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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from     to
Commission File Number 001-36773
F45 Training Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
84-2529722
(I.R.S. Employer Identification Number)
3601 South Congress Avenue, Building E
Austin, Texas 78704
(Address of principal executive offices and zip code)
(737) 787-1955
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.00005
Trading Symbol
FXLV
Name of each exchange on which registered
OTC Markets

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


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


2



Forward-Looking Statements

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

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



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

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

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

Item 1. Condensed Consolidated Financial Statements (Unaudited)













1




F45 Training Holdings Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts and share data)
(unaudited)
June 30, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$34,446 $5,265 
Restricted cash67 69 
Accounts receivable, net5,129 9,929 
Due from related parties, net382 1,669 
Inventories43,533 42,497 
Deferred costs1,843 1,886 
Prepaid expenses6,125 7,850 
Other current assets7,206 6,279 
Total current assets98,731 75,444 
Lease right-of-use asset12,978 14,258 
Property and equipment, net9,436 10,035 
Goodwill2,087 2,145 
Intangible assets, net6,260 6,262 
Deferred costs, net of current portion9,856 10,916 
Other long-term assets19,739 23,646 
Total assets$159,087 $142,706 
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses$41,126 $48,485 
Other current liabilities2,371 2,559 
Deferred revenue14,317 15,929 
Interest payable128 384 
Current portion of long-term debt2,077 106 
Income taxes payable4,989 5,102 
Total current liabilities65,008 72,565 
Deferred revenue, net of current portion4,362 2,980 
Long-term derivative liabilities26,893  
Lease liabilities, net of current portion16,019 17,184 
Long-term debt, net of current portion128,106 88,341 
Other long-term liabilities4,470 4,548 
Total liabilities244,858 185,618 
Commitments and contingencies (Note 16)
Stockholders’ deficit
Common stock, $0.00005 par value; 97,222,028 and 96,705,318 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively
6 6 
Additional paid-in capital686,289 681,338 
Accumulated other comprehensive loss(2,857)(1,426)
Accumulated deficit(594,489)(548,110)
Less: Treasury stock(174,720)(174,720)
Total stockholders' deficit(85,771)(42,912)
Total liabilities and stockholders' deficit$159,087 $142,706 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2


F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share amounts and share data)
(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
20232022
(As Restated)
20232022
(As Restated)
Revenues:
Franchise (Related party: $338 and $2,360 for the three months ended June 30, 2023 and 2022, respectively, and $643 and $4,976 for the six months ended June 30, 2023 and 2022, respectively)
$14,484 $19,109 $29,093 $38,969 
Equipment and merchandise (Related party: $71 and $121 for the three months ended June 30, 2023 and 2022, respectively, and $336 and $121 for the six months ended June 30, 2023 and 2022, respectively)
2,552 8,592 5,523 18,120 
Total revenues17,036 27,701 34,616 57,089 
Costs and operating expenses:
Cost of franchise revenue2,504 1,743 4,828 3,050 
Cost of equipment and merchandise (Related party: $0 and $869 for the three months ended June 30, 2023 and 2022, respectively, and $404 and $1,819 for the six months ended June 30, 2023 and 2022, respectively)
2,318 9,092 5,846 16,205 
Selling, general and administrative expenses27,739 51,926 59,243 84,042 
Total costs and operating expenses32,561 62,761 69,917 103,297 
Loss from operations(15,525)(35,060)(35,301)(46,208)
Loss on derivative liabilities3,361 $ 3,361  
Change in fair value - warrant liabilities (1,265) (1,265)
Interest expense, net5,059 696 8,290 822 
Other income, net(430)(1,291)(984)(669)
Loss before income taxes(23,515)(33,200)(45,968)(45,096)
Provision for income taxes211 $23,298 411 20,880 
Net loss$(23,726)$(56,498)$(46,379)$(65,976)
Other comprehensive loss
Foreign currency translation adjustment, net of tax(624)(3,199)(1,431)(2,183)
Comprehensive loss$(24,350)$(59,697)$(47,810)$(68,159)
Net loss per share
Basic and diluted$(0.24)$(0.59)$(0.48)$(0.69)
Shares used in computing net loss per share
Basic and diluted97,105,441 95,917,556 96,995,623 95,814,188 


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

3


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

Three Months Ended June 30, 2023
Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders'
Deficit
SharesAmount
Balance as of March 31, 202397,063,323 $6 $684,909 $(174,720)$(2,233)$(570,763)$(62,801)
Stock-based compensation— — 1,401 — — — 1,401 
Issuance of common stock related to settlement of RSUs46,875 — — — — — — 
Shares withheld related to net share settlement of equity awards(16,375)— (21)— — — (21)
Vested restricted stock awards128,205 — — — — — — 
Net Loss— — — — — (23,726)(23,726)
Cumulative translation adjustment, net of tax— — — — (624)— (624)
Balance as of June 30, 202397,222,028 $6 $686,289 $(174,720)$(2,857)$(594,489)$(85,771)

Three Months Ended June 30, 2022
Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders'
Equity
SharesAmount
Balance as of March 31, 2022 (As Restated)95,682,833 $6 $655,405 $(174,720)$2,167 $(378,789)$104,069 
Stock-based compensation— — 3,734 — — — 3,734 
Exercise of warrants346,192 — 4,460 — — — 4,460 
Vested restricted stock units128,252 — — — — — — 
Restricted stock awards granted334,141 — — — — — — 
Net loss (As Restated)— — — — — (56,498)(56,498)
Cumulative translation adjustment, net of tax (As Restated)— — — — (3,199)— (3,199)
Balance as of June 30, 2022 (As Restated)96,491,418 $6 $663,599 $(174,720)$(1,032)$(435,287)$52,566 

Six Months Ended June 30, 2023
Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders'
Deficit
SharesAmount
Balance as of December 31, 202296,705,318 $6 $681,338 $(174,720)$(1,426)$(548,110)$(42,912)
Stock-based compensation— — 5,488 — — — 5,488 
Issuance of common stock upon exercises of stock options1,366 — — — — — — 
Issuance of common stock related to settlement of RSUs462,514 — — — — — — 
Shares withheld related to net share settlement of equity awards(203,580)— (537)— — — (537)
Vested restricted stock awards256,410 — — — — — — 
Net loss— — — — — (46,379)(46,379)
Cumulative translation adjustment, net of tax— — — — (1,431)— (1,431)
Balance as of June 30, 202397,222,028 $6 $686,289 $(174,720)$(2,857)$(594,489)$(85,771)

4


Six Months Ended June 30, 2022
Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance as of December 31, 202195,806,063 $5 $662,946 $(174,720)$1,151 $(369,311)$120,071 
Stock-based compensation— — 4,221 — — — 4,221 
Exercise of warrants346,192 — 4,460 — — — 4,460 
Issuance of common stock related to promotional agreement
914,692 1 2,963 — — — 2,964 
Shares withheld related to net share settlement of equity awards(1,045,661)— (10,991)— — — (10,991)
Vested restricted stock units128,252 — — — — — — 
Restricted stock awards granted341,880 — — — — — — 
Net loss (As Restated)— — — — — (65,976)(65,976)
Cumulative translation adjustment, net of tax (As Restated)— — — — (2,183)— (2,183)
Balance as of June 30, 2022 (As Restated)96,491,418 $6 $663,599 $(174,720)$(1,032)$(435,287)$52,566 



The accompanying notes are an integral part of these unaudited interim condensed consolidated financial
statements.
5


F45 Training Holdings Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
20232022
(As Restated)
Cash flows from operating activities
Net loss$(46,379)$(65,976)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation667 602 
Amortization of intangible assets1,087 1,834 
Amortization of deferred costs1,478 1,682 
Amortization of debt issuance costs and debt discount420 329 
Bad debt expense6,315 6,680 
Stock-based compensation5,488 4,221 
Non-cash lease expense1,023  
Provision for inventories(17)(73)
Unrealized foreign currency transaction gains14 (957)
Impairment expense44  
Deferred income taxes 17,722 
Change in fair value - warrant liabilities (1,265)
Loss on derivative liabilities3,361  
Changes in operating assets and liabilities:
Due from related parties(268)(592)
Accounts receivable, net707 (12,006)
Inventories(1,044)(22,238)
Prepaid expenses1,727 (7,128)
Other current assets(8,767)(7,425)
Deferred costs(431)(1,752)
Other long-term assets10,759 (3,642)
Accounts payable and accrued expenses(8,604)14,296 
Deferred revenue1,164 (2,832)
Interest payable3,739  
Income taxes payable(204)2,603 
Other long-term liabilities(54)2,025 
Lease liabilities(1,084) 
Net cash used in operating activities$(28,859)$(73,892)
Cash flows from investing activities
Purchases of property and equipment(680)(4,728)
Disposal of property and equipment178  
Purchases of intangible assets(418)(1,923)
Net cash used in investing activities$(920)$(6,651)
Cash flows from financing activities
Deferred financing costs(5,838)(454)
Borrowings under KLIM Term Loan87,300 — 
6


Six Months Ended June 30,
20232022
(As Restated)
Repayments of revolving facility(20,100) 
Borrowings under revolving facility— 61,600 
Taxes paid related to net share settlement of equity awards(537)(10,991)
Net cash provided by financing activities$60,825 $50,155 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(1,867)(558)
Net change in cash, cash equivalents, and restricted cash29,179 (30,946)
Cash and cash equivalents at beginning of period5,265 42,004 
Restricted cash at beginning of period69  
Cash, cash equivalents, and restricted cash at beginning of period$5,334 $42,004 
Cash and cash equivalents at end of period34,446 8,476 
Restricted cash at end of period67 2,582 
Cash, cash equivalents, and restricted cash at end of period$34,513 $11,058 
Supplemental disclosure of noncash financing and investing activities:
Property and equipment included in accounts payable and accrued expenses$116 $1,137 
Intangible assets included in accounts payable and accrued expenses$521 $253 
Operating lease ROU assets obtained in exchange for operating lease liabilities$164 $ 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
7

F45 Training Holdings Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1—Nature of the business and basis of presentation

Organization

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

Joint Venture with Club Sports Group LLC

On May 16, 2022, the Company announced the formation of a joint venture with Club Sports Group LLC, a Delaware limited liability company (“CSG”), to, among other things, make, hold and monetize certain loans to prospective franchisees of the Company who have prior military service, with such loans secured by first priority senior liens on the equity interests of such franchisees and all or substantially all of the assets of such franchisees and its subsidiaries (if applicable). The joint venture will be conducted through FAFC LLC, a newly-formed Delaware limited liability company (“FAFC”). CSG is wholly owned by Kennedy Lewis Management LP, a significant stockholder of the Company which beneficially owns directly or indirectly through funds it manages, as of the date hereof, in excess of 14% of the Company’s outstanding common stock, and its related affiliates, and has the right to nominate a majority of the Company’s board of directors. As of June 30, 2023, no activity has occurred through FAFC.

Basis of presentation

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

The Company consolidates variable interest entities (“VIE”) in which it is the primary beneficiary and has a controlling financial interest, which is defined as (i) the power to direct the activities of a VIE that most significantly affect the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company has determined it possesses a variable interest in certain franchisee entities to which the Company provides a lease guaranty or financing (see Note 16—Commitments and contingencies) but lacks the characteristics of having a controlling financial interest. As our franchisee entities provide our franchisee the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. The Company, therefore, is not deemed to be the primary beneficiary for these franchise entities and, as a result, does not include them in the Company’s consolidation.

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

Use of estimates

The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
8



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

Going Concern

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

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

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

Subordinated Credit Agreement

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

9


Amounts outstanding under the Subordinated Credit Agreement accrue interest at a rate of 12.00% per annum, payable in kind. Upon repayment or acceleration of the KLIM Term Loan (including in connection with a change of control), the Company is required to pay an exit fee equal to: (i) 35% of the then-current principal balance of the KLIM Term Loan during the first 12 months following closing of the KLIM Term Loan; (ii) 25% of the then-current principal balance of the KLIM Term Loan during the next 12 months; and (iii) 10% of the then-current principal balance of the KLIM Term Loan thereafter.

Amendment to Subordinated Credit Agreement

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

Note 2—Restatement of Previously Issued Unaudited Interim Condensed Consolidated Financial Statements

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

Description of Restatement Errors

The errors identified as of and for the three and six months ended June 30, 2022 are as follows:

Equipment and merchandise revenue - The Company prematurely recognized Equipment and merchandise revenue before the criteria under ASC 606, Revenue from Contracts with Customers (“ASC 606”) had been met. In particular, errors resulted from incorrect conclusions regarding (i) the identification and recognition of performance obligations for customer contracts and (ii) the assessment of criteria of a contract under ASC 606. The restatement resulted in a change in the timing of the recognition of revenue and deferred revenue until such transactions meet all the criteria for revenue recognition.
Cost of equipment and merchandise - The associated Cost of equipment and merchandise for each equipment and merchandise revenue sales order was also recognized in the incorrect period.
Vendor rebate - The Company incorrectly recognized a rebate received from a vendor.
Income taxes - The Company recalculated its income tax expense on an annual and quarterly basis to account for the identified restatement adjustments.
Other errors - There are other restatement errors otherwise not described in the restatement errors listed above. These errors and related restatement adjustments were not material for the three and six months ended June 30, 2022.



10


The following table presents the impact of the restatement to the unaudited interim condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2022:

Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
As Previously Reported
Restatement AdjustmentsAs Restated
As Previously Reported
Restatement AdjustmentsAs Restated
Revenues:
Franchise $19,109 $ $19,109 $38,969 $ $38,969 
Equipment and merchandise10,924 (2,332)8,592 41,072 (22,952)18,120 
Total revenues30,033 (2,332)27,701 80,041 (22,952)57,089 
Costs and operating expenses:
Cost of franchise revenue1,690 53 1,743 2,921 129 3,050 
Cost of equipment and merchandise8,679 413 9,092 19,622 (3,417)16,205 
Selling, general and administrative expenses52,828 (902)51,926 84,918 (876)84,042 
Total costs and operating expenses63,197 (436)62,761 107,461 (4,164)103,297 
Loss from operations(33,164)(1,896)(35,060)(27,420)(18,788)(46,208)
Change in fair value - warrant liabilities(1,265) (1,265)(1,265) (1,265)
Interest expense, net696  696 822  822 
Other income, net(1,184)(107)(1,291)(614)(55)(669)
Loss before income taxes(31,411)(1,789)(33,200)(26,363)(18,733)(45,096)
Provision for income taxes3,515 19,783 23,298 6,051 14,829 20,880 
Net loss$(34,926)$(21,572)$(56,498)$(32,414)$(33,562)$(65,976)
Other comprehensive loss
Foreign currency translation adjustment, net of tax(3,545)346 (3,199)(2,639)456 (2,183)
Comprehensive loss$(38,471)$(21,226)$(59,697)$(35,053)$(33,106)$(68,159)
Per share data:
Net loss per share
Basic and diluted$(0.36)$(0.23)$(0.59)$(0.34)$(0.35)$(0.69)
Shares used in computing net loss per share
Basic and diluted95,917,556  95,917,556 95,814,188  95,814,188 


11


The following table presents the impact of the restatement to the unaudited interim condensed consolidated statement of cash flows for the six months ended June 30, 2022:
Six Months Ended
June 30, 2022
As Previously Reported
Restatement AdjustmentsAs Restated
Cash flows from operating activities
Net loss$(32,414)$(33,562)$(65,976)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation602  602 
Amortization of intangible assets1,834  1,834 
Amortization of deferred costs1,682  1,682 
Accretion and write-off of debt discount329  329 
Bad debt expense6,680  6,680 
Stock-based compensation4,221  4,221 
Deferred income taxes217 17,505 17,722 
Change in fair value - warrant liabilities(1,265) (1,265)
Unrealized foreign currency transaction gains(957)(957)
Provision for inventories(73) (73)
Changes in operating assets and liabilities:
Due from related parties(592) (592)
Accounts receivable, net(18,991)6,985 (12,006)
Inventories(24,093)1,855 (22,238)
Prepaid expenses(7,128) (7,128)
Other current assets(13,332)5,907 (7,425)
Deferred costs(956)(796)(1,752)
Other long-term assets(4,969)1,327 (3,642)
Accounts payable and accrued expenses9,354 4,942 14,296 
Deferred revenue(420)(2,412)(2,832)
Income taxes payable5,759 (3,156)2,603 
Other long-term liabilities288 1,737 2,025 
Net cash used in operating activities$(74,224)$332 $(73,892)
Cash flows from investing activities
Purchases of property and equipment(4,728) (4,728)
Purchases of intangible assets(1,923) (1,923)
Net cash used in investing activities$(6,651)$ $(6,651)
Cash flows from financing activities
Borrowings under revolving facility61,600  61,600 
Taxes paid related to net share settlement of equity awards(10,991) (10,991)
Deferred financing costs(454) (454)
Net cash provided by financing activities$50,155 $ $50,155 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(226)(332)(558)
Net increase (decrease) in cash, cash equivalents, and restricted cash(30,946) (30,946)
Cash and cash equivalents at beginning of period42,004  42,004 
Cash, cash equivalents, and restricted cash at beginning of period42,004  42,004 
Cash and cash equivalents at end of period8,476  8,476 
Restricted cash at end of period2,582  2,582 
Cash, cash equivalents, and restricted cash at end of period$11,058 $ $11,058 

The impacts to the unaudited interim condensed consolidated statements of changes in stockholders’ (deficit) equity during the three and six months ended June 30, 2022 are an increase to Accumulated deficit of $21.6 million and $44.3 million, respectively, and an increase to Accumulated other comprehensive income of $0.3 million and $1.0 million, respectively.
12



Note 3—Summary of significant accounting policies

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

Concentration of credit risk

No customer accounted for more than 10% of the Company’s Accounts receivable as of June 30, 2023 and December 31, 2022. No customer accounted for more than 10% of the Company’s total revenues for the three and six months ended June 30, 2023 or 2022.

Credit losses

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

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

For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Balance at beginning of period$19,108 $5,366 $16,043 $8,132 
Provisions for bad debts, included in Selling, general and administrative801 5,216 6,315 6,680 
Uncollectible receivables written off(3,761)(4,826)(6,210)(9,056)
Balance at end of period$16,148 $5,756 $16,148 $5,756 

Debt issuance costs and debt discount

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

Derivative instruments

Embedded derivatives

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

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

Recently issued accounting pronouncements

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

Recently Adopted Accounting Standards

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

Accounting Standards Not Yet Adopted

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

Note 4—Other current assets

Other current assets consists of the following as of June 30, 2023 and December 31, 2022 (in thousands):

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June 30, 2023December 31, 2022
Unbilled receivables, current$4,856 $5,205 
Rebate receivables1,377 348 
Prepaid taxes475 483 
Other498 243 
Total$7,206 $6,279 

Note 5—Property and equipment, net

Property and equipment, net consists of the following as of June 30, 2023 and December 31, 2022 (in thousands):
Estimated Useful LifeJune 30, 2023December 31, 2022
(years)
Vehicles5$112 $246 
Furniture and fixtures71,074 1,105 
Office and other equipment51,236 1,190 
Leasehold improvementsLesser of lease term or useful life8,299 8,272 
Construction in progressn/a1,076 994 
11,797 11,807 
Less: accumulated depreciation(2,361)(1,772)
Total property and equipment, net$9,436 $10,035 

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

Depreciation expense related to Property and equipment was approximately $0.3 million and $0.7 million for the three and six months ended June 30, 2023, respectively, and $0.3 million and $0.6 million for the three and six months ended June 30, 2022, respectively. Depreciation expense was recorded in Selling, general and administrative expenses in the unaudited interim condensed consolidated statements of operations and comprehensive loss.

Note 6—Goodwill and intangible assets

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

As of June 30, 2023As of December 31, 2022
Useful LifeGross ValueAccumulated AmortizationNet ValueGross ValueAccumulated AmortizationNet Value
(in years)
Goodwilln/a$2,087 $— $2,087 $2,145 $— $2,145 
Internal-use software3$6,497 $3,762 $2,735 $5,852 $3,054 $2,798 
Trade names & trademarksn/a1,980  1,980 1,808  1,808 
Customer contracts7713 88 625 733 30 703 
Acquired software
3 - 6
959 39 920 966 13 953 
Total intangible assets, net$10,149 $3,889 $6,260 $9,359 $3,097 $6,262 

The amortization expense of intangible assets was $0.6 million and $1.1 million for the three and six months ended June 30, 2023, respectively, and $0.9 million and $1.8 million for the three and six months ended June 30, 2022, respectively, and was recorded in Selling, general and administrative expenses in
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the unaudited interim condensed consolidated statements of operations and comprehensive loss. The weighted average remaining life of internal-use software was 2.1 years and 1.8 years as of June 30, 2023 and December 31, 2022, respectively. The weighted average remaining life of acquired software was 2.5 years and 2.3 years as of June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023, the expected amortization of intangible assets for future periods, excluding assets not yet placed in service of $0.1 million, is as follows (in thousands):

Future Amortization
Remainder of 2023$935 
20241,630 
20251,141 
2026169 
2027160 
Thereafter98 
Total$4,133 

Note 7—Other long-term assets

Other long-term assets consist of unbilled receivables, right of return asset, debt issuance costs, investments in CLF High Street Limited, long-term accounts receivable and other long-term assets. The Company recorded a right of return asset related to World Packs that were sold to franchisees pursuant to multi-unit development agreements. These agreements did not meet the criteria of a contract with a customer under ASC 606. The Company intends to recover the World Packs that were delivered, for which it has not yet received payment. The amounts for delivered World Packs have been recorded as a right of return asset. The following table summarizes Other long-term assets as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023December 31, 2022
Unbilled receivables, net of current$8,901 $11,112 
Right of return asset8,245 8,224 
Debt issuance costs(1)
 733 
Investment in CLF High Street Limited
619 590 
Long-term accounts receivable1,109 2,135 
Other long-term assets865 852 
Total$19,739 $23,646 

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

Note 8—Accounts payable and accrued expenses

Accounts payable and accrued expenses were comprised of the following (in thousands):
June 30, 2023December 31, 2022
Accounts payable$15,850 $21,767 
Accrued sales tax4,651 6,329 
Accrued payroll and benefits4,412 3,281 
Accrued litigation expenses2,525 9,613 
Accrued professional fees7,541 3,557 
Accrued inventory purchases and storage costs279 3,089 
Other payables5,868 849 
Total$41,126 $48,485 

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Note 9—Deferred revenue

Deferred revenue results from establishment fees paid by franchisees at the outset of the contract term and the value of material rights related to discounted renewal options as well as equipment fees paid by franchisees prior to the transfer of the equipment. During the three and six months ended June 30, 2023, the Company recognized approximately $3.5 million and $7.5 million of revenue, respectively, that was included in the Deferred revenue balance at the beginning of the period. The following tables reflect the change in Deferred revenue during the three and six months ended June 30, 2023 and 2022 (in thousands):

Deferred Revenue
Balance at December 31, 2022$18,909 
Net change(895)
Balance at March 31, 2023$18,014 
Net change665 
Balance at June 30, 2023$18,679 

Deferred Revenue
Balance at December 31, 2021$22,366 
Net change(673)
Balance at March 31, 2022 (As Restated)$21,693 
Net change(2,621)
Balance at June 30, 2022 (As Restated)$19,072 

Deferred revenue expected to be recognized within one year from the balance sheet date is classified as current, and the remaining balance is classified as non-current. Transaction price allocated to remaining performance obligations represents contracted franchise and equipment revenue that has not yet been recognized, which includes deferred revenue recognized as revenue in future periods. As of June 30, 2023, remaining performance obligations were $18.7 million of which the Company expects to recognize approximately $14.3 million as revenue over the next 12 months.

Note 10—Debt

The following table provides a summary of the Company’s outstanding debt as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023December 31, 2022
Term loan$66,000 $ 
Revolving facility2,000 88,100 
Subordinated second lien PIK loan91,297  
Other debt318 347 
Total debt, excluding deferred financing costs and discounts159,615 88,447 
Deferred financing costs, net(6,237)(733)
Discount on debt, net(23,195) 
Total debt$130,183 $87,714 

First Lien Loan

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

On June 23, 2020, the Company amended the Secured Credit Agreement to allow it to enter into a definitive agreement with a special purpose acquisition corporation. On October 6, 2020, the Company further amended the Secured Credit Agreement, pursuant to which amendment, the Company agreed to convert $8.0 million of the amount outstanding under the Revolving Facility to be part of the Term Facility. In addition to converting a portion of the Revolving Facility to the Term Facility, the Company agreed to repay $5.0 million of the principal amount of the Revolving Facility outstanding.

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

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

On May 13, 2022, the Company entered into a second amendment (the “Second Amendment”) to the Senior Credit Agreement. Pursuant to the Second Amendment, certain terms of the Senior Credit Agreement were amended to permit the execution of the Fortress Credit Agreement (including establishing the securitization of the franchisee loans described below) and the issuance of warrants pursuant to the Warrant Purchase Agreement (see Note 12—Warrant liabilities).

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

On February 14, 2023, the Company entered into a third amendment (the “Third Amendment”) to the Senior Credit Agreement. Pursuant to the Third Amendment, certain amendments were made to the terms of the Senior Credit Agreement to permit the execution of a $90.0 million, five-and-a-half-year term loan facility with a lender group consisting of existing stockholders of the Company led by affiliates of Kennedy Lewis Investment Management LP. In addition, a $20.1 million repayment to the Lender was required to facilitate the carve out of a $66.0 million term loan (“Term Loan”) on the Facility, with an interest rate of the Secured Overnight Financing Rate) (“SOFR”) plus 550 basis points per annum and a two-year term, and a $2.0 million revolving credit facility (“New Revolving Facility”) (10.66% as of June 30, 2023).

In connection with the New Revolving Facility, the Lender issued standby letters of credit on behalf of the Company associated with our corporate headquarters. The outstanding commitments under these letters of credit as of June 30, 2023 totaled $1.6 million, all of which have expiration dates in less than one year. The amount of borrowings available at any time under the New Revolving Facility is reduced by the amount of letters of credit outstanding.

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As a result of the reduction in borrowing capacity on the Facility with the Third Amendment, the Company, in proportion to the decrease in borrowing capacity, performed a write-off of debt issuance costs of $0.2 million during the three months ended March 31, 2023 which is included in Interest expense, net. Additionally, the Company has capitalized all new lender and third party fees paid and recognizes these fees as part of interest expense over the life of the modified debt in accordance with the effective interest method. The unamortized debt issuance cost in connection to the Facility as of June 30, 2023 and December 31, 2022 was $0.5 million and $0.7 million, respectively. The availability on the Facility as of June 30, 2023 and December 31, 2022 was $0.4 million and $0.3 million, respectively.

Subordinated Second Lien PIK Credit Agreement

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

Amounts outstanding under the KLIM Term Loan accrue interest at a rate of 12.00% per annum, payable in kind. The outstanding balance on the loan facility as of June 30, 2023 was $91.3 million, which included $90.0 million of principal, $2.7 million in a paid-in-kind (“PIK”) fee taking the form of original issue discount, and $4.0 million of PIK interest accrued.

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

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

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

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

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

Fortress Credit Facility

The Fortress Credit Agreement, which was entered into on May 13, 2022 and terminated on August 14, 2022, consisted of a $150.0 million (the “Maximum Committed Amount”) seven-year credit facility (the “Fortress Facility”). The Maximum Committed Amount could be increased to $300.0 million in certain circumstances under the terms of the Fortress Credit Agreement. The Fortress Credit Agreement required that the Company enter into a limited guaranty, guaranteeing the Company’s obligations under the Fortress Facility, in an amount not to exceed 10% of the total Fortress Facility size. The proceeds from the Fortress Facility were to be used by the borrower to purchase loans made by another subsidiary of the Company, F45 Intermediate Holdco, LLC, to certain franchisees of the Company (the “Receivables”). The obligations under the Fortress Credit Agreement were secured by the Receivables. Amounts outstanding under the Fortress Credit Agreement accrued interest at a rate equal to the amount of interest received by the Company from each franchisee loan agreement.

The covenants of the Fortress Credit Agreement included negative covenants that, among other things, restricted the Company’s ability to incur additional indebtedness, grant liens and make certain acquisitions, investments, asset dispositions and restricted payments. In addition, the Fortress Credit Agreement contained certain financial covenants that required the Company to maintain certain market capitalization levels. Subsequent to June 30, 2022, the Company determined it was no longer in compliance with covenants requiring minimum market capitalization thresholds in the Fortress Credit Agreement. On August 14, 2022, F45 SPV Finance Company, LLC, delivered a notice to Fortress, as administrative agent, terminating the Fortress Credit Agreement. There were no borrowings outstanding under the Fortress Credit Agreement at the time of termination.

In connection with the Fortress Credit Agreement, the Company entered into a warrant purchase agreement with certain affiliates of Fortress, pursuant to which the Company was obligated to issue warrants in up to four tranches, each representing 1.25% of the fully diluted shares of the Company’s common stock outstanding on the issue date of the warrants (see Note 12—Warrant liabilities). As a result of issuance of the warrants, the Company determined the fair value of the warrants issued in connection with the Fortress Credit Agreement of approximately $8.9 million would be deferred and amortized over the term of the Fortress Credit Agreement. The Company recorded additional debt issuance costs for fees paid lenders and third parties of approximately $2.9 million. As a result of the termination of the Fortress Credit Agreement on August 14, 2022, the Company recorded Interest expense of $11.5 million in the condensed consolidated statements of operations and comprehensive loss during three and nine months ended September 30, 2022 associated with the write-off of debt issuance costs incurred on the Fortress Credit Agreement. Additionally, the Company recorded additional charges of approximately $2.5 million associated with fees incurred with termination of the Fortress Credit Agreement during the three and nine months ended September 30, 2022.

March 2023 Consents under Credit Agreements

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

Amendment of Letter Agreement

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

May 2023 Consents Under Credit Agreements

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

Fourth Amendment to Senior Credit Agreement

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

June 2023 Consent Under Subordinated Credit Agreement

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

Further Amendment of Side Letter Agreement

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

Additional Consents Under Credit Agreements

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

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

Amendment to Subordinated Credit Agreement and Senior Credit Agreement

On October 20, 2023, the Company entered into an Amendment to the Subordinated Credit Agreement. Pursuant to the amendment, the lenders agreed, subject to the satisfaction of certain conditions precedent, to extend credit in the form of an incremental loan in an original aggregate principal amount equal to $40.0 million, upon the same terms as the original loan amount, which the Company received on October 23, 2023, provide delayed draw commitments in an aggregate principal amount of up $10 million, and extend the deadline under the Subordinated Credit Agreement with respect to the delivery of the Company’s quarterly financial statements for the first and second fiscal quarters of 2023, together with the accompanying compliance certificate, to November 8, 2023. The delayed draw commitments are available to be drawn until the date that is fifteen months following the effective date of the Amendment to the Subordinated Credit Agreement. The incremental term loans and delayed draw loans will accrue interest at a rate of 12.00% per annum, payable in kind, and will mature on August 13, 2028.

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

Interest expense

Interest expense recorded on the debt facilities was $5.1 million and $8.3 million for the three and six months ended June 30, 2023, respectively, and $0.7 million and $1.0 million for the three and six months ended June 30, 2022, respectively.

The weighted-average interest rate on the Company’s outstanding debt as of June 30, 2023 was 11.44%.

Note 11—Derivative instruments
Embedded Derivatives

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

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

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

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The following table sets forth the inputs to the “with-and-without method” that was used to value the embedded derivatives based on potential change in control scenarios with different probabilities and a maturity scenario that would not result in a change in control event:

As of June 30, 2023
Expected term in years
0.88
Exit fee “with” the embedded derivatives
10.00% - 35.00%
Make-whole premium discount rate(1)
5.90%
Implied discount rate
48.50%
(1)
The make-whole premium discount rate is the 1-year constant maturity Treasury rate plus 50 basis points as of June 30, 2023 and would not be applicable if the loan fully matures without a change in control event.

Note 12—Warrant liabilities

In conjunction with the Fortress Facility, on May 13, 2022, the Company issued (i) immediately exercisable warrants (“Immediately Exercisable Warrants”) to purchase an aggregate of up to 1,211,210 shares of the Company’s common stock and (ii) warrants that would become exercisable on the date on which loans in an amount equal to 50% of the Maximum Committed Amount (as in effect on the date any warrant is issued) were drawn under the Fortress Credit Agreement (“50% Utilization Warrants” and together with the Immediately Exercisable Warrants, the “Warrants”) (the date a 50% Utilization Warrant becomes exercisable upon reaching required utilization levels under the New Facility, a “Vesting Date”) to purchase up to 1.25% of the fully diluted shares of common stock as of the Vesting Date.

The exercise price of the Warrants is $16.00 per share of the Company’s common stock, subject to adjustment as defined within the warrant purchase agreement. The Warrants were exercisable from the date of issuance (in the case of the Immediately Exercisable Warrants) or their Vesting Date (in the case of the 50% Utilization Warrants) until the seventh anniversary of the date of issuance of each Warrant, may only be exercised on a cashless net exercise basis, and are subject to certain anti-dilution adjustments upon the occurrence of certain events such as a distribution, reorganization, recapitalization, reclassification, or similar event.

Each holder of the Warrants had the right to put back the Warrants to the Company (the “Put Option”) at an aggregate price (the “Aggregate Put Price”) equal to the product of (a) such holder’s percentage share of $2.5 million (calculated based on the number of Warrants issued to such holder relative to the number of Warrants issued to all holders) and (b) a fraction, expressed as a percentage, equal to the number of shares of the Company’s common stock subject to the Warrants for which the Put Option would be exercised divided by the number of shares of the Company’s common stock subject to the Warrants issued to the holder as of the issue date of the Warrant (in the case of the Immediately Exercisable Warrants) or the Vesting Date (in the case of the 50% Utilization Warrants). The Aggregate Put Price would be settled (i) within the first twelve months after the issue date (in the case of the Immediately Exercisable Warrants) or the Vesting Date (in the case of the 50% Utilization Warrants), solely in shares of the Company’s common stock, subject to the Share Issuance Cap (as defined herein) and certain limitations on beneficial ownership of the holders (the “Beneficial Ownership Limitation”), based on a trailing volume-weighted average price (“VWAP”) or (ii) after the twelve month anniversary of the issue date (in the case of the Immediately Exercisable Warrants) or the Vesting Date (in the case of the 50% Utilization Warrants), in cash or shares of common stock based on a trailing VWAP, at the holder’s option, and subject to the Share Issuance Cap and the Beneficial Ownership Limitation. In the event that the number of shares of common stock to be issued upon exercise of the Put Option would exceed the Share Issuance Cap or the Beneficial Ownership Limitations with respect to a holder, a cash payment would be made in lieu of delivery of such excess shares of common stock.

The Immediately Exercisable Warrants and the 50% Utilization Warrants issued did not meet the criteria for equity classification and therefore must be recorded as liabilities pursuant to ASC 480 - Distinguishing Liabilities from Equity and ASC 815 - Derivatives and Hedging, respectively. The liability for these Warrants was recorded at fair value on the date of the issuance of the Warrants and subsequently re-
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measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings.