Australian fitness franchise F45 has had to overcome some major obstacles in its rise to prominence and, more recently, in its struggle for survival. And that includes multimillion-dollar payouts to celebrities who were brought in to push their now-abandoned global expansion plans.
F45’s US-listed shares fell after a July 26 market update that said it had lost the funding underpinning its franchise sales. The update also revealed the company’s plans to cut staff and earnings and revenue forecasts for this year.
Just 12 days earlier, on July 14, F45 celebrated the first anniversary of its New York Stock Exchange debut. That meant a cash payment of $US5 million ($7.2 million) for soccer star David Beckham, who had signed up as one of the company’s celebrity endorsers.
This would have been Beckham’s second $5m payment since Christmas as part of his promotion deal which runs until 2025 and includes two free F45 studios.
The Beckham deal was not the only lucrative contract that drained the cash that F45 now desperately needs.
Mark Wahlberg, who recruited Beckham to the F45 cause, received an even more lucrative deal, along with other celebrities such as basketball player Magic Johnson, golfer Greg Norman and supermodel Cindy Crawford, who were considered crucial to the group’s fitness become familiar with his name among the gym enthusiasts of the United States. .
“Influencer marketing is a key method by which we integrate F45 Training into popular culture,” F45 said of these offerings in its prospectus ahead of the company’s $1.6 billion IPO in July last year.
“Our partnership with actor and entrepreneur Mark Wahlberg has accelerated our path to becoming a household name in the US market. In addition, we have benefited from the organic and paid social media promotion of brand F45 Training by celebrities and professional athletes who visit our studios,” he added.
As their subsequent accounts have shown, cash was a better deal for those celebs who took the money rather than waiting for stock deals tied to F45’s market valuation which began to dwindle- shortly after its initial public offering.
Johnson opted for a $4 million cash payment instead of F45 stock, following the successful IPO. But he fares less well with the deal to receive $5 million in shares — based on future vesting events — that were linked to increases in the company’s market capitalization.
Former supermodel Crawford had a similar deal that offered $5 million in stock, tied to a growing market capitalization. Greg Norman was to receive “annual compensation” that was not specified.
In connection with the IPO, F45 recognized $4.5 million in stock-based expense related to its agreements with Norman, Beckham, Johnson and Crawford. And recognized future liabilities of $4.5 million in share-based expenses, as of December 31.
In its most recent accounts, these future liabilities had fallen in value to just $1.7 million.
This week, F45 revealed that 300 franchise sales have been canceled due to lack of funding and another 300 are in serious doubt.
In a conference call with analysts and investors on Tuesday, F45 interim chief executive Ben Coates made it clear that the company’s big growth plans will not return, with the company’s focus on preserving cash and the benefits.
“Our immediate focus on liquidity and cash flow generation is a focus on cost reduction and our core business. As we announced three weeks ago, we have made significant reductions in our global workforce to align our cost structure with a more conservative growth outlook,” he said.
Celebrity deals, staff cuts and funding needed to buy gym equipment for which F45 no longer has buyers left the group with just $8.5 million in cash and $60.6 million in debt at the end of June.
The most lucrative celebrity endorsement deal went to Wahlberg, a fitness fanatic who owns several F45 studios and sits on the fitness group’s board and owns stock in the business.
He received 2.74 million stock rights that were attributed to the IPO at a valuation of just under $44 million. The downside for Wahlberg was that he didn’t receive the stock until March of this year, when the stock had already begun its decline.
Wahlberg sold more than $10 million worth of stock in a series of trades, but stopped in April with 1.66 million shares remaining in his account.
Wahlberg was part of a group that invested $100 million in F45 in 2019. Wahlberg and his business partners sold $25 million worth of stock at $16 each before F45’s public debut, but they also unload 3.2 million shares in Australian fund manager L1 Capital in 2020.
“We are comfortable with our liquidity position.”
Chris Payne, CFO of F45
Last month’s disastrous downgrade, which sent the stock down to a low of $1.35, has piqued the interest of US law firms who have begun to apply for the investor interest in potential claims against F45.
“We are focused on investor losses and whether F45 misled investors about the scalability of its model and whether there was an actual $250 million in committed financing available to franchisees,” said Reed Kathrein, a partner at the law firm Hagens Berman. .
Others include LA-based Faruqi & Faruqi, LLP and The Schall Law Firm, which also announced it is “investigating claims on behalf of investors in F45 Training Holdings.”
F45 would not comment on what impact a lawsuit might have on its financial viability, but it could be significant.
Legal costs were already high in the June quarter, up more than 700 percent to $6.5 million due to “unspecified one-time legal costs, primarily related to litigation activity and legal settlements.”
Plans to generate $10 million in free cash flow for the December quarter will be even more critical if class-action lawsuits are added to those costs.
“We are comfortable with our liquidity position,” F45 chief financial officer Chris Payne said this week.
Payne is due to receive a $2.4 million retainer payment from F45 on October 15 of this year.
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