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 September 30, 2021

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 001-40590

F45 Training Holdings Inc.

(Exact name of registrant as specified in its charter)

Delaware	38-3978689
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

801 Barton Spring Road, 9th Floor

Austin, Texas 98704

(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	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.00005	FXLV	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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 15, 2021, there were approximately 90,554,571 shares of the registrant’s common stock outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words, variations of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:

• our dependence on the operational and financial results of, and our relationships with, our franchisees and the success of their new and existing studios;

• our ability to protect our brand and reputation;

• our ability to identify, recruit and contract with a sufficient number of qualified franchisees;

• our ability to execute our growth strategy, including through development of new studios by new and existing franchisees;

• our ability to manage our growth and the associated strain on our resources;

• our ability to successfully integrate any acquisitions, or realize their anticipated benefits;

• the high level of competition in the health and fitness industry;

• economic, political and other risks associated with our international operations;

• changes to the industry in which we operate;

• our reliance on information systems and our and our franchisees’ ability to properly maintain the confidentiality and integrity of our data;

• the occurrence of cyber incidents or a deficiency in our cybersecurity protocols;

• our and our franchisees’ ability to attract and retain members;

• our and our franchisees’ ability to identify and secure suitable sites for new franchise studios;

• risks related to franchisees generally;

• our ability to obtain third-party licenses for the use of music to supplement our workouts;

• certain health and safety risks to members that arise while at our studios;

• our ability to adequately protect our intellectual property;

• risks associated with the use of social media platforms in our marketing;

• our ability to obtain and retain high-profile strategic partnership arrangements;

• our ability to comply with existing or future franchise laws and regulations;

• our ability to anticipate and satisfy consumer preferences and shifting views of health and fitness;

• our business model being susceptible to litigation;

• the increased expenses associated with being a public company; and

• additional factors discussed in our filings with the Securities and Exchange Commission, or the SEC.

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 our current expectations and projections about future events and trends that we believe may affect our business, results of operations, financial condition and prospects.

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 our Final Prospectus dated July 14, 2021. 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.

F45 Training Holdings Inc.

Form 10-Q

Table of Contents

		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Condensed consolidated financial statements (unaudited)		1
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income		2
	Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)		3
	Condensed Consolidated Statements of Cash Flows		5
	Notes to the Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		57
Item 4.	Controls and Procedures		57
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings		59
Item 1A.	Risk Factors		59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3.	Defaults Upon Senior Securities		60
Item 4.	Mine Safety Disclosures		60
Item 5.	Other Information		60
Item 6.	Exhibits		60

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements

F45 Training Holdings Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts and share data)

	September 30, 2021			December 31, 2020
	(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	52,618		$	28,967
Accounts receivable, net		15,326			9,582
Due from related parties		2,150			2,406
Inventories		17,252			4,485
Deferred costs		1,851			1,616
Prepaid expenses		10,653			2,891
Other current assets		5,209			2,452
Total current assets		105,059			52,399
Property and equipment, net		2,014			884
Deferred tax assets, net		6,703			7,096
Intangible assets, net		25,598			1,758
Deferred costs, net of current		13,081			11,215
Other long-term assets		14,166			5,165
Total assets	$	166,621		$	78,517
Liabilities, convertible preferred stock and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and accrued expenses	$	34,461		$	18,657
Deferred revenue		8,787			3,783
Interest payable		143			250
Current portion of long-term debt		—			5,847
Income taxes payable		1,792			3,499
Total current liabilities		45,183			32,036
Deferred revenue, net of current		5,908			10,312
Long-term derivative liability		—			36,640
Long-term debt, net of current		—			236,186
Other long-term liabilities		4,615			4,890
Total liabilities		55,706			320,064
Commitments and contingencies (Note 12)
Convertible preferred stock, $0.0001 par value; 0 and 9,854,432 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively (Note 13)		—			98,544
Stockholders’ equity (deficit)
Common stock, $0.00005 par value; 90,554,571 and 29,281,514 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		4			1
Additional paid-in capital		659,977			11,456
Accumulated other comprehensive loss		(938	)		(982	)
Accumulated deficit		(373,408	)		(175,846	)
Less: Treasury stock		(174,720	)		(174,720	)
Total stockholders’ equity (deficit)		110,915			(340,091	)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	166,621		$	78,517

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

1

F45 Training Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in thousands, except share amounts and share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenues:
Franchise (Related party: $2,724 and $52 for the three months ended September 30, 2021 and 2020, respectively, and $3,329 and $277 for the nine months ended September 30, 2021 and 2020, respectively)	$	18,513		$	14,067		$	52,250		$	39,766
Equipment and merchandise (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $328 for the nine months ended September 30, 2021 and 2020, respectively)		8,664			7,896			19,950			24,497
Total revenues		27,177			21,963			72,200			64,263
Costs and operating expenses:
Cost of franchise revenue (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $12 for the nine months ended September 30, 2021 and 2020, respectively)		1,486			1,997			4,162			6,591
Cost of equipment and merchandise (Related party: $1,561 and $355 for the three months ended September 30, 2021 and 2020, respectively, and $3,678 and $1,098 for the nine months ended September 30, 2021 and 2020, respectively)		5,752			5,247			12,672			14,410
Selling, general and administrative expenses		110,492			10,100			145,882			31,724
Total costs and operating expenses		117,730			17,344			162,716			52,725
(Loss) income from operations		(90,553	)		4,619			(90,516	)		11,538
Loss on derivative liabilities		—			—			48,603			—
Interest expense, net		41,897			534			59,165			1,333
Other income, net		(2,035	)		(238	)		(1,415	)		(815	)
(Loss) income before income taxes		(130,415	)		4,323			(196,869	)		11,020
(Benefit) provision for income taxes		(222	)		1,974			693			3,536
Net (loss) income	$	(130,193	)	$	2,349		$	(197,562	)	$	7,484
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate swap, net of tax		(7	)		88			196			(639	)
Reclassification to interest expense from interest rate swaps		464			—			464			—
Foreign currency translation adjustment, net of tax		(509	)		138			(616	)		(426	)
Comprehensive (loss) income	$	(130,245	)	$	2,575		$	(197,518	)	$	6,419
Per share data:
Net (loss) income per common share
Basic and diluted		(1.52	)		0.03			(4.10	)		0.09
Weighted average common shares outstanding
Basic and diluted		85,463,755			58,000,000			48,214,724			58,000,000

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

2

F45 Training Holdings Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share amounts)

(unaudited)

	Convertible Preferred Stock						Common Stock				Additional Paid-In Capital		Treasury Stock			Accumulated other comprehensive loss			Accumulated deficit			Total Stockholders’ Equity (Deficit)
	Shares			Amount			Shares		Amount
Balance at June 30, 2021		9,854,432		$	98,544			29,281,514	$	1	$	11,456	$	(174,720	)	$	(886	)	$	(243,215	)	$	(407,364	)
Conversion of convertible preferred stock into common stock upon initial public offering		(9,854,432	)		(98,544	)		27,368,102		1		98,543		—			—			—			98,544
Conversion of convertible notes into common stock upon initial public offering		—			—			14,847,066		1		191,517		—			—			—			191,518
Stock-based compensation		—			—			—		—		80,707		—			—			—			80,707
Issuance of common stock pursuant to initial public offering, net of underwriting commissions and discounts and offering costs of $5.8 million		—			—			19,057,889		1		277,754		—			—			—			277,755
Net loss		—			—			—		—		—		—			—			(130,193	)		(130,193	)
Unrealized loss on interest rate swap, net of tax		—			—			—		—		—		—			(7	)		—			(7	)
Reclassification to interest expense from interest rate swap		—			—			—		—		—		—			464			—			464
Cumulative translation adjustment, net of tax		—			—			—		—		—		—			(509	)		—			(509	)
Balances at September 30, 2021		—		$	—			90,554,571	$	4	$	659,977	$	(174,720	)	$	(938	)	$	(373,408	)	$	110,915

	Convertible Preferred Stock				Common Stock				Additional Paid- In Capital		Treasury Stock		Accumulated other comprehensive loss			Accumulated deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount		Shares		Amount
Balance at June 30, 2020		11,000,000	$	110,000		58,000,000	$	3	$	—	$	—	$	(1,832	)	$	(145,422	)	$	(147,251	)
Net income		—		—		—		—		—		—		—			2,349			2,349
Unrealized gain on interest rate swap, net of tax		—		—		—		—		—		—		88			—			88
Cumulative translation adjustment, net of tax		—		—		—		—		—		—		138			—			138
Balances at September 30, 2020		11,000,000	$	110,000		58,000,000	$	3	$	—	$	—	$	(1,606	)	$	(143,073	)	$	(144,676	)

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

3

	Convertible Preferred Stock						Common Stock				Additional Paid-In Capital		Treasury Stock			Accumulated other comprehensive loss			Accumulated deficit			Total Stockholders’ Equity (Deficit)
	Shares			Amount			Shares		Amount
Balances at December 31, 2020		9,854,432		$	98,544			29,281,514	$	1	$	11,456	$	(174,720	)	$	(982	)	$	(175,846	)	$	(340,091	)
Conversion of convertible preferred stock into common stock upon initial public offering		(9,854,432	)		(98,544	)		27,368,102		1		98,543		—			—			—			98,544
Conversion of convertible notes into common stock upon initial public offering		—			—			14,847,066		1		191,517		—			—			—			191,518
Stock-based compensation		—			—			—		—		80,707		—			—			—			80,707
Issuance of common stock pursuant to initial public offering, net of underwriting commissions and discounts and offering costs of $5.8 million		—			—			19,057,889		1		277,754		—			—			—			277,755
Net loss		—			—			—		—		—		—			—			(197,562	)		(197,562	)
Unrealized gain on interest rate swap, net of tax		—			—			—		—		—		—			196			—			196
Reclassification to interest expense from interest rate swap		—			—			—		—		—		—			464			—			464
Cumulative translation adjustment, net of tax		—			—			—		—		—		—			(616	)		—			(616	)
Balances at September 30, 2021		—		$	—			90,554,571	$	4	$	659,977	$	(174,720	)	$	(938	)	$	(373,408	)	$	110,915

	Convertible Preferred Stock				Common Stock				Additional Paid- In Capital		Treasury Stock		Accumulated other comprehensive loss			Accumulated deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount		Shares		Amount
Balances at December 31, 2019		11,000,000	$	110,000		58,000,000	$	3	$	—	$	—	$	(541	)	$	(150,557	)	$	(151,095	)
Net income		—		—		—		—		—		—		—			7,484			7,484
Unrealized loss on interest rate swap, net of tax		—		—		—		—		—		—		(639	)		—			(639	)
Cumulative translation adjustment, net of tax		—		—		—		—		—		—		(426	)		—			(426	)
Balances at September 30, 2020		11,000,000	$	110,000		58,000,000	$	3	$	—	$	—	$	(1,606	)	$	(143,073	)	$	(144,676	)

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

4

F45 Training Holdings Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities
Net (loss) income	$	(197,562	)	$	7,484
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation		195			279
Amortization of intangible assets		1,968			499
Amortization of deferred costs		1,330			975
Accretion and write-off of debt discount		31,585			—
Bad debt expense		5,417			3,400
Stock-based compensation		85,745			—
(Gain) loss on disposal of property, plant and equipment		(6	)		—
Prepayment penalty included in interest expense		13,034			—
PPP loan forgiveness		(2,063	)		—
Loss on derivative liability		48,603			—
Provision for inventory		147			90
Paid in kind interest accrual		12,851			—
Unrealized foreign currency transaction gains (losses)		333			(659	)
Changes in operating assets and liabilities:
Due from related parties		178			—
Accounts receivable, net		(11,361	)		(80	)
Inventories		(7,120	)		(2,315	)
Prepaid expenses		(7,863	)		1,673
Other current assets		(2,742	)		(2,344	)
Deferred costs		(2,534	)		(3,616	)
Other long-term assets		(9,274	)		(4,675	)
Accounts payable and accrued expenses		5,432			2,891
Deferred revenue		989			(13,507	)
Interest payable		(107	)		188
Income taxes payable		(1,766	)		1,391
Other long-term liabilities		(167	)		(971	)
Net cash used in operating activities		(34,758	)		(9,297	)
Cash flows from investing activities
Purchases of property and equipment		(1,465	)		(307	)
Disposal of property and equipment		—			3
Acquisition of Flywheel		(25,033	)		—
Purchases of intangible assets		(872	)		(601	)
Net cash used in investing activities		(27,370	)		(905	)
Cash flows from financing activities
Borrowings under revolving facility		—			8,145
Proceeds from issuance of Common stock, net of offering costs		277,753			—
Repayment of 1st Lien Loan		(33,688	)		(2,250	)
Repayment of 2nd Lien Loan		(137,443	)		—
Prepayment of premium on 2nd Lien Loan		(13,034	)		—
Deferred financing costs		(1,012	)		—
Repayment of revolving facility		(7,000	)		—
Proceeds from Paycheck Protection Program loan		—			2,062
Net cash provided by financing activities		85,576			7,957
Effect of exchange rate changes on cash and cash equivalents		203			(171	)
Net decrease in cash and cash equivalents		23,651			(2,416	)
Cash and cash equivalents at beginning of period		28,967			8,267
Cash and cash equivalents at end of period	$	52,618		$	5,851
Supplemental disclosures of cash flow information
Interest paid		14,143			803
Income taxes paid	$	1,771		$	—
Supplemental disclosure of noncash financing and investing activities:
Conversion of convertible debt and derivative liability into common stock	$	191,519		$	—
Deferred offering costs included in accounts payable and accrued expenses		—			1,030
Conversion of convertible preferred stock into common stock		98,544			—

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

5

F45 Training Holdings Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Nature of the business and basis of presentation

Organization

F45 Training Holdings Inc. (“F45 Training Holdings”, the “Company,” or “F45”) was incorporated in the State of Delaware on March 12, 2019 as a C-Corp. The Company and its subsidiaries are engaged in franchising and licensing the F45 Training brand to fitness facilities in multiple countries across the globe.

Initial public offering

The Company’s registration statement on Form S-1 (“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on July 14, 2021, and the Company’s common stock began trading on the New York Stock Exchange on July 15, 2021. On July 15, 2021, the Company completed its IPO of 20,312,500 shares of the Company common stock, $0.00005 par value per share at an offering price of $16.00 per share. The Company sold 18,750,000 shares and an existing stockholder sold an aggregate of 1,562,500 shares. The Company received aggregate net proceeds of approximately $277.8 million after deducting underwriting discounts, commissions and other offering costs. Immediately prior to the closing of the IPO, the Company amended and restated its article of incorporation and its bylaws authorizing an increase of capital stock to 215,000,000 shares with a par value of $0.00005 per share.

On August 13, 2021, the underwriters in the Company’s IPO exercised in part their overallotment option to purchase an additional 307,889 shares of the Company’s common stock from the Company and an additional 1,231,555 shares of the Company’s common stock from the selling stockholder at a public offering price of $16.00 per share. The overallotment sale was consummated on August 17, 2021 and the Company received $4.6 million in net proceeds from the purchase of the additional 307,889 shares after deducting underwriting discounts and commissions and will utilize the net proceeds for continuing operations and to pay expenses related to the offering.

Upon completion of the IPO, 9,854,432 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $98.5 million were automatically converted into an aggregate of 27,368,102 shares of the Company’s common stock and the Company’s outstanding convertible notes were converted into an aggregate of 14,847,066 shares of common stock. Following the completion of the IPO, the Company only has outstanding common stock.

2020 Stock repurchase agreements

On October 6, 2020, the Company entered into stock repurchase agreements (“Repurchase Agreements”) with 2M Properties Pty Ltd and Robert Deutsch, in which the Company purchased a total of 31,900,000 shares of common stock for $174.7 million. In addition, the Company paid a $2.5 million bonus to Mr. Deutsch. As a result of the Repurchase Agreements, these two parties no longer own any common stock in the Company.

Transaction with MWIG LLC (“MWIG”)

On March 15, 2019, MWIG, a special purpose private investment fund vehicle led by FOD Capital LLC, a family office investment fund, and Mark Wahlberg, made a minority preferred investment in the Company. On March 15, 2019, F45 Training Holdings, MWIG and Flyhalf Acquisition Company Pty Ltd, a newly incorporated wholly-owned, indirect subsidiary of F45 Training Holdings, entered into a Share Purchase Agreement (“SPA”) with F45 Aus Hold Co Pty Ltd (“F45 Aus Hold Co”) and its existing stockholders pursuant to which F45 Training Holdings became the ultimate parent of F45 Aus Hold Co and its subsidiaries. Upon the consummation of the transaction with MWIG, the existing stockholders and MWIG held 72.5% and 27.5% ownership interests, respectively, in the Company and, its wholly-owned subsidiaries. On December 30, 2020, MWIG converted 1,145,568 shares of preferred stock of the Company into 3,181,514 shares of common stock of the Company and sold those shares of common stock to affiliates of L1 Capital Fund, an Australian based global fund manager. See Note 13—Convertible preferred stock and stockholders’ equity (deficit) for further discussion.

6

Pursuant to the SPA and in return for acquiring 100% of the shares in F45 Aus Hold Co, F45 Training Holdings issued 29,000,000 shares of common stock to the existing stockholders of F45 Aus Hold Co proportionate to their relative ownership of the common stock of F45 Aus Hold Co and its wholly-owned subsidiaries. As a result of this transaction there was no change in control. All references to shares in the condensed consolidated financial statements and the notes to the condensed consolidated financial statements presented herein, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the effects of the transaction retrospectively as of the earliest period presented in the interim unaudited condensed consolidated financial statements.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements and related notes to the unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In accordance with such rules and regulations, certain information and accompanying note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments which are considered necessary for the fair presentation of the financial position of the Company at September 30, 2021 and the results of operations for the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. All intercompany balances and transactions have been eliminated in consolidation.

These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company as of and for the years ended December 31, 2020 and 2019 disclosed in the final prospectus filed with the SEC on July 16, 2021.

Note 2—Summary of significant accounting policies

There were no changes to the significant accounting policies or recent accounting pronouncements that were disclosed in Note 2—Summary of significant accounting policies to the audited consolidated financial statements of the Company as of and for the years ended December 31, 2020 and 2019, other than as discussed below.

7

Stock split

In July 2021, the Company effected a 2-for-1 forward stock split of its common stock. In connection with the forward stock split, each issued and outstanding share of common stock, automatically and without action on the part of the holders, became two shares of common stock. The par value per share of common stock was adjusted from $0.0001 to $0.00005. All share, per share and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the stock split.

Use of estimates

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period.

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

Accounts receivable and allowance for doubtful accounts

Accounts receivable is primarily comprised of amounts owed to the Company resulting from fees due from franchisees. The Company evaluates its accounts receivable on an ongoing basis and establishes an allowance for doubtful accounts based on historical collections and specific review of outstanding accounts receivable. Accounts receivable are written off as uncollectible when it is determined that further collection efforts will be unsuccessful.

The change in allowance for doubtful accounts is as follows (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Balance at beginning of period	$	5,256		$	2,195		$	5,746		$	1,069
Provisions for bad debts, included in selling, general and administrative		1,903			1,483			5,417			3,400
Uncollectible receivables written off		(114	)		(892	)		(4,118	)		(1,683	)
Balance at end of period	$	7,045		$	2,786		$	7,045		$	2,786

None of the Company’s related parties accounted for more than 10% of accounts receivable as of September 30, 2021 and December 31, 2020. None of the Company’s customers accounted for more than 10% of the Company’s accounts receivable as of September 30, 2021 and December 31, 2020. None of the Company’s customers accounted for more than 10% of the Company’s revenue for the three and nine months ended September 30, 2021 and 2020.

Deferred IPO costs

Deferred IPO costs, which consist of direct incremental legal and accounting fees relating to the IPO, are capitalized. As of September 30, 2021, the deferred IPO costs of $5.8 million were recorded in additional paid-in capital in the condensed consolidated balance sheets as a reduction from the proceeds of the IPO. There were no deferred IPO costs as of December 31, 2020.

8

Revenue recognition—Change in estimate

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

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

Contract assets

Contract assets primarily consist of unbilled revenue where the Company is utilizing costs incurred as the measure of progress of satisfying the performance obligation. When the contract price is invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. The unbilled receivable represents the amount expected to be billed and collected for services performed through period-end in accordance with contract terms. As of September 30, 2021 and December 31, 2020, the Company recorded $3.7 million and $1.2 million, respectively, of short-term unbilled receivable, which is included in other current assets on the condensed consolidated balance sheets. As of September 30, 2021 and December 31, 2020, the Company recorded $11.6 million and $4.9 million, respectively, of long-term unbilled receivable, which is included in other long-term assets on the condensed consolidated balance sheets.

9

Recently issued accounting pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) established Topic 842, Leases (“Topic 842”), by issuing Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvements for Lessors; ASU No. 2019-01, Codification Improvements; ASU No. 2019-10, Effective Dates, and ASU No. 2020-20, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance requires lessees to recognize the assets and liabilities on the balance sheet for the rights and obligations created by leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Leases will be classified as finance or operating, with the classification affecting the pattern and classification of expense recognition within the income statement. Topic 842 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. While the Company is currently evaluating the impact of adopting Topic 842, the Company expects to recognize right-of-use assets and lease liabilities on its consolidated balance sheets upon adoption. The standard is not expected to have a material impact to the condensed consolidated statements of operations and comprehensive (loss) income and statements of cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Topic 326 was subsequently amended by ASU No. 2018-19, Codification Improvements; ASU No. 2019-04, Codification Improvements; ASU No. 2019-11, Codification Improvements that clarify the scope of the standard in the amendments in ASU 2016-13; ASU No. 2019-05, Targeted Transition Relief; ASU No. 2019-10, Effective Dates; and ASU no. 2020-02, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC section on Effective Date Related to Accounting Standards Update No. 2016-02. The guidance changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current ‘incurred loss’ model with an ‘expected loss’ approach. The guidance will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact that the guidance will have on the consolidated financial statements.

In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Entity (Subtopic 815-40), to clarify the accounting for modifications or exchanges of equity-classified warrants. In accordance with the ASU, if there is a modification and the option is still determined to be classified as equity, the modification should be accounted for as an exchange of the original option for a new option. This guidance will be effective for the Company beginning with the year ending December 31, 2022, with early adoption permitted. The Company is currently evaluating the impact of this update and will monitor for modifications or exchanges of the issued freestanding stock options, but at this time does not anticipate the adoption of ASU 2021-04 to have a material impact on the consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. This guidance will be effective for the Company beginning with the year ended December 31, 2023, with early adoption permitted. The Company is currently evaluating the impact that the guidance will have on the consolidated financial statements.

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Note 3—Property and equipment, net

Property and equipment, net, consists of the following as of September 30, 2021 and December 31, 2020 (in thousands):

	Estimated Useful Life	September 30, 2021			December 31, 2020
	(years)
Vehicles	5	$	175		$	43
Furniture and fixtures	7		223			179
Office and other equipment	5		754			720
Leasehold improvements	Lesser of lease term or useful life		1,763			675
			2,915			1,617
Less accumulated depreciation			(901	)		(733	)
Total property and equipment, net		$	2,014		$	884

Depreciation expense related to property and equipment was $0.1 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively. Depreciation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.

Note 4—Intangible assets

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

			As of September 30, 2021						As of December 31, 2020
	Useful Life		Gross Value		Accumulated Amortization		Net Value		Gross Value		Accumulated Amortization		Net Value
	(in years)
Internal-use software		3	$	3,403	$	1,823	$	1,580	$	2,767	$	1,352	$	1,415
Trade names & trademarks		n/a		1,651		—		1,651		343		—		343
Flywheel CRM software		9		22,873		506		22,367		—		—		—
Total intangible assets, net			$	27,927	$	2,329	$	25,598	$	3,110	$	1,352	$	1,758

The amortization expense of intangible assets was $0.7 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively, and $2.0 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively, and was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income. The weighted average remaining life of internal-use software was 2.2 years and 1.7 years as of September 30, 2021 and December 31, 2020, respectively.

In April 2021, the Company entered into an intellectual property license agreement with FW SPV II LLC (“FW SPV”), a Delaware limited liability company, regarding certain intellectual property previously owned by Flywheel Sports, Inc. (“Flywheel IP”). The license agreement is for a period of five years at a rate of $5.0 million per year. The Company initially recorded $20.8 million of intangible assets when the license agreement became effective in April 2021 based on the present value of the annual payments throughout the term of the license agreement.

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On July 19, 2021, after the consummation of the IPO, the Company acquired certain assets of the Flywheel indoor cycling studio business for $25.0 million in cash consideration, effectively transferring control of the assets to the Company and terminating the license agreement entered into in April 2021. The acquisition was accounted as an asset acquisition. On the acquisition date, the Company reversed the net carrying amount of $19.8 million of intangible assets, net of accumulated amortization of $0.8 million, and $20.6 million of the related liability that was initially recorded under the license agreement, resulting in a decrease to the cash consideration transferred by $0.8 million. The purchase consideration of net $24.2 million was allocated to the assets acquired on a relative fair value basis, which primarily consisted of the client relationship management (“CRM”) software and trade names. The CRM software is amortized on a straight-line basis over 9 years, while the trade names have an indefinite life. The amortization expense of the CRM software was $0.5 million for the three and nine months ended September 30, 2021.

As of September 30, 2021, the expected amortization of intangible assets for future periods, excluding those assets not yet placed in service as of September 30, 2021, is as follows (in thousands):

	Future Amortization
Remainder of 2021	$	856
2022		3,324
2023		2,991
2024		2,663
2025		2,541
Thereafter		11,572
Total	$	23,947

Note 5—Accounts payable and accrued expenses

Accounts payable and accrued expenses were comprised of the following (in thousands):

	September 30, 2021		December 31, 2020
Accounts payable	$	8,066	$	7,670
Accrued sales tax		5,998		3,423
Accrued payroll and benefits		1,493		1,399
Stock-based compensation liability		4,446		—
Accrued inventory purchases		14,376		5,999
Other payables		82		166
	$	34,461	$	18,657

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Note 6—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. The following table reflects the change in deferred revenue during the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Deferred Revenue
Balance at December 31, 2020	$	14,095
Revenue Recognized		(11,523	)
Increase		15,393
Balance at June 30, 2021	$	17,965
Revenue Recognized		(9,143	)
Increase		5,873
Balance at September 30, 2021	$	14,695

	Deferred Revenue
Balance at December 31, 2019	$	23,941
Revenue Recognized		(20,114	)
Increase		13,313
Balance at June 30, 2020	$	17,140
Revenue Recognized		(6,439	)
Increase		2,311
Balance at September 30, 2020	$	13,012

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 noncurrent. 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. Total contract revenues from franchisees yet to be recognized as revenue was $209.7 million as of September 30, 2021, of which the Company expects to recognize approximately 23% of the revenue over the next 12 months and the remainder thereafter.

Note 7—Debt

Subordinated Convertible Debt Agreement

On October 6, 2020, the Company entered into a subordinated convertible debt agreement (the “Convertible Notes”), whereby the Company issued $100 million of Convertible Notes to certain holders maturing on September 30, 2025. The Convertible Notes have an annual interest rate of 8.28%, which accrues as paid-in-kind through the duration of the contract. Repayment of principal and accrued interest may be made in cash or shares of the Company upon the occurrence of certain qualifying events or at the end of the contract term (“PIK Interest”). Interest is accrued over the term of the debt and is payable upon repayment at maturity or earlier upon the occurrence of certain events. The outstanding balance of the Convertible Notes, including PIK Interest, as of December 31, 2020 was $102.0 million.

As a part of the subordinated convertible debt agreement, the Company identified embedded derivatives that require bifurcation under ASC 815, Derivatives and Hedging, relating to the contingent conversion option, payment of liquidation, default payment and prepayment options. See Note 8—Derivative instruments for further discussion on the Company’s accounting for these embedded derivatives.

13

In conjunction with the IPO on July 15, 2021, the outstanding Convertible Notes of $106.3 million of principal and interest were converted into 14,847,066 shares of common stock at a conversion price of $16.00. The unamortized debt discount of $23.7 million remaining as of the conversion date was recognized as interest expense on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021. As of September 30, 2021, there were no Convertible Notes and PIK interest outstanding.

Subordinated Second Lien Term Loan

On October 6, 2020, the Company entered into a Subordinated Credit Agreement with certain lenders which committed the lenders to provide $125 million of financing to the Company in exchange for a note payable. This agreement matures over a five-year period that carries a Paid-In Kind (“PIK”) Interest rate of 13.00%. PIK Interest is accrued over the term of the Subordinated Credit Agreement. The Subordinated Credit Agreement has a maturity date of October 5, 2025. The outstanding balance of the note, including PIK Interest, payable as of December 31, 2020 was $124.2 million, net of unamortized debt issuance costs of $4.7 million.

In connection with issuing the note the Company paid the lenders approximately $3.8 million in fees. Similarly, the Company paid third parties fees of approximately $1.0 million associated with issuing the note. 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 effective interest method.

Beginning with the first fiscal quarter ending after the first anniversary of the agreement effective date and as of the last day of each fiscal quarter thereafter, the Company must not permit the Total Leverage Ratio, for any period of four consecutive fiscal quarters ending on the last day of such fiscal quarter, to exceed 8.00 to 1.00; provided, that for purposes of determining the Total Leverage Ratio with respect to any fiscal quarter in which studios that have been closed by government mandate due to COVID-19, EBITDA shall be adjusted by a percentage equal to (1) the excess (if any) of (x) the number of studios that were closed by government mandate due to COVID-19 during such fiscal quarter over (y) the number of studios that were closed by government mandate due to COVID-19 as of the Effective Date, divided by (2) the total number of studios during such fiscal quarter.

On July 19, 2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the Subordinated Credit Agreement. The Company used proceeds from its IPO to repay $150.5 million under the terms of the Subordinated Credit Agreement, inclusive of a prepayment penalty of $3.8 million and penalty of six months of advanced interest for $9.3 million as a result of the repayment of indebtedness or termination of the Subordinated Credit Agreement. The unamortized debt discount of $4.5 million remaining as of the repayment date was recognized as interest expense on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021.

14

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”). Initial borrowings of $30.0 million from the Term Facility and $11.9 million of the availability under the Revolving Facility were used to repay, in full, amounts due to common stockholders as a result of the MWIG transaction. See Note 13—Convertible preferred stock and stockholders’ equity (deficit) for further discussion. The remaining availability under the Revolving Facility may be drawn and used for general corporate purposes. The obligations under the Secured Credit Agreement are guaranteed by certain operating subsidiaries of the Company and secured by a majority of the Company’s assets. The Revolving Facility may be prepaid and terminated by the Company at any time without premium or penalty (subject to customary LIBOR breakage fees). The Term Facility bears interest at floating rate of LIBOR plus 1.5 percent. The Term Facility principal and interest payments are due quarterly in accordance with an amortization schedule with a maturity date of September 18, 2022.

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 amended the agreement a second time. Through the second amendment, the Company agreed to convert $8,000,000 of the amount outstanding on the Revolving Facility to be part of the Term Facility. In addition to converting a portion of the Revolving Facility to the Term Facility, the Company agreed to repay $5,000,000 of the principal amount of the Revolving Facility outstanding. The interest rate of both the Term Facility and the Revolving facility were amended to 4.00% and 3.00% for Eurodollar loans and letters of credit, and ABR Loans, respectively.

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 (“Credit Agreement”) which amended and restated the Secured Credit Agreement dated September 18, 2019. The Credit Agreement provides for a $90.0 million five-year senior secured revolving facility (“Facility”). The Credit Agreement also provides 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. The proceeds from the Facility will be used for general corporate purposes. Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s election, the LIBOR rate plus a margin of 2.50% to 3.50% per annum, or base rate plus a margin of 1.50% to 2.50%, in each case depending on the Company’s total leverage ratio.

As a result of the amendment, the Company modified the existing covenants under the Secured Credit Agreement. The total leverage ratio was modified such that the Company is required to maintain a total leverage ratio for any four quarters, of less than 3.00 to 1.00. Prior to the third amendment to the Secured Credit Agreement, the Company was required to maintain a total leverage ratio, for any period of four consecutive quarters, of less than 7.00 to 1.00, respectively.

In connection with the Credit Agreement, the Company paid the lenders approximately $0.9 million in fees. Similarly, the Company paid third parties fees of approximately $0.1 million associated with the amendment. The Company concluded that the amendment resulted in a modification of debt rather than a debt extinguishment. As such, the Company determined that all fees incurred in connection to the Credit Agreement would be deferred and amortized over the term of new arrangement. Similarly, unamortized debt issuance costs from the original revolving facility will continue to be deferred. The unamortized debt discount of $0.2 million relating to the Term Facility that remained as of the termination date was recognized as interest expense on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021.

15

The outstanding balance of the Term Facility as of September 30, 2021 and December 31, 2020 was $0 and $33.3 million, respectively, net of unamortized debt issuance costs of $0 and $0.4 million, respectively. The outstanding balance of the Revolving Facility as of September 30, 2021 and December 31, 2020 was $0 and $7.0 million, respectively. The availability on the revolving line of credit as of September 30, 2021 was $88.5 million.

The weighted-average interest rate on the Company’s outstanding debt as of December 31, 2020 was 5.15%.

As of September 30, 2021 and December 31, 2020, the Company was in compliance with its covenants on the Credit Agreement and the Secured Credit Agreement, respectively.

PPP Loan

On April 10, 2020, the Company received loan proceeds of approximately $2.1 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses to help sustain their employee payroll costs, rent, and utilities due to the impact of the recent COVID-19 pandemic. Loans obtained through the PPP are eligible to be forgiven as long as the proceeds are used for qualifying purposes, which include the payment of payroll costs, interest on covered mortgage obligations, rent obligations and utility payments. The receipt of these funds, and the forgiveness of the loan is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its adherence to the forgiveness criteria. In June 2020, Congress passed the Payroll Protection Program Flexibility Act that made several significant changes to PPP loan provisions, including providing greater flexibility for loan forgiveness.

The Company is using the proceeds from the PPP loan to fund payroll costs in accordance with the relevant terms and conditions of the CARES Act. The Company is following the government guidelines and tracking costs to ensure full forgiveness of the loan. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% over a period of 1.5 years, beginning November 2020 with a final installment in April 2025. Any amounts forgiven when the Company is legally released as the primary obligor under the loan will be recognized as a gain from the extinguishment of the loan in the condensed consolidated statements of operations and comprehensive (loss) income.

During the third quarter of 2021, the outstanding balance on the PPP loan including interest was forgiven by the U.S. Small Business Administration (SBA). The Company recognized a gain of $2.1 million from the extinguishment of the PPP loan, which is included in “other income net” on the condensed consolidated statements of operations and comprehensive (loss) income during the three and nine months ended September 30, 2021. The Company is subject to examination by the SBA as the total loan forgiveness exceeds $2.0 million threshold.

Interest expense

Interest expense recorded on the debt facilities was $42.1 million and $0.5 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and $59.2 million and $1.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The following table reflects the write off of debt discounts and penalties incurred during the three and nine months ended September 30, 2021 that are included in interest expense (in thousands):

	Debt Discount		Penalty		Total
Subordinated Convertible Debt	$	23,740	$	—	$	23,740
Subordinated Second Lien Term Loan		4,463		13,034		17,497
First Lien Loan		241		—		241
	$	28,444	$	13,034	$	41,478

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Note 8–Derivative instruments

Interest rate swap

The Company is subject to interest rate volatility with regard to existing debt. From time to time, the Company enters into swap agreements to manage exposure to interest rate fluctuations.

On October 25, 2019, the Company entered into an interest rate swap contract (the “Swap Agreement”) with JP Morgan Chase Bank N.A. to fix the interest rate on the Term Facility over the life of the loan. The notional amount of the swap covers the entire $30.0 million borrowings outstanding under the Term Facility. Under the terms of the Swap Agreement, the Term Facility, which formerly accrued interest at a rate of LIBOR plus 1.50%, started effectively accruing interest on the effective date (October 30, 2019) at a fixed rate of 1.74% on an annualized basis.

To hedge the variability in cash flows due to changes in benchmark interest rates, the Company entered into an interest rate swap agreement related to debt issuances. The swap agreement is designated as a cash flow hedge. The derivative’s gain or loss is recorded in OCI and is subsequently reclassified to interest expense over the life of the related debt.

On July 21, 2021, in connection with the repayment in full of all outstanding obligations under the Subordinated Credit Agreement, the Company terminated the interest rate swap agreement. The Company paid $0.5 million to terminate the interest rate swap. As a result of the termination, the accumulated fair value of the interest rate swap was reclassified from accumulated other comprehensive loss to interest expense of $0.5 million and $0.5 million during the three and nine months ended September 30, 2021, respectively, on the condensed consolidated statements of operations and comprehensive (loss). As of December 31, 2020, the interest rate swap liability of $0.7 million was included in long-term derivative liability on the accompanying condensed consolidated balance sheets.

The Company recognized an unrealized gain of $0.1 million on this instrument in the three months ended September 30, 2020, and an unrealized loss of $0.6 million on this instrument in the nine months ended September 30, 2020. The unrealized gains and losses have been presented within other comprehensive income (loss) in the condensed consolidated statements of operations and comprehensive (loss) income.

Convertible notes

As discussed in Note 7—Debt, in October 2020 the Company entered into a subordinated convertible debt agreement whereby the Company issued $100.0 million of Convertible Notes to certain holders maturing on September 30, 2025. These notes can be converted into common shares of the Company at the holders’ option. The Company has analyzed the conversion and redemption features of the 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) Liquidity Event Conversion Option; (ii) Liquidity Event Redemption Option; and (iii) Qualified Public Offering (“QPO”) Redemption Option.

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The $27.8 million initial fair value of the embedded derivatives for the Convertible Notes was recorded as a debt discount along with a corresponding liability on the Company’s consolidated balance sheets. The initial debt discount is not subsequently re-valued and is being amortized using the effective interest method over the life of the Convertible Notes. 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 condensed consolidated statements of operations and comprehensive (loss) income.

The Company fair values the embedded derivatives using the Bond plus Black-Scholes option pricing model because it believes that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving compound embedded derivatives.

The following table sets forth the inputs to the Bond plus Black-Scholes option pricing model that were used to value the embedded conversion and redemption features derivatives:

	As of December 31, 2020
	Risk-free rate		Volatility			Term (years)		Dividend yield
Liquidity event		0.10%-0.34%		37.4	%		3.00		—
QPO event		0.10%-0.34%		34.8	%		0.75		—

As discussed in Note 7—Debt, in connection with the IPO, outstanding Convertible Notes of $106.3 million, including principal and interest, were converted into 14,847,066 shares of common stock.

The following table summarizes the derivative liability included in the condensed consolidated balance sheets at September 30, 2021 and December 31, 2020 (in thousands):

Fair Value of Embedded Derivative Liability (Level 3 Inputs):
Balance at January 1, 2020	$	—
Initial measurement on October 6, 2020		(27,822	)
Change in fair value		(8,818	)
Balance at December 31, 2020		(36,640	)
Change in fair value		(25,505	)
Balance at March 31, 2021		(62,145	)
Change in fair value		(23,098	)
Balance at June 30, 2021		(85,243	)
Conversion on July 15, 2021 (IPO)		85,243
Balance at September 30, 2021	$	—

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Note 9 – Fair value

Our carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid expenses, accounts payable and other accrued liabilities approximate their fair value due to their short-term nature of settlement. None of the Company’s assets and liabilities are accounted for at fair value on a recurring basis as of September 30, 2021.

None of the Company’s assets are currently accounted for at fair value on a recurring basis as of December 31, 2020. The following table presents the Company’s liabilities accounted for at fair value on a recurring basis as of December 31, 2020 (in thousands).

	As of December 31, 2020
	Level 1		Level 2			Level 3			Total
Liabilities
Interest rate swap	$	—	$	(660	)	$	—		$	(660	)
Derivative liability				—			(36,640	)		(36,640	)
Total Liabilities	$	—	$	(660	)	$	(36,640	)	$	(37,300	)

The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces.

Credit risk relates to the risk of loss resulting from the non-performance or non-payment by the Company’s counterparties in connection with contractual obligation. Risk around counterparty performance and credit could ultimately impact the amount and timing of cash flows. The Company believes it has appropriately addressed any credit risk due to the financial standing of the counterparties with which it trades. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

The inputs for determining fair value of the embedded conversion and redemption features of the Company’s convertible notes are classified as Level 3 inputs, refer to Note 8—Derivative instruments for further discussion related to the accounting for these instruments.

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Note 10—Income taxes

For interim reporting periods, the Company’s provision for income taxes is calculated using its annualized estimated effective tax rate for the year. This rate is based on its estimated full-year income and the related income tax expense for each jurisdiction in which the Company operates. Changes in the geographical mix, permanent differences or the estimated level of annual pre-tax income can affect the effective tax rate. This rate is adjusted for the effects of discrete items occurring in the period.

(Benefit) provision for income taxes

The benefit for income taxes was $0.2 million for the three months ended September 30, 2021, compared with the provision for income taxes of $2.0 million for the three months ended September 30, 2020. The provision for income taxes was $0.7 million for the nine months ended September 30, 2021, compared with the provision for income taxes of $3.5 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 of (0.35%) differed from the U.S. statutory tax rate of 21% primarily due to state taxes, the foreign tax rate differential and by current period losses incurred by F45 Training Holdings not benefited due to its full valuation allowance. The effective tax rate for the nine months ended September 30, 2020 of 32.09% differed from the U.S. statutory tax rate of 21% primarily due to state taxes, foreign jurisdiction earnings taxes at different rates, and interest and penalties for uncertain tax positions.

Note 11—Related party transactions

As discussed in Note 1—Description of the business and basis of presentation, due to the repurchase of the Company’s shares from two primary directors that occurred on October 6, 2020, the Company no longer considers these two directors as related parties from October 6, 2020 onward.

Group Training is owned by certain existing stockholders that are executive officers and directors of the Company, through which, they operate two F45 studios in the United States. As of September 30, 2021 and December 31, 2020, the Company had receivables related to fees under this management service agreement of $0.7 million and $0.4 million, respectively. These amounts are included in due from related parties on the condensed consolidated balance sheets. The Company recognized less than $0.1 million of franchise revenue related to fees under this management service agreement during the three and nine months ended September 30, 2021 and 2020.

During the three months ended September 30, 2021 and 2020, the Company recognized no franchise revenue, respectively, from studios owned by Group Training. During the nine months ended September 30, 2021 and 2020, the Company recognized no franchise revenue and $0.1 million franchise revenue, respectively, from studios owned by Group Training. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.

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During the three months ended September 30, 2021 and 2020, the Company recognized less than $0.1 million and $0.1 million, respectively, of franchise revenue and of equipment and merchandise revenue from studios owned by Messrs. Wahlberg and Raymond. During the nine months ended September 30, 2021 and 2020, the Company recognized less than $0.1 million and $0.3 million, respectively, of franchise revenue and of equipment and merchandise revenue from studios owned by Messrs. Wahlberg and Raymond. As of September 30, 2021 and December 31, 2020, the Company had less than $0.1 million and no outstanding receivables, respectively. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and equipment and merchandise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.

During the three months ended September 30, 2021 and 2020, the Company recognized less than $0.1 million from studios owned by an entity in which an existing stockholder that is an executive officer and director of the Company holds a 10% ownership interest. During the nine months ended September 30, 2021 and 2020, the Company recognized less than $0.1 million and $0.1 million, respectively, from these studios. As of September 30, 2021 and December 31, 2020, the Company had less than $0.1 million and no outstanding receivables from these studios, respectively. With respect to these transactions, the Company has presented the revenue recognized during these periods in franchise revenue and equipment and merchandise revenue and the related expenses in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.

The Company incurred expenses totaling approximately $1.6 million and $0.4 million, respectively, during the three months ended September 30, 2021 and 2020, and $3.7 million and $1.1 million, respectively, during the nine months ended September 30, 2021 and 2020, in connection with certain shipping and logistic services from a third-party vendor that is owned by an immediate family member of an executive officer of the Company. As of September 30, 2021 and December 31, 2020, the Company had approximately $0.4 million and $0.3 million of outstanding payables to the third-party vendor. The Company has presented the expenses incurred during these periods in cost of equipment and merchandise revenue in the condensed consolidated statements of operations and comprehensive (loss) income.

During the three and nine months ended September 30, 2021, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $0.1 million from two studios owned by employees. During the three and nine months ended September 30, 2020, the Company recognized franchise revenue and equipment and merchandise revenue totaling less than $0.1 million and $0.1 million, respectively, from six studios owned by employees. As of September 30, 2021 and December 31, 2020, the Company had no receivables outstanding related to this revenue.

Transaction with LIIT LLC

On June 23, 2020, the Company entered into an Asset Transfer and Licensing Agreement with LIIT LLC (“LIIT”) an entity wholly-owned by Adam Gilchrist (F45’s Co-Founder and Chief Executive Officer). Pursuant to this agreement, F45 will sell to LIIT certain at-home exercise equipment packages (including the intellectual property rights thereto) for $1.0 million payable on or before December 31, 2020. LIIT assumes all outstanding rights and obligations related to these exercise equipment packages from F45. In addition, pursuant to this agreement, LIIT will receive access to F45’s library of programming related to existing and future fitness content for the duration of the license period of 10 years. In exchange for this license, LIIT will pay F45 an annual license fee equal to the greater of (a) $1.0 million and (b) 6% of the annual gross revenue of LIIT, less any payments made by LIIT to third parties in connection with the sale of such exercise equipment packages payable annually on July 30. This agreement will expire on July 1, 2030, unless otherwise terminated upon mutual agreement of F45 and LIIT. Upon termination or expiration of this agreement, LIIT must: (i) immediately cease all use and application of the licensed intellectual property; (ii) promptly return to F45, or otherwise dispose of as F45 may instruct, all documents, databases, lists and materials (whether hard copy or electronic form) including any advertising and promotion material, labels, tags, packaging material, advertising and promotional matter and all other material relating to the licensed intellectual property in the possession or control of LIIT; and (iii) immediately cease to hold itself out as having any rights in relation to the licensed intellectual property from the date of termination.

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The Company recognized $0.3 million and $0.8 million revenue and no cost of sales in conjunction with the transaction with LIIT LLC during the three and nine months ended September 30, 2021. The Company recognized no revenue and cost of sales in conjunction with the transaction with LIIT LLC during the three and nine months ended September 30, 2020. The outstanding receivable balance as of September 30, 2021 and December 31, 2020 was $1.3 million and $1.5 million respectively.

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, or Club Franchise, an affiliate of KLIM. Pursuant to the term multi-unit studio agreement, the Company have granted to Club Franchise the right, and Club Franchise has agreed to, at least 300 studios in certain territories in the U.S. over 36 months, with the first 150 studios to be opened within 18 months of the date of the multi-unit studio agreement, or December 15, 2022.

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 other franchise agreements in the United States entered into since July 2019, Club Franchise are 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 establishment fee of $7,500,000 as follows: (i) $1,875,000 upon execution of the multi-unit studio agreement (which amount has been paid); (ii) $1,875,000 by June 2022; (iii) $1,875,000 by December 2022; and (iv) $1,875,000 by December 2023. Club Franchise is required to pay monthly franchise fees to us in respect of additional studios with monthly franchise fees for 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 have agreed to provide at a discounted rate.

The Company recognized $2.4 million revenue and no cost of sales in conjunction with the transaction with Club Franchise Group LLC during the three months and nine ended September 30, 2021. There was no outstanding receivable balance owed by the Club Franchise as of September 30, 2021.

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

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Note 12—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 September 30, 2021, the Company had established a litigation accrual of $4.1 million in accounts payable and accrued expenses for claims brought against the Company in the ordinary course of business. The Company’s accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. The Company discloses the amount accrued if the Company believes it is material or if the Company believes such disclosure is necessary for the Company’s financial statements to not be misleading. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount previously accrued, the Company assesses whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and the Company adjusts the accruals and disclosures accordingly. The Company does not presently believe that the ultimate resolution of the foregoing matters 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 the Company’s liquidity, consolidated financial position, and/or results of operations.

Lease commitments

The Company leases eight office buildings in the United States and other international locations. Future minimum lease payments, which include non-cancelable operating leases at September 30, 2021, are as follows (in thousands):

	Operating Leases
Remainder of 2021	$	416
2022		2,231
2023		2,241
2024		2,103
2025		1,991
Thereafter		7,289
Total minimum lease payments	$	16,271

Rent expense under operating leases was approximately $0.5 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and $1.1 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively. The Company has presented rent expense during these periods in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.

As of September 30, 2021, the Company had an outstanding guarantee of $2.8 million in aggregate total for lease payments over 10 years for a franchisee’s studio lease in the state of California.

On December 21, 2020, the Company entered into a lease agreement with CIM Urban REIT Properties IX, L.P. to lease an office building in Austin, Texas. The lease term expires on the last day of the 96th lease month from the Rent Commencement Date, as defined in the lease agreement. In the event that the Company does not achieve earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $20.0 million for the period from January 1, 2021 through June 30, 2021, the Company shall post an additional conditional deposit of $1.0 million on or before September 30, 2021 (“First Conditional Deposit”) as additional security for the Company’s obligations under the lease. The Company did not achieve the required EBITDA for the period from January 1, 2021 through June 30, 2021. In the event that the Company does not achieve EBITDA of $53.0 million for the period from January 1, 2021 through December 31, 2021, the Company shall deposit an additional deposit of $1.0 million on or before April 30, 2022 (“Second Conditional Deposit”). The Company is not obligated to deposit the Second Conditional Deposit, regardless of the Company’s EBITDA for the year ended December 31, 2021, in the event that the Company deposits the First Conditional Deposit. As of September 30, 2021, CIM Urban REIT Properties IX, L.P. waived the EBITDA requirement for the First Conditional Deposit of $1 million.

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2020 Promotional agreements

On October 15, 2020, the Company entered into a promotional agreement with ABG-Shark, LLC (“ABG-Shark”). Pursuant to this agreement, Greg Norman will 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 is 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 will 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. As of September 30, 2021, no definitive partnership agreement has been reached with 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, DB Ventures will 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 is 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 will expire on December 5, 2025. The Company will recognize expenses related to 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. As of September 30, 2021, these studio and related lease agreements had yet to commence.

2021 Promotional agreements

On April 12, 2021, the Company entered into a promotional agreement with Magic Johnson Entertainment (“MJE”). Pursuant to this agreement, MJE will 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. Additionally, in connection with the Company becoming publicly traded on July 15, 2021, the Company is 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, which is 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 promotional agreement with Craw Daddy Productions (“CDP”). Pursuant to this agreement, effective July 1, 2021, Cindy Crawford will 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 is obligated to grant Craw Daddy Productions 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 will 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 September 24, 2021, the Company entered into a promotional agreement with Big Sky, Inc (“Big Sky”). Pursuant to this agreement, Joe Montana will provide certain promotional services to the Company in exchange for an annual compensation. On the same date, Malibu Crew, a subsidiary of the Company, also entered into a promotional agreement with Big Sky Inc. whereby Joe Montana will 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. As of September 30, 2021, these studios and associated start-up costs had yet to commence.

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In connection with the consummation of the IPO on July 15, 2021, the Company recognized total stock-based compensation expense of $5.0 million in connection to these promotional agreements entered with ABG-Shark, DB Ventures, MJE and Cindy Crawford for the three and nine months ended September 30, 2021, respectively. The Company determined that the common stock to be issued upon settlement of the promotional agreements are liability classified awards. As of September 30, 2021, the Company recorded $4.4 million of stock-based compensation liability in accounts payable and accrued expenses and $0.6 million of stock-based compensation liability in other long-term liabilities on the condensed consolidated balance sheets.

The Company estimates the fair value of the stock-based compensation using a Monte-Carlo simulation model. The other significant assumptions used in the analysis were as follows:

Risk-free interest rate	0.07 – 0.92%
Expected dividend yield	—
Expected term in years	0.29 – 4.75
Expected volatility	20.70 – 28.10%

See Note 14—Stock-based compensation for discussion on the stock option activities and total stock-based compensation expense for the three and nine months ended September 30, 2021, respectively.

Note 13—Convertible preferred stock and stockholders’ equity (deficit)

Issuance of convertible preferred stock and common stock

In connection with the transaction with MWIG described in Note 1—Nature of the business and basis of presentation, on July 14, 2021, the Company amended its articles of incorporation and authorized 108,000,000 shares of common stock with a par value of $0.00005, and 11,000,000 shares of preferred stock, all with par values of $0.0001. As of September 30, 2021 and December 31, 2020, the Company had 90,554,571 and 29,281,514 shares of common stock, respectively. As of September 30, 2021 and December 31, 2020, the Company had 0 and 9,854,432 shares of convertible preferred stock issued and outstanding, respectively.

As part of the transaction with MWIG and in return for Flyhalf Acquisition Company Pty Ltd acquiring 100% of the shares in F45 Aus Hold Co, the Company issued 58,000,000 shares of its common stock to F45 Aus Hold Co’s existing stockholders. In addition, Flyhalf Acquisition Company Pty Ltd made a payment to F45 Aus Hold Co’s existing stockholders of $100 million.

The payment of $100 million was funded by MWIG, subscribing for 10,000,000 shares of preferred stock at $10.00 per share in the Company. This amount was ultimately paid to F45 Aus Hold Co’s existing stockholders pro rata in proportion to their interests in F45 Aus Hold Co. Further, Flyhalf Acquisition Company Pty Ltd issued $50.0 million secured promissory notes to F45 Aus Hold Co’s existing stockholders pro rata in proportion to their interests in F45 Aus Hold Co (the “Sellers Notes”). The $100.0 million payment, $50.0 million Sellers Notes and related interest thereon have been recorded as a dividend in the condensed consolidated statements of changes in convertible preferred stock and stockholders’ equity (deficit) during the year ended December 31, 2019. In addition to the initial issue of 10,000,000 shares of Preferred Stock, MWIG was granted an option to acquire an additional 1,000,000 shares of Preferred Stock for $10.00 per share under the SPA. The $10.0 million in funds raised by the issue of the additional Preferred Stock were used in full to partially settle the outstanding Sellers Notes.

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On December 30, 2020, MWIG converted 1,145,568 shares of preferred stock of the Company into 3,181,514 shares of common stock of the Company and sold those shares of common stock to affiliates of L1 Capital Fund, an Australian based global fund manager.

In July 2021, due to the completion of the IPO, all preferred stock outstanding was automatically converted into an aggregate of 27,368,102 shares
of common stock with a conversion price of $16.00 per share. There were no shares of convertible preferred stock outstanding as of September 30, 2021.

Note 14—Stock-based compensation

Issuance of restricted stock units

In connection with the transaction with MWIG described in Note 1—Nature of the business and basis of presentation, on March 15, 2019, the Company entered into a promotional agreement with Mark Wahlberg (“Mr. Wahlberg”), a member of the Company’s Board of Directors and an investor in MWIG, pursuant to which Mr. Wahlberg agreed to provide promotional services to the Company. In exchange for the agreed upon services provided in the promotional agreement, the Company issued 2,738,648 restricted stock units (RSUs) to Mr. Wahlberg.

The RSUs were to vest based on the Company attaining certain valuation thresholds upon a vesting event, defined as: (i) a deemed liquidation event or change in control; (ii) the closing of a financing transaction including the sale, issuance or redemption of the Company’s (or one of its subsidiaries) equity securities, and any initial public offering; or (iii) at any time that the Company’s common stock is publicly traded, with the Company’s equity value exceeding the following thresholds:

Company Equity Value Threshold	Potential Restricted Stock Units Vested
$1.0 billion		912,882
$1.5 billion		912,882
$2.0 billion		912,884

The Company determined that the RSUs are equity 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.

On July 5, 2021, the Company approved the acceleration of Mr. Wahlberg’s RSUs such that 100% of the RSUs granted to Mr. Wahlberg would fully vest concurrently with and subject to the consummation of the IPO, effectively eliminating the market condition based on the achievement of prescribed Company equity values. The RSUs shall be settled in shares of common stock on a date determined by the Company during 2022 but no later than March 15, 2022. All remaining terms and conditions in the original promotional agreement are still applicable. The Company determined the modification of the RSUs as a Type IV modification in accordance with ASC 718, Compensation—Stock Compensation, because at the modification date, both the original and modified awards were considered improbable of vesting as the performance condition had not been met on the modification date of July 5, 2021. The Company utilized the assumed IPO price of $16.00 per share as the modification date fair value.

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In connection with the Company becoming publicly traded on July 15, 2021, the fair value of the 2,738,648 RSUs fully vested and was recognized as compensation expense in the amount of $43.8 million during the three and nine months ended September 30, 2021, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of operation and comprehensive (loss) income.

2021 Incentive Plan

The Company’s stock based compensation plan, which became effective at the IPO date, included 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 incentive stock options (ISOs), 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. As per 2021 Equity Incentive Plan, the maximum aggregate number of Shares that may be subject to Awards under various equity incentive compensation plans is 5,000,000 Shares.

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

Incentive stock options (ISOs)

ISOs 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. Stock options generally vest over one to three years from the date of grant. 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 stock options issued by the Company contains only service vesting conditions. For the nine months ended September 30, 2021 the total number of shares authorized for ISOs is 254,965.

The Company utilizes the Black-Scholes option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:

Weighted-average fair value (1)	4.69
Risk-free interest rate (2)	0.92%
Expected dividend yield (3)	—
Expected volatility (4)	29.20%
Expected term in years	5.76

(1) The weighted-average fair value based on stock options granted during the period.

(2) The risk-free interest rate was estimated based on the yield on U.S. Treasury scrips

(3) The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.

(4) Selected volatility is re-levered equity volatility based on median asset volatility.

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A summary of option activity under the employee share option plan as of September 30, 2021, and changes during the period then ended is presented below:

	Shares (In thousands)		Weighted - Average Exercise Price		Weighted - Average Remaining Contractual Term		Aggregate Intrinsic Value (In thousands)
Outstanding at January 1, 2021		—	$	—			$	—
Granted		264	$	16.00
Exercised		—	$	16.00
Forfeited or expired		(9)	$	16.00
Outstanding at September 30, 2021		255	$	16.00			$	—
Vested and exercisable		66	$	16.00			$	—
Expected to vest		189	$	16.00		1.8	$	—

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 September 30, 2021. The aggregate intrinsic value of vested and unvested option as of September 30, 2021 was $0, since the options are out-of-the-money. The aggregate intrinsic value is the difference between the Company’s closing stock price of $14.96 per share on the last trading day of September 30, 2021 and the exercise price of $16.00 per shar multiplied by the number of in-the-money options. All the options were out-of-the-money. The total grant date fair value of the options vested during the three and nine months ended September 30, 2021 was $0.3 million, which was included in selling, general and administrative expenses on the condensed consolidated statements of operation and comprehensive (loss) income.

As of September 30, 2021, the total unrecognized pre-tax stock-based compensation expense related to the ISO was $0.9 million, which is expected to be recognized over a weighted-average vesting period of 1.8 years. The maximum contractual term of the ISO is approximately 3 years.

Restricted stock units (RSUs)

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 on 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 issued by the Company currently only contain service vesting conditions. RSUs also provide for accelerated vesting in certain circumstances as defined in the plans and related grant agreements. For the nine months ended September 30, 2021 the total number of shares authorized for RSUs is 3,438,555.

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.

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A summary of RSU’s activity is as follows:

	Shares (In thousands)			Weighted - Average Grant Date Fair Value Per Share
Outstanding at January 1, 2021		—		$	—
Granted		3,591			15.54
Vested		(2,370	)		15.31
Forfeited		(152	)		16.00
Outstanding at September 30, 2021		1,069		$	16.00

The total grant date fair value of RSUs vested during the three and nine months ended September 30, 2021 was $36.3 million, respectively, which was included in selling, general and administrative expenses on the condensed consolidated statements of operation and comprehensive (loss) income. As of September 30, 2021, total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units was $17.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.78 years. The maximum contractual term of RSUs is approximately 3 years.

Restricted stock awards (RSAs)

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 issued by the Company contains service vesting conditions. For the nine months ended September 30, 2021 the total number of shares authorized for RSAs is 104,512.

The Company uses the closing stock price on the grant date to estimate the fair value of service-based RSAs.

A summary of RSAs activity is as follows:

	Shares (In thousands)		Weighted - Average Grant Date Fair Value Per Share
Outstanding at January 1, 2021		—	$	—
Granted		105		14.42
Vested		—		—
Forfeited		—		—
Outstanding at September 30, 2021		105	$	14.42

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The total grant date fair value of RSAs vested during the three and nine months ended September 30, 2021 was $0. As of September 30, 2021, total recognized pre-tax stock-based compensation expense related to non-vested RSAs was $0.3 million, which was included in selling, general and administrative expenses on the condensed consolidated statements of operations and comprehensive (loss) income. Total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards was $1.2 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.67 years. The maximum contractual term of RSAs is less than one year.

Non-employee promotional agreements

As described in Note 12—Commitments and contingencies, the Company entered into promotional agreements with ABG-Shark, DB Ventures, MJE, and CDP which included restricted stock units that contain equity-based payments, which have performance, market and service conditions.

The Company determined that the restricted stock units 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 September 30, 2021, the market conditions have not been met on any of the non-employee 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.

Note 15—Basic and diluted net (loss) income per share

The computation of net (loss) income 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):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Numerator:
Net (loss) income	$	(130,193)	$	2,349	$	(197,562)	$	7,484
Net income allocated to participating preferred shares	$	—	$	646	$	—	$	2,058
Net (loss) income attributable to common stockholders—basic and diluted	$	(130,193)	$	1,703	$	(197,562)	$	5,426
Denominator:
Weighted average common shares outstanding—basic and diluted		85,463,755		58,000,000		48,214,724		58,000,000
Net (loss) income per common share:
Basic and diluted	$	(1.52)	$	0.03	$	(4.10)	$	0.09
Anti-dilutive securities excluded from diluted loss per common share:
Unvested restricted stock units		1,068,750		—		1,068,750		—
Unvested restricted stock awards		104,512		—		104,512		—
Stock options to purchase common stock		254,965		—		254,965		—
Total		1,428,227		—		1,428,227		—

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For the three and nine months ended September 30, 2020, the restricted stock units of 2,738,648 have no impact to the diluted net income per share as the performance condition as specified in Note 14-Stock-based compensation has not been met as of September 30, 2020.

Note 16—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 region 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 “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, Messrs. Adam Gilchrist and Chris Payne. Segment information is presented in the same manner that the Company’s CODM reviews the operating results in assessing performance and allocating resources. The CODM reviews 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:

	For the Three Months Ended September 30, 2021						For the Three Months Ended September 30, 2020
	Revenue		Cost of revenue		Gross profit		Revenue		Cost of revenue			Gross profit (loss)
United States:
Franchise	$	11,117	$	1,047	$	10,070	$	6,245	$	1,774		$	4,471
Equipment and merchandise		4,162		2,239		1,923		3,583		1,857			1,726
	$	15,279	$	3,286	$	11,993	$	9,828	$	3,631		$	6,197
Australia:
Franchise	$	4,330	$	158	$	4,172	$	6,145	$	248		$	5,897
Equipment and merchandise		2,234		1,992		242		2,707		2,305			402
	$	6,564	$	2,150	$	4,414	$	8,852	$	2,553		$	6,299
Rest of World:
Franchise	$	3,066	$	281	$	2,785	$	1,677	$	(25	)	$	1,702
Equipment and merchandise		2,268		1,521		747		1,606		1,085			521
	$	5,334	$	1,802	$	3,532	$	3,283	$	1,060		$	2,223
Consolidated:
Franchise	$	18,513	$	1,486	$	17,027	$	14,067	$	1,997		$	12,070
Equipment and merchandise		8,664		5,752		2,912		7,896		5,247			2,649
	$	27,177	$	7,238	$	19,939	$	21,963	$	7,244		$	14,719

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	For the Nine Months Ended September 30, 2021						For the Nine Months Ended September 30, 2020
	Revenue		Cost of revenue		Gross profit		Revenue		Cost of revenue		Gross profit (loss)
United States:
Franchise	$	29,873	$	3,377	$	26,496	$	21,954	$	5,863	$	16,091
Equipment and merchandise		11,166		6,154		5,012		11,045		5,561		5,484
	$	41,039	$	9,531	$	31,508	$	32,999	$	11,424	$	21,575
Australia:
Franchise	$	12,039	$	430	$	11,609	$	10,985	$	580	$	10,405
Equipment and merchandise		3,762		3,313		449		5,185		4,489		696
	$	15,801	$	3,743	$	12,058	$	16,170	$	5,069	$	11,101
Rest of World:
Franchise	$	10,338	$	355	$	9,983	$	6,827	$	148	$	6,679
Equipment and merchandise		5,022		3,205		1,817		8,267		4,360		3,907
	$	15,360	$	3,560	$	11,800	$	15,094	$	4,508	$	10,586
Consolidated:
Franchise	$	52,250	$	4,162	$	48,088	$	39,766	$	6,591	$	33,175
Equipment and merchandise		19,950		12,672		7,278		24,497		14,410		10,087
	$	72,200	$	16,834	$	55,366	$	64,263	$	21,001	$	43,262

Selling, general and administrative expenses, other expenses, and taxes are not allocated to individual segments as these are managed on an entity wide group basis. The reconciliation between reportable segment gross profit to condensed consolidated net (loss) income is as follows (in thousands):

	For the Three Months Ended September 30,
	2021			2020
Segment gross profit	$	19,939		$	14,719
Selling, general and administrative expenses		110,492			10,100
Loss on derivative liabilities		—			—
Interest expense, net		41,897			534
Other income, net		(2,035	)		(238	)
(Benefit) provision for income taxes		(222	)		1,974
Net (loss) income	$	(130,193	)	$	2,349

	For the Nine Months Ended September,
	2021			2020
Segment gross profit	$	55,366		$	43,262
Selling, general and administrative expenses		145,882			31,724
Loss on derivative liabilities		48,603			—
Interest expense, net		59,165			1,333
Other income, net		(1,415	)		(815	)
(Benefit) provision for income taxes		693			3,536
Net (loss) income	$	(197,562	)	$	7,484

For the three and nine months ended September 30, 2021 and September 30, 2020, respectively, the Company’s long-lived asset additions were not significant.

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Note 17—Subsequent events

On October 29, 2021, the Company entered into a share purchase agreement to acquire 100% of the outstanding stock of Vive Active Brookvale Pty Ltd (Vive). Vive, located in Australia, provides Pilates classes through its online platform and its studios. The stock acquisition was a strategic transaction to strengthen the Company’s position as one of the fastest growing fitness franchisors and creating a leading global fitness training and lifestyle brand. The consideration exchanged for the acquisition is $5 million less working capital adjustments. Consummation of the acquisition remains subject to customary closing conditions. The Company is in the process of evaluating the nature of the stock purchase to determine whether the purchase is a business combination or an asset acquisition.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We are F45 Training, the fastest growing fitness franchisors in the world, focused on creating a leading global fitness training and lifestyle brand. We offer consumers functional 45-minute workouts that are effective, fun, and community-driven. Our workouts combine elements of high-intensity interval, circuit, and functional training to offer consumers what we believe is the world’s best functional training workout. We deliver our workouts through our digitally-connected global network of studios, and we have built a differentiated, technology-enabled platform that allows us to create and distribute workouts to our global franchisee base. Our platform enables the rapid scalability of our model and helps to promote the success of our franchisees. We offer our members a continuously evolving fitness program in which virtually no two workouts are ever the same. Our vast and growing library of functional training content allows us to vary workout programs to keep consumers engaged with fresh content, stay at the forefront of consumer trends and drive maximum individual results, while helping our members achieve their fitness goals.

Impact of the COVID-19 pandemic

The COVID-19 pandemic and related shelter-in-place restrictions and other containment efforts have had and continue to have a significant impact on the gym and fitness industry generally, as well as our business, financial condition and results of operations. Following the outbreak of the pandemic and at its initial peak, nearly all of our studios temporarily closed pursuant to local, state and federal mandates and guidelines.

As businesses have been allowed to re-open in certain jurisdictions pursuant to local and state mandates, we have worked closely with our franchisees in helping to re-open their studios subject to certain indoor capacity or other restrictions, including company-implemented health and safety policies. We have also been providing additional operating guidance to our franchisees by assisting with modifications to studio layouts and workouts to accommodate proper social distancing.

As of September 30, 2021, we had approximately 1,197 Open Studios, which represents approximately 74% of our Total Studios. The remaining 26% of our Total Studios are generally located in regions that continue to face restrictions, which we expect to be relaxed over time.

We have found that, on average, studios that have re-opened following temporary closure quickly return close to pre-pandemic levels on a weekly revenue basis, and eventually exceed pre-pandemic levels on the same basis. As of September 30, 2021, the median weekly revenue of the 466 studios that have been re-opened the longest since temporary closure exceeded pre-pandemic levels.

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There have been frequent changes and variation in local and state regulation of the health club industry, and many local and state jurisdictions have returned to shelter in place restrictions after allowing for health club re-openings. While we are optimistic about our ability to continue to effectively manage through the COVID-19 pandemic, we are unable to predict the duration or future impact of the pandemic on our business, financial condition and results of operations.

Our Segments

We operate and manage our business based on geographic regions and our strategy to become a leading global fitness and lifestyle brand. We have three reportable segments: United States (which for segment reporting purposes includes our operations in the United States and South America), Australia and Rest of World. We refer to “Australia” as our operations in Australia, New Zealand and the immediately surrounding island nations. We refer to “Rest of World” or “ROW” as our operations in locations other than the United States and Australia. We evaluate the performance of our segments and allocate resources to them based on revenue and gross profit. Revenue and gross profit for all operating segments include only transactions with external customers and do not include inter-segment transactions. The tables on the following pages summarize the financial information for our segments for the years ended December 31, 2020 and 2019 and the three months ended September 30, 2021 and 2020. In all other sections of this filing when we present geographic data, we are presenting such data for the named region on a stand-alone basis.

Our Franchise Model

We operate a nearly 100% franchise model. We believe our franchise model is attractive due to its potential for asset-light growth, strong profitability and robust cash flow generation, and has helped to facilitate our rapid growth and strong financial performance prior to the COVID-19 pandemic. Despite challenges posed by the COVID-19 pandemic, we grew our footprint and experienced minimal permanent closures during 2020, which we believe underscores the resilience of our business model. Between Q3 2021 and Q3 2020, our Total Franchises Sold increased by 36% and our Total Studios increased by 18%. For the three months ended September 30, 2021, as compared with the same period in 2020, our revenue increased by 24% as our network recovers from the COVID-19 pandemic.

Notwithstanding the ongoing challenges presented by the COVID-19 pandemic, we believe we are well positioned to continue to successfully manage through the pandemic and drive growth in the future.

Our opportunities to drive the long-term growth of our business include:

• expanding our studio footprint in the United States;

• expanding our studio footprint throughout Rest of World;

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

• expanding into new channels;

• developing new workout programs to access new target demographics; and

• driving increased member spend through ancillary product offerings.

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Key Non-GAAP Financial and Operating Metrics

In addition to our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees, and monitor our business.

Our financial condition and results of operation have been, and will continue to be, affected by a number of important factors, including new franchises sold, new studio openings and number of visits. Many of these factors have been, and will continue to be, impacted by the COVID-19 pandemic.

The following table sets forth our key performance indicators for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	(in thousands)
Net income/(loss)	$	(130,193	)	$	2,349		$	(197,562	)	$	7,484
Earnings per share	$	(1.52	)	$	0.03		$	(4.10	)	$	0.09
System-wide Sales	$	99,436		$	74,627		$	296,474		$	212,594
System-wide Visits		6,350			5,420			20,081			14,194
Same store sales growth		6.0	%		(33.8	%)		14.7	%		(32.7	%)
New Franchises Sold, net		210			155			767			322
Total Franchises Sold, end of period		3,011			2,214			3,011			2,214
Initial Studio Openings, net		63			101			181			236
Total Studios, end of period		1,618			1,376			1,618			1,376
EBITDA	$	(87,127	)	$	5,448		$	(134,211	)	$	14,106
Adjusted EBITDA	$	10,115		$	7,381		$	26,061		$	20,021
Adjusted EBITDA margin		37.2	%		33.6	%		36.1	%		31.2	%

System-Wide Sales

We define System-wide Sales as all payments made to our studios and includes payment for classes, apparel and other sales for a given period. We track System-wide Sales as an indication of the strength of our franchisee network.

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

Our System-wide Sales have quickly recovered. For the three and nine months ended September 30, 2021, our System-wide Sales were approximately $99.4 million and $296.5 million, respectively, which compares favorably to approximately $74.6 million and $212.6 million for the three and nine months ended September 30, 2020.

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	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
United States	$	46,306	$	20,154	$	117,047	$	59,633
Australia		33,965		40,937		135,121		114,434
ROW		19,165		13,536		44,306		38,527
Total	$	99,436	$	74,627	$	296,474	$	212,594

System-wide Visits

We define System-wide Visits as the number of registered individual workouts for any specified period. A workout is registered when the consumer checks into a class.

Our long-term growth will depend in part on our continued ability to attract and retain consumers to visit our studios for individual workouts. Our franchisees must continue to provide an experience that attracts existing and new consumers. We cannot be sure that we and our franchisees will be successful in attracting and retaining consumers for individual workouts or that visits will not materially decline due to any number of factors, such as harm to our brand or our inability to anticipate and meet consumer preferences and successfully introduce new workout programs to meet those demands.

Our System-wide Visits have quickly recovered. For the three and nine months ended September 30, 2021, our System-wide Visits were approximately 6 million and 20 million, respectively, which compares favorably to approximately 5 million and 14 million for the three and nine months ended September 30, 2020.

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in thousands)
United States		3,025		1,406		8,141		3,550
Australia		2,047		3,120		9,015		8,112
ROW		1,278		894		2,925		2,532
Total		6,350		5,420		20,081		14,194

New Franchises Sold

New Franchises Sold refers to the number of franchises sold during any specific period. We classify Total Franchises Sold, as of any specified date, as the total number of signed franchise agreements in place as of such date that have not been terminated. Each new franchise is included in the number of franchises sold from the date on which we enter into a signed franchise agreement related to each such new franchise. Total Franchises Sold includes franchise arrangements in all stages of development after signing a franchise agreement, and includes franchises with open studios. Franchises are removed from Total Franchises Sold upon termination of the franchise agreement.

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Our long-term growth will depend in part on our continued ability to sell new franchises. We are still in the early stages of growth and expansion, particularly in the United States and ROW, and we believe we can significantly grow our franchisee base. If we cannot sell new franchises as quickly as we would like in these geographies, our operating results may be adversely affected.

	Three months ended September 30, 2021								Three months ended September 30, 2020
	U.S.		Australia		ROW		Total		U.S.		Australia		ROW		Total
Total Franchises Sold, beginning of period		1,379		785		637		2,801		846		667		546		2,059
New Franchises Sold, net(a)		87		15		108		210		68		8		79		155
Total Franchises Sold, end of period		1,466		800		745		3,011		914		675		625		2,214

	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	U.S.		Australia		ROW		Total		U.S.		Australia		ROW		Total
Total Franchises Sold, beginning of period		931		679		634		2,244		814		643		435		1,892
New Franchises Sold, net(a)		535		121		111		767		100		32		190		322
Total Franchises Sold, end of period		1,466		800		745		3,011		914		675		625		2,214

(a)  New Franchises Sold are shown net of franchises that were signed but subsequently terminated prior to the initial studio opening.

During the three and nine months ended September 30, 2021, we sold a net average of 70 and 85 new franchises per month, respectively. This compares favorably to the 52 and 36 net average new franchises sold during the three and nine months ended September 30, 2020, respectively. This increase is supported by recent multi-unit franchise deals.

Initial Studio Openings and Total Studios

Initial Studio Openings refers to the number of studios that were determined to be first opened during such period. We classify an Initial Studio Opening to occur in the first month in which the studio first generates monthly revenue of at least $4,500. We classify Total Studios, as of any specified date, as the total cumulative Initial Studio Openings as of that date less cumulative permanent studio closures as of that date. Neither Initial Studio Openings nor Total Studios are adjusted downward for studios that were temporarily closed due to the COVID-19 pandemic or otherwise.

Our long-term growth will depend in part on our continued ability to open new studios. We believe that we will experience continued expansion of new studio openings in the United States and ROW. However, if delays or difficulties are encountered and new studio openings do not occur as quickly as we would like, our operating results may be adversely affected.

	Three months ended September 30, 2021								Three months ended September 30, 2020
	U.S.		Australia		ROW		Total		U.S.		Australia		ROW		Total
Total Studios, beginning of period		556		628		371		1,555		396		595		284		1,275
Initial Studio Openings, net(a)		30		5		28		63		55		9		37		101
Total Studios, end of period		586		633		399		1,618		451		604		321		1,376

	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	U.S.		Australia		ROW		Total		U.S.		Australia		ROW		Total
Total Studios, beginning of period		486		616		335		1,437		320		581		239		1,140
Initial Studio Openings, net(a)		100		17		64		181		131		23		82		236
Total Studios, end of period		586		633		399		1,618		451		604		321		1,376

(a)  Initial Studio Openings are shown net of studios that have permanently closed which had a recorded initial studio opening.

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During the three and nine months ended September 30, 2021, we had net initial studio openings of average 21 and 20 per month, respectively. This compares to the average 34 and 26 net initial studio openings during the three and nine months ended September 30, 2020. The decrease in net initial studio openings was driven by lower gross studio openings in the US, Australia and ROW due to lingering impacts of COVID-19.

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EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

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

EBITDA is defined as net income before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization and adjusted to exclude the impact of sales tax liability, transaction expenses, certain legal costs and settlements, forgiveness of loans to directors and relocation costs as well as certain other items identified as affecting comparability, when applicable. Adjusted EBITDA margin means Adjusted EBITDA divided by total revenue.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have been included in this filing because they are important metrics used by management as one of the means by which it assesses our financial performance. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing our company and its results of operations.

The non-GAAP information in this filing should be read in conjunction with our audited annual and unaudited interim financial statements and the related notes included elsewhere in our prospectus and this report. For a discussion of material risks and limitations of these measures, see “Prospectus Summary—Summary Historical Combined and Consolidated Financial and Other Data” within our prospectus filed in July 2021.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Other Data:	(dollars in thousands)
EBITDA	$	(87,127	)	$	5,448		$	(134,211	)	$	14,106
Adjusted EBITDA	$	10,115		$	7,381		$	26,061		$	20,021
Adjusted EBITDA margin (1)		37.2	%		33.6	%		36.1	%		31.2	%
Same store sales growth (2)		6.0	%		(33.8	%)		14.7	%		(32.7	%)

(1) Management believes that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are useful to investors as they eliminate certain items identified as affecting the period-over-period comparability of our operating results. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin eliminate, among other items, non-cash depreciation and amortization expense that results from our capital investments and intangible assets, as well as income taxes, which may not be comparable with other companies based on our tax structure.

Other companies may define Adjusted EBITDA and Adjusted EBITDA margin differently, and as a result our measures of Adjusted EBITDA and Adjusted EBITDA margin may not be directly comparable to those of other companies. Although we use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as financial measures to assess the performance of our business, such use is limited because these measures do not include certain material costs necessary to operate our business. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

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Some of these limitations are:

• they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and EBITDA, Adjusted EBITDA and Adjusted EBITDA margin do not reflect any cash requirement for such replacements or improvements; and

• they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows

Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not intended as alternatives to net income or as indicators of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using EBITDA, Adjusted EBITDA and Adjusted EBITDA margin along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Our GAAP-based measures can be found in our consolidated financial statements and related notes included elsewhere in this filing.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021			2020
	(dollars in thousands, except per share amounts)
Net (loss) income	$	(130,193	)	$	2,349	$	(197,562	)	$	7,484
Net interest expense		41,897			534		59,165			1,333
(Benefit) provision for income taxes		(222	)		1,974		693			3,536
Depreciation and amortization		786			301		2,163			778
Amortization of deferred costs		605			290		1,330			975
EBITDA	$	(87,127	)	$	5,448	$	(134,211	)	$	14,106
Sales tax reserve (a)		140			1		387			516
Transaction fees (b)		5,485			1,124		8,816			3,780
Loss on derivative liability (c)		—			—		48,603			—
Certain legal costs and settlements (d)		1,029			808		4,452			1,589
Stock-based compensation (e)		85,745			—		85,745			—
Recruitment (f)		17			—		70			—
COVID concessions (g)		1,590			—		5,923			—
Relocation (h)		258			—		510			30
Development costs (i)		932			—		3,720			—
Charitable donation (j)		2,046			—		2,046			—
Adjusted EBITDA	$	10,115		$	7,381	$	26,061		$	20,021

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

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

(c)  Represents loss on derivative liabilities associated with convertible note.

(d)  Represents legal costs related to litigation activities and legal settlements.

(e)  Represents stock-based compensation of our employees, non-employees and directors.

(f)  Represents one-time recruitment expense of department leaders.

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

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

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

(j)  Represents one-time charitable donation made in the amount of total PPP loan forgiveness.

(2) “Same store sales” means, for any reporting period, studio-level revenue generated by a comparable base of franchise studios, which we define as Total Studios that have been operating for more than 16 months. As of September 30, 2021 and December 31, 2020, there were 1,046 and 940 studios, respectively in our comparable base of franchise studios.

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Same Store Sales

Same store sales means, for any reporting period, studio-level revenue generated by a comparable base of franchise studios, which we define as Total Studios that have been operating for more than 16 months. As of September 30, 2021 and September 30, 2020, there were 1,146 and 877 studios, respectively in our comparable base of franchise studios. We view same store sales as a helpful measure to assess performance of our franchise studios.

Several factors impact our same store sales in any given period, including the following:

• the number of studios that have been in operation for more than 16 months;

• the mix of recurring membership and workout pack revenue per studio;

• growth in total memberships and workout pack visits per studio;

• consumer recognition of our brand and our ability to respond to changing consumer preferences;

• our and our franchisees’ ability to operate studios effectively and efficiently to meet consumer expectations;

• marketing and promotional efforts;

• local competition;

• trade area dynamics;

• opening of new studios in the vicinity of existing locations; and

• overall economic trends, particularly those related to consumer spending.

Same store sales of our international studios are calculated on a constant currency basis on a studio level, meaning that we translate the current year’s same store sales of our international studios at the same exchange rates used in the prior year. We view same store sales as a helpful measure to assess performance of our franchise studios.

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Components of Our Results of Operations

Revenue

We generate revenue from the following sources:

• Franchise Revenue: Consists primarily of upfront establishment fees, monthly franchise fees, and other franchise-related fees, including fees related to marketing and other recurring fixed fees paid by franchisees on a monthly basis for various services we provide, such as the use of intranet, email and the studio’s website. Franchise agreements generally consist of an obligation to grant exclusive rights over a defined territory and may include options to renew the agreement, generally for two additional five year terms, as well as the license for certain trademarks and systems to operate that studio.

Monthly franchise fees generally become payable six to nine months after we and a franchisee execute a franchise agreement, irrespective of whether the franchise has opened their studio. Historically, monthly franchise fees were structured as fixed payments of $1,000-$3,000 per month per studio or the higher of 7% of monthly gross sales. In July 2019, we transitioned our model in the United States for new franchisees to a franchise fee based on the greater of a fixed monthly franchise fee or a percentage of gross monthly studio revenue, which we believe will help to further align our interests with those of our franchisees while also providing us with the opportunity to increase franchise revenue. In select markets outside of the United States, and for renewals of existing franchisees in the United States, we are in the process of developing a strategy for transitioning to a similar model.

• Equipment and Merchandise: Consists of fees paid to us in exchange for (i) World Packs for new F45 Training studios, which are comprehensive opening packs containing the standardized set of F45-branded fitness equipment and related technology required to operate an F45 Training studio and (ii) subsequent additional and/or replacement equipment and merchandise sales to franchisees including technology, apparel and other fitness-related products. Typically, a portion of the World Pack fee is required to be paid upon the execution of a franchise agreement, with the balance due upon the earlier of: (i) the date the franchisee orders the World Pack; or (ii) eight months from the effective date of the franchise agreement. The franchise agreement mandates all franchisees to order and update new equipment on an annual basis.

Expenses

We primarily incur the following expenses directly related to our cost of revenues:

• Cost of Franchise Revenue: Consists of direct costs associated with franchise sales, lead generation and the provision of marketing services to our franchisees. Our cost of franchise revenue changes primarily based on the number of Total Franchises Sold and Total Studios.

• Cost of Equipment and Merchandise Revenue: Primarily includes the direct costs associated with World Pack equipment as well as additional and replacement equipment and merchandise sales to new and existing franchisees. World Pack costs consist of the cost of the components included in opening packs sold to franchisees, including: (i) gym equipment; (ii) our tech pack (e.g., TVs, F45TV adapters / dongles, heart monitors); and (iii) uniforms and merchandise. Our cost of equipment and merchandise changes primarily based on the World Pack equipment sales, which is driven by the number of franchises sold.

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• Selling, General, and Administrative Expenses: Consists of costs associated with wages and salaries and ongoing administrative and franchisee support functions related to our existing franchisees. These costs primarily consist of brand marketing, fitness programming development and testing, technology costs related to development and maintenance of our technology-enabled centralized delivery platform, marketing and promotional activities for the F45 Training brand and legal and accounting expenses.

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

(Benefit) Provision for Income Taxes

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

Recent Transactions

On July 5, 2021, the Company approved the acceleration of Mr. Wahlberg’s RSUs such that 100% of the RSUs granted to Mr. Wahlberg are fully vested concurrent with and subject to the consummation of the IPO, effectively eliminating the market condition based on the achievement of prescribed Company equity values. The RSUs shall be settled in shares of common stock on a date determined by the Company during 2022 but no later than March 15, 2022. All remaining terms and conditions in the original promotional agreement are still applicable. The Company determined the modification of the RSUs as a Type IV modification in accordance with ASC 718, Compensation—Stock Compensation, because at the modification date, both the original and modified awards were considered improbable of vesting as the performance condition had not been met on the modification date of July 5, 2021. The Company utilized the assumed initial public offering price of $16.00 per share as the modification date fair value.

In connection with the Company becoming publicly traded on July 15, 2021, the fair value of the restricted stock units of 2,738,648 fully vested and was recognized as compensation expense in the amount of $43.8 million during the three and nine months ended September 30, 2021, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of operation and comprehensive (loss) income.

On July 15, 2021, the Company completed its IPO of 20,312,500 shares of the Company common stock, $0.00005 par value per share at an offering price of $16.00 per share. The Company sold 18,750,000 shares and certain existing stockholders sold an aggregate of 1,562,500 shares. The Company received aggregate net proceeds of approximately $277.8 million after deducting underwriting discounts, commissions and other offering costs.

On July 19, 2021, after the consummation of the IPO, the Company acquired certain assets of the Flywheel indoor cycling studio business for $25.0 million in cash consideration, effectively transferring control of the assets to the Company and terminating the license agreement entered into in April 2021. The acquisition was accounted as an asset acquisition. On the acquisition date, the Company reversed the net carrying amount of $19.8 million of intangible assets, net of accumulated amortization of $0.8 million, and $20.6 million of the related liability that was initially recorded under the license agreement, resulting in a decrease to the cash consideration transferred by $0.8 million. The purchase consideration of $24.2 million was allocated to the assets acquired on a relative fair value basis, which primarily consisted of the client relationship management (“CRM”) software and trade names. The CRM software is amortized on a straight-line basis over 9 years, while the trade name has indefinite life. The amortization expense of the CRM software was $0.5 million for each of the three and nine months ended September 30, 2021.

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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”). Initial borrowings of $30.0 million from the Term Facility and $11.9 million of the availability under the Revolving Facility were used to repay, in full, amounts due to common stockholders as a result of the MWIG transaction. See Note 13—Convertible preferred stock and stockholders’ equity (deficit) for further discussion.

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 (“Credit Agreement”) which amended and restated the Secured Credit Agreement dated September 18, 2019. The Credit Agreement provides for a $90 million five-year senior secured revolving facility (“Facility”). The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $35 million. The proceeds from the Facility will be used for general corporate purposes. Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s election, the LIBOR rate plus a margin of 2.50% to 3.50% per annum, or base rate plus a margin of 1.50% to 2.50%, in each case depending on the Company’s total leverage ratio.

On July 21, 2021, in connection with the repayment in full of all outstanding obligations under the Subordinated Credit Agreement, the Company terminated the interest rate swap agreement. The Company paid $0.5 million to terminate the interest rate swap. As a result of the termination, the accumulated fair value of the interest rate swap was reclassified from accumulated other comprehensive loss to interest expense of $0.5 million for each of the three and nine months ended September 30, 2021, respectively, on the condensed consolidated statements of operations and comprehensive (loss) income.

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Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	(dollars in thousands)
Revenues:
Franchise (Related party: $2,724 and $52 for the three months ended September 30, 2021 and 2020, respectively, and $3,329 and $277 for the nine months ended September 30, 2021 and 2020, respectively)	$	18,513		$	14,067		$	52,250		$	39,766
Equipment and merchandise (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $328 for the nine months ended September 30, 2021 and 2020, respectively)		8,664			7,896			19,950			24,497
Total revenues		27,177			21,963			72,200			64,263
Costs and operating expenses:
Cost of franchise revenue (Related party: $0 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $12 for the nine months ended September 30, 2021 and 2020, respectively)		1,486			1,997			4,162			6,591
Cost of equipment and merchandise (Related party: $1,561 and $355 for the three months ended September 30, 2021 and 2020, respectively, and $3,678 and $1,098 for the nine months ended September 30, 2021 and 2020, respectively)		5,752			5,247			12,672			14,410
Selling, general and administrative expenses		110,492			10,100			145,882			31,724
Total costs and operating expenses		117,730			17,344			162,716			52,725
(Loss) income from operations		(90,553	)		4,619			(90,516	)		11,538
Loss on derivative liabilities		—			—			48,603			—
Interest expense, net		41,897			534			59,165			1,333
Other income, net		(2,035	)		(238	)		(1,415	)		(815	)
(Loss) income before income taxes		(130,415	)		4,323			(196,869	)		11,020
(Benefit) provision for income taxes		(222	)		1,974			693			3,536
Net (loss) income	$	(130,193	)	$	2,349		$	(197,562	)	$	7,484

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Comparison of the three and nine months ended September 30, 2021 and 2020

Revenue

Franchise Revenue

	Three Months Ended September 30,				Change
	2021		2020		$			%
	(dollars in thousands)
Franchise
USA	$	11,117	$	6,245	$	4,872			78	%
Australia		4,330		6,145		(1,815	)		(30	)%
ROW		3,066		1,677		1,389			83	%
Total franchise revenue	$	18,513	$	14,067	$	4,446			32	%

	Nine Months Ended September 30,				Change
	2021		2020		$		%
	(dollars in thousands)
Franchise
USA	$	29,873	$	21,954	$	7,919		36	%
Australia		12,039		10,985		1,054		10	%
ROW		10,338		6,827		3,511		51	%
Total franchise revenue	$	52,250	$	39,766	$	12,484		31	%

	Three months ended September 30, 2021								Three months ended September 30, 2020
	U.S.		Australia		ROW		Total		U.S.		Australia		ROW		Total
Total Franchises Sold, beginning of period		1,379		785		637		2,801		846		667		546		2,059
New Franchises Sold, net		87		15		108		210		68		8		79		155
Total Franchises Sold, end of period		1,466		800		745		3,011		914		675		625		2,214

	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	U.S.		Australia		ROW		Total		U.S.		Australia		ROW		Total
Total Franchises Sold, beginning of period		931		679		634		2,244		814		643		435		1,892
New Franchises Sold, net		535		121		111		767		100		32		190		322
Total Franchises Sold, end of period		1,466		800		745		3,011		914		675		625		2,214

The $4.9 million, or 78%, increase in franchise revenue in the United States for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to the increase in establishment and other-franchise-related fees. The increase in fees was reflective of increased number of franchises sold in the United States. The number of total franchises sold increased by 552 or 60%, from 914 during the three months ended September 30, 2020 to 1,466 during the three months ended September 30, 2021. Total studios opened in this region increased by 135 or 30%, from 451 studios opening during the three months ended September 30, 2020 to 586 during the three months ended September 30, 2021. As a result of the increase in studio openings, marketing revenue increased approximately by $0.3 million during this period.

The $7.9 million, or 36%, increase in franchise revenue in the United States for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in the number of franchises sold as an increase in studios openings in the United States. The amount of total franchises sold in the United States increased by 552 or 60%, from 914 during the nine months ended September 30, 2020 to 1,466 during the nine months ended September 30, 2021. In addition, the number of new studio openings in the United States increased by 135 or 30%, from 451 new studio openings during the nine months September 30, 2020 to 586 during the nine months ended September 30, 2021.

The $1.8 million, or 30%, decrease in franchise revenue in Australia for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to the impact of COVID credits provided to franchisees within Australia, thus reducing the monthly franchise revenue. The decrease in franchise revenue was slightly offset by the increase in number of total franchises sold. The number of total franchises sold in Australia increased by 125 or 19%, from 675 during the three months ended September 30, 2020 to 800 for the three months ended September 30, 2021. The total number of studios opened in this region increased by 29 or 5%, from 604 during the three months ended September 30, 2020 to 633 during the three months ended September 30, 2021.

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The $1.1 million, or 10%, increase in franchise revenue in Australia for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in the number of total franchises sold as well as an increase in studio openings in Australia. The amount of total franchises sold in Australia increased by 125 or 19%, from 675 during the nine months ended September 30, 2020 to 800 during the nine months ended September 30, 2021. In addition, the number of new studio openings in Australia increased by 29 or 5%, from 604 new studio openings during the nine months ended September 30, 2020 to 633 during the nine months ended September 30, 2021.

The $1.4 million, or 83%, increase in franchise revenue in ROW for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to the increase in the number of total franchises sold as well as an increase in studio openings in ROW. The number of total franchises sold in ROW increased by 120 or 19%, from 625 during the three months ended September 30, 2020 to 745 during the three months ended September 30, 2021. The total number of new studio openings in this region increased by 78 or 24%, from 321 new studio openings during the three months ended September 30, 2020 to 399 during the three months ended September 30, 2021.

The $3.5 million, or 51%, increase in franchise revenue in ROW for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in total franchises sold as well as an increase in studios openings in ROW. The number of total franchises sold in this region increased by 120 or 19%, from 625 during the nine months ended September 30, 2020 to 745 during the nine months ended September 30, 2021. In addition, the number of new studios opening in ROW increased by 78 or 24%, from 321 new studio openings during the nine months ended September 30, 2020 to 399 during the nine months ended September 30, 2021.

Equipment and Merchandise Revenue

	Three Months Ended September 30,				Change
	2021		2020		$			%
	(dollars in thousands)
Equipment and merchandise
USA	$	4,162	$	3,583	$	579			16	%
Australia		2,234		2,707		(473	)		(17	)%
ROW		2,268		1,606		662			41	%
Total equipment and merchandise revenue	$	8,664	$	7,896	$	768			10	%

	Nine Months Ended September 30,				Change
	2021		2020		$			%
	(dollars in thousands)
Equipment and merchandise
USA	$	11,166	$	11,045	$	121			1	%
Australia		3,762		5,185		(1,423	)		(27	)%
ROW		5,022		8,267		(3,245	)		(39	)%
Total equipment and merchandise revenue	$	19,950	$	24,497	$	(4,547	)		(19	)%

48

The $0.6 million, or 16%, increase in equipment and merchandise revenue in the United States for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily attributable to deliveries of equipment and merchandise to 27 studios during the three months ended September 30, 2021, compared to deliveries to 25 studios during the three months ended September 30, 2020.

The $0.5 million, or 17%, decrease in equipment and merchandise revenue in Australia for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 in Australia was largely attributable to the decrease in deliveries of equipment as a result of the government lockdown to combat the COVID-19 pandemic.

The $1.4 million, or 27%, decrease in equipment and merchandise revenue in Australia for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 in Australia was largely attributable to the decrease in deliveries of equipment as a result of the government lockdown to combat the COVID-19 pandemic.

The $0.7 million, or 41%, increase in equipment and merchandise revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 in ROW was primarily attributable to the increase in top-up equipment sold compared to the prior comparative period. The increase is partially offset by the decrease in equipment and merchandise sales, driven by the global supply chain delays.

The $3.2 million, or 39%, decrease in equipment and merchandise revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 in ROW was primarily attributable to the decrease in equipment and merchandise revenue, driven by the global supply chain delays.

Cost of revenue

Cost of franchise revenue

	Three Months Ended September 30,						Change
	2021			2020			$			%
	(dollars in thousands)
Franchise
USA	$	1,047		$	1,774		$	(727	)		(41	)%
Australia		158			248			(90	)		(36	)%
ROW		281			(25	)		306			1224	%
Total cost of franchise revenue	$	1,486		$	1,997		$	(511	)		(26	)%
Percentage of franchise revenue		8	%		14	%

	Nine Months Ended September 30,						Change
	2021			2020			$			%
	(dollars in thousands)
Franchise
USA	$	3,377		$	5,863		$	(2,486	)		(42	)%
Australia		430			580			(150	)		(26	)%
ROW		355			148			207			140	%
Total cost of franchise revenue	$	4,162		$	6,591		$	(2,429	)		(37	)%
Percentage of franchise revenue		8	%		17	%

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The $0.7 million, or 41%, decrease in cost of franchise revenue in the United States for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 are attributable to the group marketing initiatives, which we reclassified from cost of sales to selling, general, and administrative expenses in 2021.

The $2.5 million, or 42%, decrease in cost of franchise revenue in the United States for the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily attributable to the decrease in marketing expenses due to the COVID-19 pandemic.

The less than $0.1 million, or 36%, decrease in cost of franchise revenue in Australia during the three months ended September 30, 2021 as compared to the same period in 2020 was attributable to a decrease in expenses related to the membership marketing programs.

Cost of equipment and merchandise

	Three Months Ended September 30,						Change
	2021			2020			$			%
	(dollars in thousands)
Equipment and merchandise
USA	$	2,239		$	1,857		$	382			21	%
Australia		1,992			2,305			(313	)		(14	)%
ROW		1,521			1,085			436			40	%
Total equipment and merchandise cost of revenue	$	5,752		$	5,247		$	505			10	%
Percentage of equipment and merchandise revenue		66	%		66	%

	Nine Months Ended September 30,						Change
	2021			2020			$			%
	(dollars in thousands)
Equipment and merchandise
USA	$	6,154		$	5,561		$	593			11	%
Australia		3,313			4,489			(1,176	)		(26	)%
ROW		3,205			4,360			(1,155	)		(26	)%
Total equipment and merchandise cost of revenue	$	12,672		$	14,410		$	(1,738	)		(12	)%
Percentage of equipment and merchandise revenue		64	%		59	%

The $0.4 million, or 21%, increase in cost of equipment and merchandise for the United States for the three months ended September 30, 2021 as compared to the same period in 2020 was primarily attributable to the increase in freight and storage costs due to an increase in deliveries of equipment and merchandise.

The $0.6 million, or 11%, increase in cost of equipment and merchandise in revenue in the United States for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to the increase in shipping and freight costs related to the deliveries of equipment and merchandise, which increased nearly 95%, due to the global supply chain issues.

The $1.2 million, or 26%, decrease in cost of equipment and merchandise revenue in Australia for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a decrease in equipment and merchandise costs due to the decrease in franchise openings in 2020 as a result of the pandemic, as well as decrease in sales of apparel and protein supplements.

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The $0.4 million, or 40%, increase in cost of equipment and merchandise for ROW for the three months ended September 30, 2021 as compared to the same period in 2020 is primarily attributable to an increase in shipping and freight costs related to the deliveries of equipment and merchandise, which increased nearly 190%, due to global supply chain issues.

The $1.2 million, or 26%, decrease in cost of equipment and merchandise in ROW for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to a decrease in equipment costs, which are due to the decrease in new franchise openings in ROW and decrease in merchandise costs.

Selling, general, and administrative expenses

	Three Months Ended September 30,						Change
	2021			2020			$		%
	(dollars in thousands)
Selling, general and administrative expenses	$	110,492		$	10,100		$	100,392		994	%
Percentage of revenue		407	%		46	%

	Nine Months Ended September 30,						Change
	2021			2020			$		%
	(dollars in thousands)
Selling, general and administrative expenses	$	145,882		$	31,724		$	114,158		360	%
Percentage of revenue		202	%		49	%

The $100.4 million, or 994%, increase in selling, general, and administrative expenses during the three months ended September 30, 2021 as compared to the same period in 2020 was primarily attributable to a $36.9 million increase in stock based compensation granted to certain employees and directors related to the Company’s IPO, a $4.3 million increase of payroll related to the increase in headcount from 111 to 144 due to the continuing expansion of the business, a $1.7 million increase in bonus payments to certain employees granted at the Company’s IPO, an increase of $2.3 million in marketing expenses due to our ongoing brand awareness campaigns with worldwide celebrities, an increase of $48.9 million in stock awards from existing promotional agreements granted by the Company’s IPO, an increase of $2.4 million in business travel expenses related to site visits due to our continuing brand expansion, and increase of $0.9 million in other expenses related to the day-to-day operations of our business, and a $2.2 million increase in charitable contributions related to the forgiveness of the PPP Loan. In addition, an increase of $0.4 million in bad debt expense from terminated studios affected by the on-going effects of the COVID-19 pandemic, a $0.5 million increase in depreciation and amortization expense mainly related to the amortization of Flywheel intangible.

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The $114.2 million, or 360%, increase in selling, general, and administrative expenses during the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily attributable to a $36.9 million increase in stock based compensation granted to certain employees and directors related to the Company’s IPO, a $6.6 million increase of payroll related the increase in headcount from 111 to 144 due to the continuing expansion of the business, a $1.9 million increase in bonus payments to certain employees granted at the Company’s IPO, an increase of $7.7 million in marketing expenses due to ongoing brand awareness campaigns with worldwide celebrities, an increase of $48.9 million in stock awards from existing promotional agreements granted by the Company’s IPO, $2.2 million from an increase in business travel expenses related to site visits due to our continue brand expansion, $2.5 million in other expenses related to the day-to-day operations of our business, a $2.2 million increase in charitable contributions mainly related to the forgiveness of the PPP Loan, a $1.4 million increase in professional services mainly from accounting and tax firms, a $1.4 million increase in depreciation and amortization expense mainly related to the amortization of Flywheel intangible, and a $0.5 million increase in rent. In addition, an increase of $2.0 million in bad debt expense from terminated studios affected by the on-going effects of the COVID-19 pandemic.

Loss on derivative liabilities

	Three Months Ended September 30,				Change
	2021		2020		$		%
	(dollars in thousands)
Loss on derivative liabilities	$	—	$	—	$	—

	Nine Months Ended September 30,				Change
	2021		2020		$		%
	(dollars in thousands)
Loss on derivative liabilities	$	48,603	$	—	$	48,603		100	%

On October 6, 2020, we entered into a subordinated convertible debt agreement, or the Convertible Notes, whereby we issued $100 million of Convertible Notes to certain holders maturing on September 30, 2025. The Convertible Notes contain embedded derivatives that required bifurcation and recognition as liabilities on the condensed consolidated balance sheet. The liabilities for these embedded derivatives were measured at fair value as of October 6, 2020, and the subsequent change in the estimated fair value was recorded as a loss during the three and nine months ended September 30, 2020.

In conjunction with the IPO on July 15, 2021, the outstanding Convertible Notes of $106.3 million of principal and interest were converted into 14,847,066 shares of common stock at a conversion price of $16.00. There was no loss on derivative liabilities as a result from the conversion.

Interest expense, net

	Three Months Ended September 30,				Change
	2021		2020		$		%
	(dollars in thousands)
Interest expense, net	$	41,897	$	534	$	41,363		7746	%

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	Nine Months Ended September 30,				Change
	2021		2020		$		%
	(dollars in thousands)
Interest expense, net	$	59,165	$	1,333	$	57,832		4338	%

The increase in interest expense, including the amortization of debt discounts, net for the three and nine months ended September 30, 2021 compared to the same periods in 2020 was primarily attributable to the write off of debt discounts and penalties as a result of the early repayments of indebtedness in connection with the IPO. The following table reflects the write off of debt discounts and penalties incurred during the three and nine months ended September 30, 2021 that are included in the interest expense (in thousands):

	Debt Discount		Penalty		Total
Subordinated Convertible Debt	$	23,740	$	—	$	23,740
Subordinated Second Lien Term Loan		4,463		13,034		17,497
First Lien Loan		241		—		241
	$	28,444	$	13,034	$	41,478

Other income, net

	Three Months Ended September 30,						Change
	2021			2020			$		%
	(dollars in thousands)
Other income, net	$	(2,035	)	$	(238	)	$	1,797		755	%

	Nine Months Ended September 30,						Change
	2021			2020			$		%
	(dollars in thousands)
Other income, net	$	(1,415	)	$	(815	)	$	600		74	%

The $1.8 million and $0.6 million increase in other income, net represents realized and unrealized gains and losses on foreign currency transactions for the three and nine months ended September 30, 2021, respectively. This increase during the three and nine months ended September 30, 2021, was mostly due to the volatility of foreign exchange rates during the three and nine months ended September 30, 2021 under the COVID-19 pandemic compared to the strengthening of the U.S. dollar relative to the Australian dollar during the same period in prior year.

Provision for income taxes

	Three Months Ended September 30,					Change
	2021			2020		$			%
	(dollars in thousands)
(Benefit) provision for income taxes	$	(222	)	$	1,974	$	(2,196	)		(111	)%

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	Nine Months Ended September 30,				Change
	2021		2020		$			%
	(dollars in thousands)
(Benefit) provision for income taxes	$	693	$	3,536	$	(2,843	)		(80	)%

The decrease in the provision for income taxes was primarily driven by an increase in pretax loss reported by the US and Australia segments in the three months ended September 30, 2021. The decline in loss before income taxes was most significantly driven by the operational challenges experienced due to the COVID-19 pandemic.

Liquidity and Capital Resources

Overview

As of September 30, 2021, we held $52.6 million of cash and cash equivalents, of which $4.8 million was held by our foreign subsidiaries outside of the United States. In the event that we repatriate these funds from our foreign subsidiaries, we would need to accrue and pay applicable United Sates taxes and withholding taxes payable to various countries. As of September 30, 2021, our intent was to permanently reinvest these funds outside of the United States. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately $38.7 million of undistributed earnings from these foreign subsidiaries as those earnings continue to be permanently reinvested. It is not practicable to estimate income tax liabilities that might be incurred if such earnings were remitted to the United States due to the complexity of the underlying calculation. Although we have no intention to repatriate the undistributed earnings of our foreign subsidiaries for the foreseeable future, if such funds are needed for operations in the United States, to the extent applicable and material, we will revise future filings to address the potential tax implications. Our primary cash needs are for the funding of day-to-day operations, financing capital investments and to address our working capital needs.

We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing and financing needs for the next 12 months. If necessary, we may borrow funds under the Revolving Facility to finance our liquidity requirements, subject to customary borrowing conditions. There was no outstanding balance of the Revolving Facility as of September 30, 2021. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in our prospectus under the heading “Risk Factors.” In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be our ability to globally expand our franchisee footprint.

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Cash flow

	Nine Months Ended September 30,
	2021			2020
	(dollars in thousands)
Net cash used in operating activities	$	(34,758	)	$	(9,297	)
Net cash used in investing activities		(27,370	)		(905	)
Net cash provided by financing activities		85,576			7,957
Effect of exchange rate changes on cash and cash equivalents		203			(171	)
Net decrease in cash and cash equivalents	$	23,651		$	(2,416	)

Net cash used in operating activities

In all periods presented, our largest source of cash inflow stemmed from our collections of establishment and World Pack fees from our franchisees. The most significant cash outflow is our equipment/merchandise costs and employee costs. Historically, we have produced positive net cash flow. We have seen a decrease in operating cash flows due to the pandemic and studio shutdowns during COVID-19.

For the nine months ended September 30, 2021, net cash used in operating activities amounted to $34.8 million compared to net cash used in operating activities of $9.3 million for the nine months ended September 30, 2020. This $25.5 million decrease in net cash used in operating activities was primarily attributable to a $205.0 million fluctuation in net loss being offset by a net decrease of $194.4 million in non-cash adjustments to net income including a no loss on derivative liabilities, which was included in the three months ended September 30, 2021 and not in the same period in the prior year. This change was further impacted by a net $14.8 million decrease in working capital primarily due to defer payment terms provided to franchisees and investments in online development deals during the nine months ended September 30, 2021 compared to the same period in the prior year.

Net cash used in investing activities

For the nine months ended September 30, 2021, our cash used in investing activities increased by $26.5 million compared to the cash used in investing activities for the nine months ended September 30, 2020, mainly attributable to the asset acquisition of Flywheel CRM software and Flywheel brand names, which in total amounted to $25 million.

Net cash used in provided by financing activities

For the nine months ended September 30, 2021, net cash provided by financing activities was $85.6 million compared to net cash provided by financing activities of $8.0 million during the nine months ended September 30, 2020, a decrease of $77.6 million. This increase was mainly attributable to the proceeds of $277.8 million from issuance of common stock, net of offering costs, during the IPO less repayments of debt facilities of $188.6 million in connection to the IPO, $2.6 million of repayment on the Term Facility prior to the settlement and $1.0 million of payments on debt issuance costs in connection to the modification of the Revolving Facility during the three and nine months ended September 30, 2021.

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Contractual obligations and commitments

Contractual obligations and commitments as of September 30, 2021 consisted of $16.3 million in operating leases, all of which is due within the next four years and thereafter. Please see “Note 7 - Debt” and “Note 12—Commitments and contingencies” to the interim unaudited condensed consolidated financial statements for discussion of the contractual obligations under the Term Facility and Revolving Facility related to our debt and operating leases.

Off-Balance Sheet Arrangements

As of September 30, 2021, our off-balance sheet arrangements consisted of operating leases for office space. See “Note 12—Commitments and Contingencies” to the interim unaudited condensed consolidated financial statements included elsewhere in this filing for more information regarding these operating leases.

Critical Accounting Policies and Use of Estimates

Our consolidated financial statements included elsewhere in this filing have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this filing, we believe that the following accounting policies and estimates are critical to our business operations and understanding of our financial results.

Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” in the Prospectus and the notes to the audited consolidated financial statements appearing in the Prospectus. During the three and nine months ended September 30, 2021, there were no material changes to our critical accounting policies from those discussed in our Prospectus.

Stock-based compensation

See “Note 14—Stock-based compensation” to the consolidated financial statements included elsewhere in this filing for discussions on the stock-based compensation.

Recent accounting pronouncements

See “Note 2—Summary of significant accounting policies” to the consolidated financial statements included elsewhere in this filing for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this filing.

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Jumpstart Our Business Startups Act of 2012

We have chosen to apply the provision of the JOBS Act that permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk

As of September 30, 2021, we had cash and cash equivalents of $52.6 million deposited with major financial institutions, which consisted of bank deposits. Due to the short-term nature of these instruments, our exposure to interest rate risk is limited to changes in our bank interest rates for which an immediate one percent change would not have had a material effect on our financial condition or operating results.

Foreign exchange risk

We report our results in U.S. dollars, which is our reporting currency. The operations of Australia and ROW that are denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency regulations. The majority of Australia’s operations, income, revenues, expenses and cash flows are denominated in Australian dollars, which we translate to U.S. dollars for financial reporting purposes. ROW revenues and expenses in their respective local currencies are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates.

During the three months ended September 30, 2021, income from operations would have decreased or increased approximately $0.1 million if all foreign currencies uniformly weakened or strengthened 10% relative to the U.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may move in uniform or different directions and in different magnitudes.

Item 4. Controls and Procedures

Evaluation of Disclosure and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow, to allow for timely decisions regarding disclosure.

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As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of senior management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based upon our evaluation, certain material weaknesses were identified in our internal control over financial reporting in the course of preparing the financial statements included in our prospectus filed in July 2021.

Material Weakness in Internal Control Over Financial Reporting

The material weaknesses related to a failure to properly staff and design our financial closing and reporting team and processes, a lack of segregation of duties in certain key financial reporting processes and a lack of formal documentation of policies and internal controls being followed by us, including, but not limited to, controls involving risk assessment procedures, tools to prevent a cybersecurity breach and controls designed to prevent or detect fraud. For more information, see “Risk Factors—We have identified certain material weaknesses in our internal control over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired” in our Final Prospectus, dated July 14, 2021, filed in connection with our IPO.

Remediation Measures

To address the material weakness described above, the Company continues to take the following steps including:

• adopt formal internal control processes and documentation related to controls that address the elements of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Framework;

• hired additional accounting personnel to implement more robust internal controls and enhanced financial reporting;

• maintain sufficient accounting personnel so that journal entries and account reconciliations are reviewed by someone other than the preparer, including retaining evidence of the reviews performed by management;

• implemented a more robust enterprise resource planning, or ERP, system to assist with the monthly close process, segregation of duties and the timely review and recording of financial transactions; and

• restrict access to our financial systems to appropriate personnel and implementing segregation of duties within our finance and accounting processes.

We believe the actions described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. However, the steps taken to address the material weakness have not operated for a sufficient amount of time to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these controls and will make further changes management determines appropriate.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently, and from time to time may become, involved in legal or regulatory proceedings arising in the ordinary course of our business, including personal injury claims, employment disputes and commercial contract disputes. Although the outcome of these and other claims cannot be predicted with certainty and except for those matters discussed below, we are not currently a party to any litigation or regulatory proceeding that would reasonably be expected to have a material adverse effect on our business, results of operations, financial condition or cash flows.

We have received demand letters from a number of performance rights organizations in the United States and Australia with respect to our and our franchisees’ use of music in studios. On July 1, 2019, we received a letter from Universal Music Group, or UMG alleging copyright infringement and licensing violations in connection with our distribution of music to our franchisees. We have entered into an ongoing tolling agreement with UMG and are having ongoing discussions regarding resolution of the matter. In addition, we previously received demand letters from APRA AMCOS and PPCA, and entered into licensing arrangements with these rights holders. In response to the allegations, we have contracted with Soundtrack Your Brand, a streaming service for businesses, which provides a global database of licensed music that is made available directly to our franchisees. We believe our relationship with Soundtrack Your Brand and the services provided by Soundtrack Your Brand will help to mitigate the risk of future copyright infringement allegations regarding use of music in our studios and during our classes.

Item 1A. Risk Factors.

There have been no material changes to our risk factors from the risk factors disclosed in our Final Prospectus dated July 14, 2021, filed in connection with our initial public offering. The risks described in our Final Prospectus, in addition to the other information set forth in this Quarterly Report on Form 10-Q, are not the only risks facing we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds

In connection with our initial public offering, we filed a Registration Statement on Form S-1 (File No. 333-257193) on June 21, 2021. The registration statement, as amended, registered up to 19,375,000 shares of our common stock to be issued and sold by us and up to 3,984,375 shares of common stock to be issued and sold by MWIG LLC, one of our stockholders. The SEC declared the registration statement effective on July 14, 2021. The offering commenced immediately thereafter. In the initial public offering, we sold 19,057,889 shares of our common stock (including 307,889 shares that were sold on August 17, 2021 to the underwriters pursuant to exercise of their overallotment option) and MWIG LLC sold 2,794,055 shares of our common stock (including 1,231,555 shares that were sold on August 17, 2021 to the underwriters pursuant to the exercise of their overallotment option) at a public offering price of $16.00 per share, resulting in aggregate gross proceeds to us of approximately $304.9 million and aggregate gross proceeds to MWIG LLC of approximately $44.7 million.

The net offering proceeds received by us after deducting total estimated expenses were $277.8 million. Our estimated expenses incurred of $23.5 million consisted of $21 million in underwriting discounts, fees and commissions and $2.5 million in other offering expenses. No payments for such expenses were made directly or indirectly to any of our officers, directors or their associates, to any persons owning 10% or more of any class of our equity securities or to any of our affiliates. We did not receive any proceeds from the sale of shares of our common stock by MWIG LLC. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC served as the representatives of the underwriters.

We used (i) approximately $188.6 million to repay indebtedness, including repayment of our First Lien Term Facility, Revolving Facility, Subordinated Term Facility and PPP loan; (ii) approximately $25.0 million to pay the purchase price for our acquisition of certain assets of the Flywheel indoor cycling studio business; (iii) approximately $1.7 million to pay cash bonuses to certain of our employees, including certain of our executive officers, in connection with our initial public offering; (iv) approximately $5.8 million to pay expenses incurred in connection with our initial public offering; and (v) approximately $2.4 million for working capital and general corporate purposes.

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Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number	Description
10.1*	Amended and Restated Credit Agreement, dated as of August 13, 2021, among F45 Training Holdings Inc., the guarantors party, JPMorgan Chase Bank, N.A., as Administrative Agent and Australian Security Trustee, and other lender parties thereto (filed as Exhibit 10.1 to the Company’s Current Report Form 8-K filed with the SEC on August 16, 2021 and incorporated herein by reference)
31.1*	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*	Inline XBRL Taxonomy Extension Schema Document.
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 104*	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		F45 Training Holdings Inc.
Date: November 15, 2021	By:	/s/ Chris E. Payne
		Chris E. Payne
		Chief Financial Officer

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