 31, 2022
(As Restated)
RevenueCost of revenueGross profitRevenueCost of revenueGross profit
United States:
Franchise$8,893 $2,093 $6,800 $12,401 $1,037 $11,364 
Equipment and merchandise2,013 2,208 (195)5,864 3,808 2,056 
$10,906 $4,301 $6,605 $18,265 $4,845 $13,420 
Australia:
Franchise$2,765 $122 $2,643 $3,448 $173 $3,275 
Equipment and merchandise374 449 (75)1,394 1,547 (153)
$3,139 $571 $2,568 $4,842 $1,720 $3,122 
Rest of World:
Franchise$2,951 $109 $2,842 $4,011 $97 $3,914 
Equipment and merchandise584 871 (287)2,270 1,758 512 
$3,535 $980 $2,555 $6,281 $1,855 $4,426 
Consolidated:
Franchise$14,609 $2,324 $12,285 $19,860 $1,307 $18,553 
Equipment and merchandise2,971 3,528 (557)9,528 7,113 2,415 
$17,580 $5,852 $11,728 $