NEW YORK--(BUSINESS WIRE)--Bragar Eagel & Squire, P.C., a nationally recognized shareholder rights law firm, is investigating potential claims against F45 Training Holdings Inc. (NYSE: FXLV) on behalf of long-term stockholders following a class action complaint that was filed against F45 on December 8, 2022 pursuant to the F45's July 2021 IPO. Our investigation concerns whether the board of directors of F45 have breached their fiduciary duties to the company.
F45 is a fitness franchisor with a business model based on rapid growth through the franchising of low-overhead fitness facilities. The Company was founded in Sydney, Australia in 2013 and, by the time of the Company’s July 16, 2021 initial public offering more fully described below, maintained 2,801 franchises in 68 countries.
Plaintiff brings this class action on behalf of all persons and entities that purchased or otherwise acquired the common stock ("stock" or "shares") of F45 pursuant and/or traceable to the Company's false and/or misleading Form S-1 Registration Statement and accompanying Prospectus and Supplemental Prospectus (collectively, the "Registration Statement") issued in connection with the Company's July 16, 2021 initial public offering of 18.75 million shares of common stock, priced at $16 per share (the "July 2021 IPO" or the "Offering"), to pursue remedies under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act").
As set forth in the Prospectus issued in support of the July 2021 IPO, the Company asserted that the proceeds would be used, inter alia, to repay indebtedness, to complete the purchase of Flywheel indoor cycling studio, to pay bonuses to certain employees, to pay expenses related to the offering, and for working capital and general corporate purposes.
In support of the July 2021 IPO F45’s Registration Statement professed and represented its advantage over traditional owner-operated fitness facilities both because the franchise model “has enabled us to open new studios at an accelerated pace versus the owner-operator model” and because it generated quick revenue for the Company because “[f]or the majority of franchises that we sell, we receive an upfront payment from the franchisee.” However, due to the material misstatements and omissions contained therein, Defendants’ Registration Statement was false and misleading regarding the Company’s revenue stream and its ability to maintain its rapid expansion business model.
In its Prospectus, the Company noted that it intended to emphasize the growth of multi-unit franchisees over single-unit franchisees, stating that as of March 31, 2021, “[a]pproximately 49% of Total Franchises Sold are owned by single-unit franchisee owners, with the other 51% owned by multi-unit franchisees.” The Company stated that “[a]s we pursue opportunities to develop multi-unit franchise systems with financial partners, we expect the percentage of multi-unit franchisees to increase over time.” However, at the time, the Registration Statement did not disclose that F45 could not maintain new franchise growth because it was offering more favorable payment terms to multi-unit franchisees. The Registration Statement merely represented that “[t]he upfront establishment fee is payable by the franchisee upon signing a new franchise agreement….”
In truth, as of the July 2021 IPO and as the Company would later acknowledge, F45 provided for “modified” payment terms for “large multiunit deals.” This would and did ultimately result in material increases to accounts receivable and lower cash flow for the Company. F45’s approach to starting new franchises was not sustainable over the long term as the Company was not being, and would not be, repaid by multi-unit franchise owners quickly enough to maintain significant franchise growth. Indeed, in the first and second quarters of 2022, F45 reported just 117 and 92 new franchise openings, respectively, compared to 96 studio openings in the first quarter of 2020, when the COVID-19 pandemic began. This lackluster pace of growth was accompanied by a massive and unsustainable increase in F45’s accounts receivable and a similar, and equally unsustainable, decrease in its cash and cash equivalents. These practices were not sustainable at the time of the IPO. When the Company could no longer sustain this defective business model, its growth rate and revenue plummeted.
Then, on July 26, 2022, just a year after the IPO, and just a little more than two months after reiterating its growth targets, F45 issued a press release titled “F45 Training Announces Strategic Update.” The press release described “strategic updates to align the Company more closely with macroeconomic conditions and current business trends and prepare for the next phase of studio and membership growth.” According to the press release, the Company’s “strategic updates” informed the market: (1) of a significant reduction in its financial guidance, from a range of $255 to $275 million to a new range of $120 to $130 million; (2) of a dramatic cut in the number of new exercise studios that it would open in 2022- down approximately 60% (or 350 to 450 new studios, versus 1,000); (3) that a $250 million credit line “will not be available”; (4) that it was letting go of about 110 employees, equaling approximately 45% of its workforce; and (5) that CEO, Adam Gilchrist, had resigned his position as CEO, effective July 24, 2022.
Importantly, more adverse news was disclosed in the July 26, 2022, “Strategic Updates.” The Company disclosed that for the full-year net franchises sold would be between 350 and 450, a fraction of the prior guidance of 1,500, and that full-year net initial studio openings would be between 350 and 450, compared to the prior guidance of 1,000.
As a consequence of its infirm business model and condition, existing at the time of the July 2021 IPO, F45 was also forced to substantially slash guidance for the full-year 2022 revenue to just between $120 million and $130 million, compared to the prior guidance of $255 million to $275 million, and full-year Adjusted EBITDA between $25 million and $30 million, compared to the prior guidance of $90 million to $100 million, signaling a dramatic decrease in its business and momentum.
The July 26, 2022 adverse disclosures caused the trading price of F45 to plunge over 60%, from a close at $3.51 on July 26 to close at $1.35 on July 27, 2022 and representing more than a 78% decline from its offering price of $16 per share on July 16, 2021 – just slightly more than a year earlier.
If you are a long-term stockholder of F45, have information, would like to learn more about these claims, or have any questions concerning this announcement or your rights or interests with respect to these matters, please contact Brandon Walker or Marion Passmore by email at investigations@bespc.com, by telephone at (212) 355-4648, or by filling out this contact form. There is no cost or obligation to you.
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