The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes thereto and the other financial
information included elsewhere in this Quarterly Report on Form 10-Q. In
addition to historical consolidated financial information, the following
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results and timing may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including those discussed below and elsewhere in this
Quarterly Report on Form 10-Q, particularly in the section titled “Risk
Factors.”
franchisor of boutique fitness brands. On
an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock
at an initial public offering price of
reorganization into a holding company structure, the Company is a holding
company with its principal asset being a 55.6% ownership interest in
through its ownership interest in
Holdings
LLC
We operate a diversified platform of ten brands spanning across verticals
including Pilates, indoor cycling, barre, stretching, rowing, dancing, boxing,
running, functional training and yoga.
accessible, and personalized workout experiences led by highly qualified
instructors in studio locations across 48 U.S. states, the
and
12 additional countries. The Company’s portfolio of brands includes Club
Pilates, the largest Pilates brand in
indoor cycling brand in
one-on-one and group stretching services; Row House, the largest franchised
indoor rowing brand in
combining toning, interval and circuit training; YogaSix, the largest franchised
yoga brand in
ballet barre to perform small isometric movements, and the largest Barre brand
in
concept; Rumble, a boxing-inspired full-body workout; and BFT, a functional
training and strength-based program.
As of
were contractually committed to open an additional 1,881 studios under existing
franchise agreements. In addition, as of
internationally, and our master franchisees were contractually obligated to sell
licenses to franchisees to open an additional 917 new studios in 12 additional
countries.
During the six months ended
States
one segment for financial reporting purposes.
The COVID-19 Pandemic
In 2020 and through most of 2021, the COVID-19 pandemic adversely impacted our
ability to generate revenue. A substantial portion of our revenue is derived
from royalty fees, which were affected by the decline in system-wide sales as
almost all of our franchised studios were temporarily closed beginning in
also experienced a reduction in sales of new studio licenses and in installation
of equipment in new studios. Additionally, we temporarily reduced our marketing
fund fees from 2% to 1% of the sales of franchisees while studios were closed
due to the COVID-19 pandemic and related government mandates and restrictions as
part of our COVID-19 support response.
In response to the COVID-19 pandemic, franchisees temporarily closed almost all
studios system-wide in
operations as of
areas in which our studios operate, certain of our studios have had to re-close
or significantly reduce capacity, and additional studios may have to re-close or
further reduce capacity, pursuant to local guidelines. We also experienced lower
license sales and delays in new studios openings due to the COVID-19 pandemic.
However, we have continued opening studios throughout the COVID-19 pandemic and
franchisees have opened 782 studios globally from
2022
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Our proven operational model allowed us to provide robust support to franchisees
during the COVID-19 pandemic and has led to no units permanently closed under
our ownership. Even though studios were temporarily closed, franchisees
maintained strong member loyalty, with many members maintaining actively paying
accounts or putting their memberships “on hold.” Members who did not pay
membership dues while “on hold” kept their agreements and preserved the ability
to reactivate when studios reopened, mitigating high member cancellation rates.
While studios were closed, we continued to generate revenue from franchise
license and royalty payments as customers engaged with our digital platform
services and purchased merchandise. We took several actions to support
franchisees’ efforts to ensure they had access to resources that guided them on
generating revenues and reducing operating costs, including a temporary
reduction in marketing fund percentage collected.
The adverse effects of the COVID-19 pandemic began to decline during 2021, and
through the first half of 2022, although, infection rates continue to fluctuate
in various regions and new strains and variants of the virus, including the
omicron variants, remain a risk. During the second quarter of 2021 through the
first half of 2022 in particular, as vaccination rates have increased
substantially in
most states have either been reduced or eliminated, franchisees’ membership
visits have increased. As of
membership visits for the quarter ended
respectively, relative to the quarter ended
prior to the onset of the pandemic. For the quarter ended
run-rate Average Unit Volume (“AUVs”) recovered to approximately 101% relative
to the quarter ended
Following the significant disruption to the global fitness industry caused by
the COVID-19 pandemic, we took ownership of a greater number of studios than we
would expect to hold in the normal course of our business. We are in the process
of reselling the licenses for these studios to new or existing franchisees
(“company-owned transition studios”) as operating studios is not a component of
our business model. However, we may not be able to do so and we may choose to
close some or all such studios to the extent they are not profitable for an
extended period of time and could incur charges in connection therewith for
asset impairment and lease termination, employee severance and related matters,
which could adversely affect our business, results of operations, cash flows and
financial condition. See Note 3 of Notes to Condensed Consolidated Financial
Statements for additional information.
The full extent of the future impact of the COVID-19 pandemic on our operational
and financial performance continues to be uncertain and will depend on many
factors outside of our control, including, without limitation, the timing,
extent, trajectory and duration of the pandemic; the availability, distribution
and effectiveness of vaccines; the spread of new variants of COVID-19; the
continued and renewed imposition of protective public safety measures by local,
state, federal and international authorities; the disruption to global supply
chain; rising inflation rates; the impact of the pandemic on the fitness
industry and responses from our franchisees to the pandemic. Although we have
implemented measures to mitigate the impact of the COVID-19 pandemic on our
business, we expect the pandemic to continue to adversely affect franchisees, as
well as our overall business, results of operations, cash flows and financial
condition.
Rumble Acquisition
On
entered into a contribution agreement with
LLC
of
connection with the franchise business under the “Rumble” trade name. Pursuant
to this agreement, Rumble became a direct subsidiary of
is owned by
rights and intellectual property of
all of the issued and outstanding membership interests of Rumble. As
consideration,
to 1,300,032 shares of
(ii) issued Class A Units equivalent to 2,024,445 shares of
common stock to
as provided in the contribution agreement and (iii) assumed and discharged any
liabilities arising from and after the closing date under the assigned contracts
and acquired assets.
assets to
Rumble assets to
holder of 5% or more of the equity interests of
Prior to the vesting and/or forfeiture of certain equity instruments issued to
balance sheet instead of equity and will therefore be subject to a subsequent
quarterly fair value remeasurement on a mark-to-market basis as a derivative
liability. As a result, fluctuations in these quarterly liability valuations
will impact our financial results following the IPO in accordance with movements
in our stock price, and the related valuation of the derivative liability that
we will be required to make on a quarterly basis. See Note 3 of Notes to
Condensed Consolidated Financial Statements for additional information.
30
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BFT Acquisition
On
(“APA”) with
(the “Seller”) whereby the Company acquired certain assets relating to the
concept and brand known as BFT™. Assets acquired include franchise rights,
brand, intellectual property and the rights to manage and license the franchise
business (the “Franchise System”). The Company also assumed certain contingent
liabilities associated with the purchased assets and provided certain
indemnifications to the Seller. This acquisition is expected to enhance the
Company’s franchise offerings and provide a platform for future growth, which
the Company believes is complementary to its portfolio of franchises.
Consideration for the transaction included cash of
million USD
addition, the Company agreed to pay contingent consideration to the Seller
consisting of quarterly cash payments based on the sales of the Franchise System
and equipment packages in
of royalties collected by the Company, provided that aggregate minimum payments
of
exchange rate as of the purchase date) are required to be paid to the Seller for
the two-year period ending
payments for the two-year period ending
maximum of
currency exchange rate as of the purchase date). Based on the purchase price
allocation, the Company has determined that the fair value of the estimated
contingent consideration liability as of the acquisition date is
and is recorded in accrued expenses and contingent consideration from
acquisitions in the condensed consolidated balance sheets. During the three and
six months ended
consideration.
In addition, the Company entered into a Master Franchise Agreement (“MFA”) with
an affiliate of the Seller (the “Master Franchisee”), pursuant to which the
Company granted the Master Franchisee the master franchise rights for the BFT™
brands in
receive certain fees and royalties, including a percentage of the revenue
generated by the Master Franchisee under the MFA. The MFA contains an option for
the Company to repurchase the master franchise rights granted under the MFA in
either 2023 or 2024 at a purchase price based on the Master Franchisee’s EBITDA.
If the Company (or a designee of the Company) does not exercise the option
pursuant to the terms of the MFA, then the Company might be required to pay a
cancellation fee to the Master Franchisee which might be material to the
Company. If the Master Franchisee rejects an offer to repurchase the franchise
rights, then the cancellation fee is not required to be paid.
At the acquisition date, there were certain claims and lawsuits against the
Seller for which the Company has agreed to indemnify the Seller. The claims and
lawsuits relate to alleged patent and trademark infringements. Plaintiff alleges
that plaintiff has suffered, and is likely to continue to suffer, loss and
damage due to breach of the patents by the Seller and is seeking damages or in
the alternative an account of profits. The Seller has filed a cross-claim
alleging that the defendant’s two Australian patents are, and always have been,
invalid and that they should be revoked. The court in
that the Plaintiff’s claims of infringement were invalid and that even if they
were valid, the Seller did not infringe upon these patents and trademarks. In
addition, the Plaintiff has brought related claims for patent infringement
against the Seller in the
actions are currently pending. See Note 3 of Notes to Condensed Consolidated
Financial Statements for additional information.
Factors Affecting Our Results of Operations
In addition to the impact of the risks described above, we believe that the most
significant factors affecting our results of operations include:
•
Licensing new qualified franchisees, selling additional licenses to existing
franchisees and opening studios. Our growth depends upon our success in
licensing new studios to new and existing franchisees. We believe our success in
attracting new franchisees and attracting existing franchisees to invest in
additional studios has resulted from our diverse offering of attractive brands,
corporate level support, training provided to franchisees and the opportunity to
realize attractive returns on their invested capital. We believe our significant
investments in centralized systems and infrastructure help support new and
existing franchisees. To continue to attract qualified new franchisees, sell
additional studios to existing franchisees and assist franchisees in opening
their studios, we plan to continue to invest in our brands to enable them to
deliver positive consumer experiences and in our integrated services at the
brand level to support franchisees.
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•
Timing of studio openings. Our revenue growth depends to a significant extent on
the number of studios that are open and operating. Many factors affect whether a
new studio will be opened on time, if at all, including the availability and
cost of financing, selection and availability of suitable studio locations,
delays in hiring personnel as well as any delays in equipment delivery or
installation. To the extent franchisees are unable to open new studios on the
timeline we anticipate, or at all, we will not realize the revenue growth that
we expect. We believe our investments in centralized systems and infrastructure,
including real estate site selection, studio build-out and design assistance
help enable franchisees to open studios in a timely manner, and we plan to
continue to invest in our systems to continue to provide assistance during the
opening process.
•
Increasing same store sales. Our long-term revenue prospects are driven in part
by franchisees’ ability to increase same store sales (discussed below). Several
factors affect our same store sales in any given period, including the number of
stores that have been in operation for a significant period of time, growth in
total memberships and marketing and promotional efforts. We expect to continue
to seek to grow same store sales and AUVs by helping franchisees acquire new
members, increase studio utilization and drive increased spend from consumers.
We also intend to expand ancillary revenue streams, such as our digital platform
offerings and retail merchandise.
•
International and domestic expansion. We continue to invest in increasing the
number of franchisees outside of
relationships and executed committed development contracts with master
franchisees to propel our international growth. We plan to continue to invest in
these relationships and seek new relationships and opportunities, including
through acquisitions and partnerships, in countries that we have targeted for
expansion. In the
partnership with certain complimentary assets or businesses that can enhance and
expand our brands and operations.
•
Demand and competition for consumer income. Our revenue and future success will
depend in part on the attractiveness of our brands and the services provided by
franchisees relative to other fitness and entertainment options available to
consumers. Our franchisees’ AUVs are dependent upon the performance of studios
and may be impacted by reduced capacity as a result of various factors,
including the COVID-19 pandemic and shifting consumer demand and behavior for
fitness services. Macroeconomic factors generally, and economic factors
affecting a particular geographic territory, may also increase competition for
discretionary income, impact the returns generated by franchisees and therefore
impact our operating results.
Key Performance Indicators
In addition to our financial statements prepared in accordance with accounting
principles generally accepted in
the following key metrics to measure performance, identify trends, formulate
financial projections, compensate our employees, and monitor our business. While
we believe that these metrics are useful in evaluating our business, other
companies may not use similar metrics or may not calculate similarly titled
metrics in a consistent manner.
The following table sets forth our key performance indicators for the three and
six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in thousands)
System-wide sales
Number of new studios openings globally, net 128 77 227 156
Number of studios operating globally
(cumulative total as of period end) 2,357 1,952 2,357 1,952
Number of licenses sold globally (cumulative
total as of period end)(1) 4,935 3,853 4,935 3,853
Number of licenses contractually obligated
to open internationally (cumulative total as
of period end) 917 872 917 872
AUV (LTM as of period end) $ 457 $ 313 $ 457
AUV (run rate) $ 480 $ 384 NA NA
Same store sales 25 % 129 % 35 % 22 %
Adjusted EBITDA(2)
(1) Global franchise licenses sold are presented gross of terminations.
(2) The definition of adjusted EBITDA and a detailed reconciliation of adjusted
EBITDA are set forth below under the section entitled “Non-GAAP Financial
Measures”.
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The following table presents additional information related to our studio and
license key performance indicators for the three and six months ended
2022
Three Months Ended June 30,
2022 2021
North North
America International Global America International Global
Open Studios:
Open studios (beginning of
period) 2,030 199 2,229 1,767 108 1,875
New studio openings, net 93 35 128 59 18 77
Open studios (end of period) 2,123 234 2,357 1,826 126 1,952
Franchise Licenses Sold: (1)
Franchise licenses sold (total
beginning of period) 4,273 411 4,684 3,373 228 3,601
New franchise license sales 193 58 251 200 52 252
Franchise licenses sold (total
end of period) 4,466 469 4,935 3,573 280 3,853
Studios Obligated to Open
Internationally under MFAs:
Gross studios obligated to open
under MFAs 1,151 998
Less: studios opened under MFAs 234 126
Remaining studios obligated to
open under MFAs 917 872
Licenses sold by master
franchisees, net (2) 224 152
Six Months Ended June 30,
2022 2021
North North
America International Global America International Global
Open Studios:
Open studios (beginning of
period) 1,954 176 2,130 1,714 82 1,796
New studio openings, net 169 58 227 112 44 156
Open studios (end of period) 2,123 234 2,357 1,826 126 1,952
Franchise Licenses Sold: (1)
Franchise licenses sold (total
beginning of period) 4,062 362 4,424 3,275 194 3,469
New franchise license sales 404 107 511 298 86 384
Franchise licenses sold (total
end of period) 4,466 469 4,935 3,573 280 3,853
Studios Obligated to Open
Internationally under MFAs:
Gross studios obligated to
open under MFAs 1,151 998
Less: studios opened under
MFAs 234 126
Remaining studios obligated to
open under MFAs 917 872
Licenses sold by master
franchisees, net (2) 224 152
(1) Global franchise licenses sold are presented gross of terminations.
(2) Reflects the number of licenses for studios which have already been sold,
but not yet opened, by master franchisees under master franchise agreements, net
of terminations.
All metrics above, other than adjusted EBITDA, are presented on an adjusted
basis to reflect historical information of Rumble and BFT prior to the
acquisition by the Company in March and
references to these metrics in this Form 10-Q use this same basis of reporting.
System-Wide Sales
System-wide sales represent gross sales by all studios in
System-wide sales includes sales by franchisees that are not revenue realized by
us in accordance with GAAP. While we do not record sales by franchisees as
revenue, and such sales are not included in our consolidated financial
statements, this operating metric relates to our revenue because we receive
approximately 7% and 2% of the sales by franchisees as royalty revenue and
marketing fund revenue, respectively. We believe that this operating measure
aids in understanding how we derive our royalty revenue and marketing fund
revenue and is important in evaluating our performance. System-wide sales growth
is driven by new studio openings and increases in same store sales. Management
reviews system-wide sales monthly, which enables us to assess changes in our
franchise revenue, overall studio performance, the health of our brands and the
strength of our market position relative to competitors.
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Number of New Studio Openings
The number of new studio openings reflects the number of studios opened during a
particular reporting period, net of studios no longer operating in the system.
We consider a new studio to be open once the studio begins offering classes.
Opening new studios is an important part of our growth strategy. New studios may
not generate material revenue in the early period following an opening and their
revenue may not follow historical patterns. Management reviews the number of new
studio openings in order to help forecast operating results and to monitor
studio opening processes.
Number of Studios Operating
In addition to the number of new studios opened during a period, we track the
number of total studios operating at the end of a reporting period. We view this
metric on a net basis to take account of any studios that may have closed during
the reporting period. While nearly all our franchised studios are licensed to
franchisees, from time to time we own and operate a limited number of
company-owned transition studios (typically as we take possession of a studio
following a franchisee ceasing to operate it and as we prepare it to be licensed
to a new franchisee). Management reviews the number of studios operating at a
given point in time in order to help forecast system-wide sales, franchise
revenue and other revenue streams.
Licenses Sold
The number of licenses sold in
number of licenses sold by us (or, outside of
franchisees), since inception through the date indicated. Licenses contractually
obligated to open refer to licenses sold net of opened studios and terminations.
Licenses contractually obligated to be sold internationally reflect the number
of licenses that master franchisees are contractually obligated to sell to
franchisees to open internationally that have not yet opened as of the date
indicated. The number of licenses sold is a useful indicator of the number of
studios that have opened and that are expected to open in the future, which
management reviews in order to monitor and forecast our revenue streams. Of the
franchisees that opened their first studio in 2019, on average it took
approximately 12.2 months from signing the franchise agreement to open. Of the
franchisees that opened their first studio in 2020, on average it took
approximately 14.6 months from signing the franchise agreement to open. The
length of time increased during 2020 and 2021 due to COVID-related opening
restrictions. Management also reviews the number of licenses sold globally and
the number of licenses contractually obligated to open internationally in order
to help forecast studio growth and system-wide sales.
Average Unit Volume
Average Unit Volume (“AUV”) is calculated by dividing sales during the
applicable period for all studios being measured by the number of studios being
measured. AUV (LTM as of period end) consists of the average sales for the
trailing 12 calendar months for all studios in
for at least 13 calendar months as of the measurement date. Quarterly run-rate
AUV consists of average quarterly sales for all studios that are at least six
months old at the beginning of the respective quarter, multiplied by four. AUV
growth is primarily driven by changes in same store sales and is also influenced
by new studio openings. Management reviews AUV to assess studio economics.
Same Store Sales
Same store sales refer to period-over-period sales comparisons for the base of
studios. We define the same store sales base to include studios in
that have been open for at least 13 calendar months as of the measurement date.
Any transfer of ownership of a studio does not affect this metric. We measure
same store sales based solely upon monthly sales as reported by franchisees.
This measure highlights the performance of existing studios, while excluding the
impact of new studio openings. Management reviews same store sales to assess the
health of the franchised studios.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the
following non-GAAP measures are useful in evaluating our operating performance.
We use the following non-GAAP financial information to evaluate our ongoing
operations and for internal planning and forecasting purposes. We believe that
non-GAAP financial information, when taken collectively, is helpful to investors
because it provides consistency and comparability with past financial
performance. In addition, our management uses non-GAAP measures to compare our
performance relative to forecasts and to benchmark our performance externally
against competitors. However, non-GAAP financial information is presented for
supplemental informational purposes only, has limitations as an analytical tool,
and should not be considered in isolation or as a substitute for financial
information presented in accordance with GAAP. In addition, other companies,
including companies in our industry, may calculate and present similarly titled
non-GAAP measures differently or may use other measures to evaluate their
performance, all of which could reduce the usefulness of our non-GAAP financial
measure as tools for comparison. A reconciliation is provided below for the
non-GAAP financial measures to the most directly comparable financial measures
stated in accordance with GAAP. Investors are encouraged to review the related
GAAP financial measures and the reconciliation of the non-GAAP financial
measures to their most directly comparable GAAP financial measures and not rely
on any single financial measure to evaluate our business.
We believe that the non-GAAP financial measures presented below, when taken
together with the corresponding GAAP financial measures, provides meaningful
supplemental information regarding our performance by excluding certain items
that may not be indicative of our business, results of operations or outlook.
Adjusted EBITDA
We define adjusted EBITDA as EBITDA (net income/loss before interest, taxes,
depreciation and amortization), adjusted for the impact of certain non-cash and
other items that we do not consider in our evaluation of ongoing operating
performance. These items include equity-based compensation, acquisition and
transaction expenses (including change in contingent consideration), management
fees and expenses (that were discontinued after
(consisting of legal and related fees for specific proceedings that arise
outside of the ordinary course of our business), employee retention credit (a
tax credit for retaining employees throughout the COVID-19 pandemic), secondary
public offering expenses for which we do not receive proceeds and expense
related to the remeasurement of our TRA obligation that we do not believe
reflect our underlying business performance and affect comparability. EBITDA and
adjusted EBITDA are also frequently used by analysts, investors and other
interested parties to evaluate companies in our industry.
We believe that adjusted EBITDA, viewed in addition to, and not in lieu of, our
reported GAAP results, provides useful information to investors regarding our
performance and overall results of operations because it eliminates the impact
of other items that we believe reduce the comparability of our underlying core
business performance from period to period and is therefore useful to our
investors in comparing the core performance of our business from period to
period.
The following table presents a reconciliation of net loss, the most directly
comparable financial measure calculated in accordance with GAAP, to adjusted
EBITDA for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in thousands)
Net income (loss)
Interest expense, net 2,448 11,233 4,920 15,561
Income taxes 2,217 83 150 284
Depreciation and amortization 3,579 2,407 7,071 4,462
EBITDA 39,721 5,722 28,439 7,556
Equity-based compensation 4,429 449 19,677 671
Acquisition and transaction expenses
(income) (31,627 ) 297 (22,083 ) 647
Management fees and expenses – 207 – 399
Litigation expenses 4,619 1,659 7,359 2,618
Employee retention credit – – (2,597 ) –
Secondary public offering expenses 250 – 737 –
TRA remeasurement 244 – 557 –
Adjusted EBITDA
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Results of Operations
The following table presents our condensed consolidated results of operations
for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in thousands)
Revenue, net:
Franchise revenue
Equipment revenue 12,381 4,755 20,160 8,821
Merchandise revenue 6,753 4,509 12,836 8,741
Franchise marketing fund revenue 4,937 3,314 9,372 5,797
Other service revenue 7,867 5,433 14,432 9,962
Total revenue, net 59,560 35,775 109,922 64,840
Operating costs and expenses:
Costs of product revenue 13,519 6,274 23,111 11,618
Costs of franchise and service revenue 4,544 3,127 8,778 5,446
Selling, general and administrative
expenses 29,322 21,202 63,241 37,804
Depreciation and amortization 3,579 2,407 7,071 4,462
Marketing fund expense 4,081 2,860 8,436 5,476
Acquisition and transaction expenses
(income) (31,627 ) 297 (22,083 ) 647
Total operating costs and expenses 23,418 36,167 88,554 65,453
Operating income (loss) 36,142 (392 ) 21,368 (613 )
Other (income) expense:
Interest income (418 ) (358 ) (807 ) (453 )
Interest expense 2,866 11,591 5,727 16,014
Gain on debt extinguishment – (3,707 ) – (3,707 )
Total other expense 2,448 7,526 4,920 11,854
Income (loss) before income taxes 33,694 (7,918 ) 16,448 (12,467 )
Income taxes 2,217 83 150 284
Net income (loss)
36
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The following table presents our condensed consolidated results of operations
for the three and six months ended
revenue:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue, net:
Franchise revenue 47 % 50 % 49 % 49 %
Equipment revenue 21 % 13 % 18 % 14 %
Merchandise revenue 11 % 13 % 12 % 13 %
Franchise marketing fund revenue 8 % 9 % 9 % 9 %
Other service revenue 13 % 15 % 12 % 15 %
Total revenue, net 100 % 100 % 100 % 100 %
Operating costs and expenses:
Costs of product revenue 23 % 18 % 21 % 18 %
Costs of franchise and service revenue 8 % 9 % 8 % 8 %
Selling, general and administrative 48 % 59 % 58 % 58 %
expenses
Depreciation and amortization 6 % 7 % 6 % 7 %
Marketing fund expense 7 % 8 % 8 % 8 %
Acquisition and transaction expenses (53 )% 1 % (20 )% 1 %
(income)
Total operating costs and expenses 39 % 101 % 81 % 101 %
Operating income (loss) 61 % (1 )% 19 % (1 )%
Other (income) expense:
Interest income (1 )% (1 )% (1 )% (1 )%
Interest expense 5 % 32 % 5 % 25 %
Gain on debt extinguishment – % (10 )% – % (6 )%
Total other expense 4 % 21 % 4 % 18 %
Income (loss) before income taxes 57 % (22 )% 15 % (19 )%
Income taxes 4 % – % – % – %
Net income (loss) 53 % (22 )% 15 % (20 )%
Three Months Ended
The following is a discussion of our consolidated results of operations for the
three months ended
Revenue
Three Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Franchise revenue
Equipment revenue 12,381 4,755 7,626 160.4 %
Merchandise revenue 6,753 4,509 2,244 49.8 %
Franchise marketing fund revenue 4,937 3,314 1,623 49.0 %
Other service revenue 7,867 5,433 2,434 44.8 %
Total revenue, net
Total revenue. Total revenue was
30, 2022
increase of
due to reopening of studios that were temporarily closed or were operating under
capacity restrictions in 2021 due to the COVID-19 pandemic and opening of new
studios in 2022.
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Franchise revenue. Franchise revenue was
2021
franchise royalty fees of
franchise territory fees of
the three months ended
million
2021
was primarily due to a 25% increase in same store sales due in large part to
temporary studio closures as a result of the COVID-19 pandemic in the prior year
period, and to 405 new studio openings globally since
contributed to the increase in franchise territory fees.
Equipment revenue. Equipment revenue was
an increase of
the period that the equipment is installed. Global equipment installations in
the three months ended
year period, with a larger percentage of higher dollar installations in 2022.
Merchandise revenue. Merchandise revenue was
ended
2021
a higher number of operating studios in the current year period and temporary
closures of studios in the prior year period due to the COVID-19 pandemic.
Franchise marketing fund revenue. Franchise marketing fund revenue was
million
three months ended
increase was primarily due to an increase in same store sales, 297 new studio
openings in
marketing fund percentage collected from 2% to 1% of the sales of franchisees
while their studios were closed due to the COVID-19 pandemic in 2021.
Other service revenue. Other service revenue was
months ended
due to a
brand fee revenue; partially offset by a decrease in package and memberships
revenue due to fewer company-owned transition studios.
Operating Costs and Expenses
Three Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Costs of product revenue
Costs of franchise and service revenue 4,544 3,127 1,417 45.3 %
Selling, general and administrative
expenses 29,322 21,202 8,120 38.3 %
Depreciation and amortization 3,579 2,407 1,172 48.7 %
Marketing fund expense 4,081 2,860 1,221 42.7 %
Acquisition and transaction expenses
(income) (31,627 ) 297 (31,924 ) NM
Total operating costs and expenses
Costs of product revenue. Costs of product revenue was
three months ended
ended
increase in related revenues of 106.5%. Costs of product revenue as a percentage
of related revenue increased to 70.7% in the three months ended
from 67.7% in the three months ended
shift in equipment revenue mix in 2022.
Costs of franchise and service revenue. Costs of franchise and service revenue
was
million
45.3%. The increase was due to a
commissions, consistent with the related franchise territory revenue increase.
Selling, general and administrative expenses. Selling, general and
administrative expenses were
2022
increase of
an increase in equity-based compensation of
new grants; increase in legal expenses of
matters, increase in insurance expense of
other variable expenses in 2022.
38
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Depreciation and amortization. Depreciation and amortization expense was
million
three months ended
increase was due primarily to amortization of intangibles related to the BFT and
Rumble acquisitions in
Marketing fund expense. Marketing fund expense was
months ended
increase in franchise marketing fund revenue.
Acquisition and transaction expenses (income). Acquisition and transaction
expenses (income) were
compared to
consideration related to 2017 and 2021 business acquisitions.
Other (Income) Expense, net
Three Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Interest income
Interest expense 2,866 11,591 (8,725 ) (75.3 )%
Gain on debt extinguishment – (3,707 ) 3,707 NA
Total other expense, net
Interest income. Interest income primarily consists of interest on notes
receivable and was insignificant in each of the three-month periods ended
30, 2022
Interest expense. Interest expense was
2021
interest on notes payable and long-term debt, accretion of earn-out liabilities
and amortization of deferred loan costs and debt discount. The decrease was
primarily due to lower average debt balance compared to the prior year and to
write off of
penalty incurred in the prior year period related to our credit agreement with
facility in
Gain on debt extinguishment. Gain on debt extinguishment of
three months ended
interest on our Paycheck Protection Program loan.
Income Taxes
Three Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Income taxes $ 2,217
Income taxes. Income taxes were
2022
2022, the Company is taxed as a corporation. Prior to the IPO in
Company was a pass-through entity for income tax purposes.
Six Months Ended
The following is a discussion of our consolidated results of operations for the
six months ended
39
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Revenue
Six Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Franchise revenue
Equipment revenue 20,160 8,821 11,339 128.5 %
Merchandise revenue 12,836 8,741 4,095 46.8 %
Franchise marketing fund revenue 9,372 5,797 3,575 61.7 %
Other service revenue 14,432 9,962 4,470 44.9 %
Total revenue, net
Total revenue. Total revenue was
2022
increase of
due to reopening of studios that were temporarily closed or were operating under
capacity restrictions in 2021 due to the COVID-19 pandemic and opening of new
studios in 2022.
Franchise revenue. Franchise revenue was
an increase of
royalty fees of
territory fees of
months ended
training fees of
technology fees of
increase in franchise royalty fees, technology fees and training fees was
primarily due to a 35% increase in same store sales due in large part to
temporary studio closures as a result of the COVID-19 pandemic in the prior year
period, and to 405 new studio openings globally since
contributed to the increase in franchise territory fees.
Equipment revenue. Equipment revenue was
an increase of
the period that the equipment is installed. Global equipment installations in
the six months ended
year period.
Merchandise revenue. Merchandise revenue was
ended
2021
higher number of operating studios in the current year period and temporary
closures of studios in the prior year period due to the COVID-19 pandemic.
Franchise marketing fund revenue. Franchise marketing fund revenue was
million
six months ended
increase was primarily due to an increase in same store sales, 297 new studio
openings in
marketing fund percentage collected from 2% to 1% of the sales of franchisees
while their studios were closed due to the COVID-19 pandemic in 2021.
Other service revenue. Other service revenue was
ended
2021
revenue; partially offset by a decrease in package and memberships revenue due
to fewer company-owned transition studios.
Operating Costs and Expenses
Six Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Costs of product revenue
Costs of franchise and service revenue 8,778 5,446 3,332 61.2 %
Selling, general and administrative
expenses 63,241 37,804 25,437 67.3 %
Depreciation and amortization 7,071 4,462 2,609 58.5 %
Marketing fund expense 8,436 5,476 2,960 54.1 %
Acquisition and transaction expenses
(income) (22,083 ) 647 (22,730 ) NM
Total operating costs and expenses
40
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Costs of product revenue. Costs of product revenue was
months ended
in related revenues of 87.9%. Costs of product revenue as a percentage of
related revenue increased to 70.0% in the six months ended
66.2% in the six months ended
equipment revenue mix in 2022.
Costs of franchise and service revenue. Costs of franchise and service revenue
was
in the six months ended
The increase was primarily due to a
commissions, consistent with the related franchise territory revenue increase.
Selling, general and administrative expenses. Selling, general and
administrative expenses were
2022
increase of
an increase in equity-based compensation of
modification of performance-based awards in 2021 which vested in 2022 and new
grants; an increase in accounting expenses of
outsourcing of certain accounting functions and fees related to recovery of
employee retention credit; increase in legal expenses of
various legal matters; and increase in insurance expense of
partially offset by a decrease in salaries and wages expense of
attributable to employee retention credit recorded in the six months ended
30, 2022
Depreciation and amortization. Depreciation and amortization expense was
million
six months ended
increase was due primarily to amortization of intangibles related to the BFT and
Rumble acquisitions in
Marketing fund expense. Marketing fund expense was
months ended
increase in franchise marketing fund revenue.
Acquisition and transaction expenses (income). Acquisition and transaction
expenses (income) were
compared to
consideration related to 2017 and 2021 business acquisitions and
expense in 2021 related to the Rumble acquisition.
Other (Income) Expense, net
Six Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Interest income
Interest expense 5,727 16,014 (10,287 ) (64.2 )%
Gain on debt extinguishment – (3,707 ) 3,707 NA
Total other expense, net
Interest income. Interest income primarily consists of interest on notes
receivable and was insignificant in each of the six months ended
and 2021.
Interest expense. Interest expense was
30, 2022
decrease of
notes payable and long-term debt, accretion of earn-out liabilities and
amortization of deferred loan costs and debt discount. The decrease was due
primarily to lower average debt balance compared to the prior year and to write
off of
incurred in the prior year period related to our credit agreement with
Business Finance Agency, LLC
Gain on debt extinguishment. Gain on debt extinguishment of
six months ended
interest on our Paycheck Protection Program loan.
41
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Income Taxes
Six Months Ended June 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Income taxes
Income taxes. Income taxes were
2022
the Company is taxed as a corporation. Prior to the IPO in
Company was a pass-through entity for income tax purposes.
Liquidity and Capital Resources
As of
excluding
We require cash principally to fund day-to-day operations, finance capital
investments, service our outstanding debt and address our working capital needs.
Based on our current level of operations and anticipated growth, we believe that
our available cash balance and the cash generated from our operations will be
adequate to meet our anticipated debt service requirements and obligations under
our tax receivable agreement, capital expenditures, payment of tax distributions
and working capital needs for at least the next twelve months. Our ability to
continue to fund these items and continue to reduce debt could be adversely
affected by the occurrence of any of the events described under “Risk Factors”,
as disclosed in our Form 10-K for the year ended
no assurance, however, that our business will generate sufficient cash flows
from operations or that future borrowings will be available under our credit
facility or otherwise to enable us to service our indebtedness, including our
credit facility, or to make anticipated capital expenditures. Our future
operating performance and our ability to service, extend or refinance the credit
facility will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control.
Credit Facility
On
National Association
Partners, LLC
of a
and the loans thereunder, each a “Term Loan” and together, the “Term Loans”).
Affiliates of
Cayman C-2, Ltd.
Investors
Convertible Preferred Stock (the “Series A Convertible preferred stock”) for
and are secured by substantially all of the assets of
Holdings, LLC
Under the Credit Agreement, we are required to make: (i) monthly payments of
interest on the Term Loans and (ii) quarterly principal payments equal to 0.25%
of the original principal amount of the Term Loan. Borrowings under the Term
Loan Facility bear interest at a per annum rate of, at our option, either (a)
the LIBOR Rate (as defined in the Credit Agreement) plus a margin of 6.50% or
(b) the Reference Rate (as defined in the Credit Agreement) plus a margin of
5.50% (7.51% at
The Credit Agreement also contains mandatory prepayments of the Term Loan with:
(i) 50% of
Cash Flow (as defined in the Credit Agreement), subject to certain exceptions;
(ii) 100% of the net proceeds of certain asset sales and insurance/condemnation
events, subject to reinvestment rights and certain other exceptions; (iii) 100%
of the net proceeds of certain extraordinary receipts, subject to reinvestment
rights and certain other exceptions; (iv) 100% of the net proceeds of any
incurrence of debt, excluding certain permitted debt issuances; and (v) up to
least
Unless agreed in advance, all voluntary prepayments and certain mandatory
prepayments of the Term Loan made (i) on or prior to the first anniversary of
the closing date are subject to a 2.0% premium on the principal amount of such
prepayment and (ii) after the first anniversary of the closing date and on or
prior to the second anniversary of the closing date are subject to a 0.50%
premium on the principal amount of such prepayment. Otherwise, the Term Loans
may be paid without premium or penalty, other than customary breakage costs with
respect to LIBOR Rate Term Loans.
42
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The Credit Agreement contains customary affirmative and negative covenants,
including, among other things: (i) to maintain certain total leverage ratios,
liquidity levels and EBITDA levels (in each case, as discussed further in the
Credit Agreement); (ii) to use the proceeds of borrowings only for certain
specified purposes; (iii) to refrain from entering into certain agreements
outside of the ordinary course of business, including with respect to
consolidation or mergers; (iv) restricting further indebtedness or liens; (v)
restricting certain transactions with our affiliates; (vi) restricting
investments; (vii) restricting prepayments of subordinated indebtedness; (viii)
restricting certain payments, including certain payments to our affiliates or
equity holders and distributions to equity holders; and (ix) restricting the
issuance of equity. As of
covenants.
The Credit Agreement also contains customary events of default, which could
result in acceleration of amounts due under the Credit Agreement. Such events of
default include, subject to the grace periods specified therein, our failure to
pay principal or interest when due, our failure to satisfy or comply with
covenants, a change of control, the imposition of certain judgments and the
invalidation of liens we have granted.
The proceeds of the Term Loan were used to repay principal, interest and fees
outstanding under our prior financing agreement (including a prepayment penalty
of approximately
purposes. Principal payments of the Term Loan of
quarterly.
Immediately following the IPO, on
the Credit Agreement, which amended the amount of the prepayment premium
applicable to the prepayment of the Term Loan, and paid off
the principal balance of the Term Loan.
On
Credit Agreement. The Amendment provides for, among other things, additional
term loans in an aggregate principal amount of
Incremental Term Loan”), the proceeds of which were used to fund the BFT
Acquisition and the payment of fees, costs and expenses related to the
Amendment. The Amendment also (i) increased the amount of the quarterly
principal payments of the loans provided pursuant to the Credit Agreement
(including the 2021 Incremental Term Loan) commencing on
(ii) amended the amount of the prepayment premium applicable in the event the
2021 Incremental Term Loan is prepaid within two years of the effective date of
the Amendment. Outstanding borrowings on the Term Loan and the 2021 Incremental
Term Loan were
At
from known contractual and other obligations as disclosed in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” of our Annual Report on Form 10-K for the year ended
2021
Cash Flows
The following table presents summary cash flow information for the six months
ended
Six Months Ended
2022
(in thousands)
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
(5,635 ) (2,113 )
Net cash provided by (used in) financing activities (12,612 )
10,507
Net increase in cash, cash equivalents and
restricted cash
Cash Flows from Operating Activities
In the six months ended
Additionally, the following changes in operating assets and liabilities
contributed to the net increase in operating cash flows:
•
increase in accounts payable and other liabilities of
timing of payments;
•
increase in prepaid expenses and other current assets of
•
increase in deferred revenue of
due to an increase in sales of additional franchises;
43
——————————————————————————–
•
increase in cash outflows relating to (1) increase in accrued expenses of
million
in inventories of
Cash Flows from Investing Activities
In the six months ended
increase in cash used of
to an increase in cash used to purchase property and equipment and issue notes
receivables, partially offset by an increase in cash received from collection of
notes receivable, increase in cash proceeds from sales of assets and decrease in
cash used to purchase studios.
Cash Flows from Financing Activities
In the six months ended
million
million
payment of
million
issuance costs of
contingent consideration of
Off-Balance Sheet Arrangements
As of
defined in the rules and regulations of the
(the “SEC”).
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and
estimates from the information provided in Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
included in our Form 10-K for the year ended
adoption of Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic
842)” which we adopted on
adoption of this new accounting standard please see Note 2 “Summary of
Significant Accounting Policies” of Notes to Condensed Consolidated Financial
Statements in Part 1, Item 1 of this Form 10-Q.
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