F45 Training Holdings Inc. (FXLV) is a global fitness franchisor that has been navigating a dynamic industry landscape, marked by both promising growth opportunities and significant operational hurdles. With a focus on delivering effective, community-driven functional training workouts, the company has built a differentiated platform that aims to empower its franchisees and enhance the fitness experience for consumers worldwide.
Business Overview and History
F45 Training was founded in 2013 in Australia, with the goal of creating a unique fitness concept that blended high-intensity interval training, circuit training, and functional movements. The company quickly gained traction, expanding its franchise network both domestically and internationally. On March 12, 2019, F45 Training Holdings Inc. was incorporated in Delaware, setting the stage for the company's global ambitions. The company is headquartered in Austin, Texas.
F45 Training's portfolio has expanded beyond its original F45 Training brand to include FS8 and Vive Active, further diversifying its offerings in the fitness industry. In 2021, the company achieved a significant milestone by becoming a publicly traded entity, listing its shares on the New York Stock Exchange (NYSE). This move provided F45 Training with additional resources and visibility to accelerate its growth strategy.
However, the company's journey has been marked by challenges. In 2022, F45 Training faced legal issues, including a lawsuit related to promotional agreements with certain high-profile individuals. Additionally, the company encountered delays in its financial reporting, which ultimately led to its delisting from the NYSE and plans to deregister its common stock from the Securities and Exchange Commission (SEC).
In response to these challenges, F45 Training has implemented various strategies to reduce costs and manage its cash flow. These include restructuring its workforce, limiting non-recurring expenditures, and securing additional financing. The company has also been working to remediate the material weaknesses identified in its internal control over financial reporting, aiming to improve its financial reporting processes and compliance.
Financial Performance
F45 Training's financial performance has been marked by both periods of growth and significant challenges. In the fiscal year ended December 31, 2022, the company reported total revenue of $104.42 million, a 16.6% decrease from the prior year. This decline was driven by a 16.8% drop in franchise revenue and a 70.5% decrease in equipment and merchandise revenue, reflecting the impact of a slowdown in new studio openings and equipment sales.
Net income for the fiscal year 2022 was a loss of $178.80 million, compared to a loss of $193.47 million in the prior year. The company's operating cash flow in 2022 was a negative $98.03 million, while free cash flow was a negative $108.72 million, highlighting the strain on the company's liquidity.
For the six months ended June 30, 2023, F45 Training reported total revenues of $34.62 million, a 39.4% decrease compared to the same period in 2022. Franchise revenue decreased 25.4% to $29.09 million, while equipment and merchandise revenue decreased 69.5% to $5.52 million. These decreases were primarily driven by lower net new franchises sold and initial studio openings across all segments.
The company's net loss for the first half of 2023 was $46.38 million, compared to a net loss of $65.98 million in the prior year period. Adjusted EBITDA, a non-GAAP metric, was $14.54 million for the six months ended June 30, 2023, compared to $16.60 million in the same period of 2022.
In the most recent quarter (Q2 2023), revenue was $17.04 million, with a net loss of $23.73 million. Year-over-year, franchise revenue decreased by 24% and equipment and merchandise revenue decreased by 70%, primarily due to decreases in new franchise sales and studio openings.
Liquidity
As of June 30, 2023, F45 Training had $34.45 million in cash and cash equivalents, along with $67,000 in restricted cash. The company's total debt stood at $130.18 million, including a $91.30 million subordinated second lien PIK loan entered into in February 2023. The company's current ratio was 1.04, and the quick ratio was 0.45, indicating a relatively tight liquidity position. The debt-to-equity ratio was -2.46.
F45 Training also had a $2 million revolving credit facility, of which $1.6 million was utilized for letters of credit.
Navigating Operational Challenges
F45 Training's recent financial performance has been significantly impacted by a number of operational challenges, including delays in new studio openings, franchise terminations, and the COVID-19 pandemic's lingering effects on the fitness industry.
The company has faced delays in new studio openings, with net new franchises sold declining from 533 in the first half of 2022 to just 195 in the same period of 2023. This slowdown has had a direct impact on franchise and equipment revenue. Additionally, the company has experienced an elevated level of franchise terminations, with 195 net new franchises sold in the first half of 2023 compared to 533 in the prior-year period.
The COVID-19 pandemic has also continued to weigh on the company's operations, as consumer hesitancy and temporary studio closures have impacted visitation and revenue. System-wide visits, a key metric for the company, decreased from 14.55 million in the first half of 2022 to 16.36 million in the same period of 2023.
In response to these challenges, F45 Training has undertaken a series of cost-cutting measures, including headcount reductions and a focus on streamlining operations. The company has also taken steps to strengthen its financial position, such as the February 2023 issuance of a $90 million subordinated second lien PIK loan.
Business Model and Revenue Streams
F45 Training operates primarily as a global fitness franchisor, offering consumers functional 45-minute workouts that are effective, fun, and community-driven. The company has three reportable segments: United States, Australia, and Rest of World, with the majority of revenue coming from the United States segment.
Franchise revenue is generated primarily from upfront establishment fees, monthly franchise fees, and other franchise-related fees, including fees related to the brand fund, marketing, and other recurring fixed fees paid by franchisees. Monthly franchise fees generally become payable six to twelve months after the execution of a franchise agreement, regardless of whether the franchise has opened their studio.
Equipment and merchandise revenue consists of fees charged for World Packs for new F45 Training studios, which contain the standardized set of F45-branded fitness equipment and related technology required to operate a studio, as well as subsequent additional and/or replacement equipment and merchandise sales to franchisees. In 2022, the company began providing short-term financing to select franchisees for World Pack purchases.
The company's cost of revenue includes direct costs associated with franchise sales, lead generation, and marketing services for franchisees, as well as the direct costs of equipment and merchandise sales. Selling, general, and administrative expenses primarily consist of wages and salaries, stock-based compensation, depreciation and amortization, bad debt write-offs, and ongoing administrative and franchisee support functions.
Outlook and Risks
Looking ahead, F45 Training faces a number of risks and uncertainties that could impact its future performance. The company's ability to resume franchise sales and new studio openings will be crucial to driving revenue growth and restoring financial stability. The ongoing impact of the COVID-19 pandemic, as well as the potential for increased competition in the fitness industry, also pose significant challenges.
The company's delisting from the New York Stock Exchange in September 2023 and subsequent deregistration of its common stock from the SEC could also have implications for the company's access to capital markets and investor sentiment.
Despite these headwinds, F45 Training remains focused on adapting its business model and operational strategies to navigate the current environment. The company's technology-enabled platform, emphasis on functional training, and global franchise network provide a foundation for potential future growth, provided the company can successfully address its near-term operational and financial hurdles.
Conclusion
F45 Training Holdings Inc. (FXLV) is a global fitness franchisor that has faced significant challenges in recent years, including delays in new studio openings, franchise terminations, and the lingering impact of the COVID-19 pandemic. The company's financial performance has suffered, with declining revenue and negative cash flow.
To address these issues, F45 Training has taken steps to strengthen its financial position and streamline operations, but the path forward remains uncertain. The company's ability to resume franchise sales, open new studios, and adapt its business model will be critical to its long-term success. Investors should closely monitor the company's progress in navigating the current operational and financial landscape, as well as its efforts to improve liquidity and return to profitability.