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F45 Training Holdings Inc. (FXLV) Navigating Challenges, Seeking a Turnaround
Published on September 24, 2024 | Ticker: FXLV

F45 Training Holdings Inc. (FXLV) is a global fitness franchisor engaged in franchising and licensing the F45 Training, FS8, and Vive Active brands to fitness facilities in multiple countries. The company has faced significant headwinds in recent years, reporting an annual net loss of $178,799,000 on annual revenue of $104,423,000 in its latest fiscal year. Additionally, the company generated negative annual operating cash flow of $98,031,000 and negative annual free cash flow of $108,723,000.

Business Overview

F45 Training Holdings operates a unique fitness concept that combines elements of high-intensity interval, circuit, and functional training. The company's primary business model involves franchising its studio locations to third-party operators, who are responsible for the day-to-day operations of the studios. As of the latest reporting period, the company had a total of 2,083 studios across its three geographic segments: the United States, Australia, and the Rest of World.

The company generates revenue from two primary sources: franchise fees and equipment/merchandise sales. Franchise revenue consists of upfront establishment fees, monthly franchise fees, and other recurring fees paid by franchisees. Equipment and merchandise revenue is derived from the sale of comprehensive studio opening packs, as well as additional and replacement equipment and merchandise sold to new and existing franchisees.

Financials

In the latest quarter, F45 Training Holdings reported total revenue of $17,036,000, a 38.5% decrease compared to the prior-year period. This decline was driven by a 24.2% decrease in franchise revenue to $14,484,000 and a 70.3% decrease in equipment and merchandise revenue to $2,552,000. The decrease in franchise revenue was primarily attributable to a 163 net decrease in new franchises sold during the quarter, while the equipment and merchandise revenue decline was due to a reduction in studio openings and related equipment deliveries.

The company's cost of revenue also decreased, with cost of franchise revenue down 43.7% to $2,504,000 and cost of equipment and merchandise down 74.5% to $2,318,000. Selling, general, and administrative expenses decreased 46.6% to $27,739,000 from the prior-year period. This reduction was driven by lower payroll, marketing, legal, and bad debt expenses.

The company reported a net loss of $23,726,000 in the latest quarter, compared to a net loss of $56,498,000 in the prior-year period. The improved net loss was primarily due to the decrease in selling, general, and administrative expenses, as well as a $1,265,000 gain on the change in fair value of warrant liabilities in the prior-year period that did not recur.

Segmental Performance

Geographically, the company's performance was mixed. In the United States segment, franchise revenue decreased 28.8% to $8,655,000, while equipment and merchandise revenue decreased 67.7% to $1,706,000. This was driven by a 108 net decrease in new franchises sold and a 24 net decrease in studio openings in the quarter.

The Australia segment saw franchise revenue decrease 19.2% to $2,822,000, and equipment and merchandise revenue decrease 87.2% to $134,000. This was due to a 39 net decrease in new franchises sold and a 12 net decrease in studio openings.

In the Rest of World segment, franchise revenue decreased 13.4% to $3,007,000, and equipment and merchandise revenue decreased 68.3% to $712,000. This was driven by a 16 net decrease in new franchises sold and a 5 net increase in studio openings.

Liquidity

As of the latest quarter, F45 Training Holdings had $34,446,000 in cash and cash equivalents, as well as $67,000 in restricted cash. The company also had $130,183,000 in total debt, including a $66,000,000 term loan, a $2,000,000 revolving facility, and a $91,297,000 subordinated second lien PIK loan.

In February 2023, the company entered into a $90,000,000 subordinated credit agreement with its existing stockholders, which was used to pay down $20,100,000 of existing debt and for general corporate purposes. The company also obtained a waiver from its lenders to extend the deadlines for delivering its audited financial statements and unaudited interim financial statements.

Subsequent to the quarter, in October 2023, the company further amended its subordinated credit agreement to obtain an additional $40,000,000 in incremental loans and a $10,000,000 delayed draw facility. The company also amended its senior credit agreement to extend the deadlines for delivering its quarterly financial statements and adjust its minimum liquidity covenant.

Risks and Challenges

F45 Training Holdings faces several key risks and challenges that have impacted its financial performance. The company has experienced a significant decline in new franchise sales and studio openings, which has negatively affected both its franchise revenue and equipment/merchandise revenue. The company has also faced increased competition in the fitness industry, as well as macroeconomic headwinds that have impacted consumer spending.

Additionally, the company has faced delays in completing its financial reporting, which has led to difficulties in engaging in the sale of new franchises and has resulted in the need to obtain waivers and amendments from its lenders. The company's liquidity position remains a concern, as it continues to generate negative operating and free cash flow.

Outlook

F45 Training Holdings has taken steps to address its challenges, including cost-cutting measures and efforts to improve its financial reporting. The company's recent amendments to its credit agreements provide additional liquidity and flexibility, but the long-term success of the business will depend on its ability to stabilize its franchise sales and studio openings, as well as improve its overall financial performance.

Conclusion

Given the company's current challenges, investors should closely monitor F45 Training Holdings' progress in executing its turnaround strategy and improving its financial position. While the company's long-term potential remains uncertain, the recent actions taken by management to address the company's issues are a positive step forward.

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