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Just twelve months ago, Mark Wahlberg-backed fitness franchisor F45 Training Holdings (NYSE:FXLV) or “F45” went public on the NYSE at $16 per common share, thus raising almost $280 million in net proceeds.
The stock never gained much traction with investors and after a less-than-stellar fourth quarter conference call in March, shares have experienced persistent selling pressure.
Following the company’s first quarter results and conference call in May, analysts reduced price targets across the board after management announced a number of significant business model changes, including third-party franchise financing agreements.
On the Q1 call, founder, President, CEO, Chairman and largest shareholder Adam Gilchrist couldn’t be more enthusiastic about the company’s prospects:
I am pleased to report that our business is firing on all cylinders. Our key performance metrics are trending at or above pre-pandemic levels and we are encouraged by the unprecedented demand from our franchise partners and members around the world. Overall, our momentum remains strong across our performance metrics.
But after Tuesday’s market close, the company dropped the bomb:
Amid ongoing macroeconomic uncertainty, F45 initiated a comprehensive review of its strategic and financial priorities in order to best position the Company to succeed and grow sustainably over the long term. As a result of this review, the Company is realigning its corporate operations around an updated growth outlook that prioritizes profitability and cash flow generation. This includes reducing operational expenses and strategically streamlining corporate functions, including reducing global workforce by approximately 110 employees. Following these reductions, the Company expects SG&A expenses to be approximately $15 million to $20 million per quarter, which is approximately 40% to 50% less than SG&A expenses during the first quarter of 2022.
“We are taking the necessary steps to right-size our business in light of shifting macroeconomic and business conditions,” said Chris Payne, CFO of F45. He continued, “While we expect growth to continue, market dynamics are having a greater than expected impact on the ability of franchisees to obtain capital to develop new F45 locations. In addition, recent share price performance has made it challenging for franchisees to utilize financing facilities announced earlier this year.”
The company also announced the resignation of Adam Gilchrist:
After founding F45 in 2013 and successfully leading the Company for the last decade, President, CEO, and Chairman of the Board of Directors Adam J. Gilchrist has stepped down. This transition will allow his successor to establish and execute new opportunities amid changing macroeconomic and business conditions. Mr. Gilchrist will remain on the Board as a director and the Board of Directors will appoint a new Chairman.
Under the terms of the separation agreement, Mr. Gilchrist will be eligible to receive one-time cash payments of up to $5.8 million as well as additional benefits like the company making the annual $1.2 million lease payment for his residence in Florida.
The company has also agreed to file a registration statement to cover the resale of securities beneficially owned by Mr. Gilchrist as soon as practicable.
Lastly, F45 provided a disastrous outlook for FY2022:
- net new franchise expectations reduced from 1,500 to between 350 and 450
- net initial studio openings reduced from 1,000 to between 350 and 450
- revenue of between $120 million and $130 million, compared to prior guidance of $255 million to $275 million.
- Adjusted EBITDA of between $25 million and $30 million, down from prior guidance of $90 million to $100 million.
- prior free cash flow guidance of between $50 million and $60 million withdrawn
The company blamed the shortfall on funding issues experienced by franchisees:
The revised guidance assumes that the $250 million of growth capital provided by two previously announced franchise financing facilities, which F45 had arranged for franchisees to open additional studios, will not be available despite strong demand from franchisees.
In the 8-K filed by the company with the SEC, F45 also disclosed the requirement to negotiate a waiver with JPMorgan (JPM), the lender under its $90 million senior secured credit facility ($31.6 million drawn as of the end of Q1) due to certain defaults incurred in conjunction with the recently announced $150 million strategic financing facility provided by affiliates of Fortress Credit Corp. (“Fortress”).
In addition, the company expects one-time cash charges of between $10 and $12 million for one-time employee termination benefits.
Lastly, the 8-K discloses a $2.4 million cash retention bonus along with accelerated vesting of all outstanding and unvested equity awards for CFO Chris Payne if he remains with the company through October 15, 2022.
Suffice to say, the company appears to be a total mess at this point.
The new top-line guidance now suggests a year-over-year revenue decrease relative to expectations for almost 100% growth.
Also keep in mind that F45 burned $48.4 million of cash in Q1 alone with just $14 million in cash and cash equivalents left at the end of March.
Assuming a similar cash burn rate for Q2, the company’s available liquidity would have been down to $24 million at the end of June with the remaining funds already earmarked for honoring the separation agreement with Adam Gilchrist, the CFO retention bonus and severance costs related to the announced headcount reduction.
Particularly the large CFO retention bonus is unsettling and at least in my opinion a clear sign that bankruptcy might be in the cards.
Moreover, should founder Adam Gilchrist indeed start to sell his 23.1 million shares into the open market, the stock price might take a further, substantial hit.
With F45 already having tripped debt covenants and very tight liquidity, it is difficult to envision a happy end for the ailing company and its badly stricken equityholders at this point.
Bottom Line
What a mess. Based on Tuesday’s disclosures, I wouldn’t be surprised to see a number of shareholder lawsuits being filed in the coming weeks.
Particularly the failure to access $250 million in previously announced funding commitments warrants further investigation.
With the founder potentially looking to sell his 23.1 million shares and the CFO pocketing millions of dollars simply for staying with the company another 80 days, investors should prepare for the worst.
At this point, I would expect F45 to file for bankruptcy before the end of the year with new capital providers likely becoming the future owners of the business.
Even after the 50%+ late session sell-off, F45 is still valued at approximately $165 million so I would strongly advise against any sort of bottom-fishing attempt here.
Given the severe issues discussed above, investors should consider selling existing positions and moving on.
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