Beachbody Company, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) as well as our financial statements and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2023 (our "Form 10-K"). Unless otherwise indicated, the terms “BODi,” “we,” “us,” or “our” refer to The Beachbody Company, Inc., a Delaware corporation, together with its consolidated subsidiaries.

Forward-Looking Statements

This Report 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”), including statements about the financial condition, results of operations, earnings outlook and prospects of the Company. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements are based on our current expectations as applicable and are inherently subject to uncertainties and changes in circumstances and their potential effects and speak only as of the date of such statement. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to the following:

• our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, operating expenses including changes in selling and marketing, general and administrative, and enterprise technology and development expenses (including any components of the foregoing), Adjusted EBITDA (as defined below) and our ability to achieve and maintain future profitability;
• disruptions related to the Pivot (as defined below) and our ability to implement the proposed restructuring of our core business model;
• our anticipated growth rate and market opportunity;
• our liquidity and ability to raise financing;
• our success in retaining or recruiting, or changes required in, officers, key employees or directors;
• other than the pre-funded warrants, our warrants are accounted for as liabilities and changes in the value of such warrants could have a material effect on our financial results;
• our ability to effectively compete in the fitness and nutrition industries;
• our ability to successfully acquire and integrate new operations;
• our reliance on a few key products;
• market conditions and global and economic factors beyond our control;
• intense competition and competitive pressures from other companies worldwide in the industries in which we will operate;
• litigation and the ability to adequately protect our intellectual property rights; and
• other risk and uncertainties under the heading “Risk Factors” set forth in this Report as well as our most recent Form 10-K.

Should one or more of these risks or uncertainties materialize or should any of the assumptions made by management prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

You should not place undue reliance upon our forward-looking statements.

Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

Overview

BODi is a leading fitness and nutrition company. We focus primarily on digital content, supplements, connected fitness, and consumer health and fitness. Our goal is to continue to provide holistic health and fitness content, subscription-based solutions and digital program sales. We are the creator of some of the world’s most popular fitness programs, including P90X, Insanity, and 21 Day Fix, which transformed the at-home fitness market and disrupted the global fitness industry by making it accessible for people to get results—anytime, anywhere. Our comprehensive nutrition-first programs, Portion Fix and 2B Mindset, teach healthy eating habits and promote healthy, sustainable weight loss. These fitness and nutrition programs are available through our BODi streaming service.

We offer nutritional products such as Shakeology nutrition shakes, Beachbody Performance supplements and BEACHBAR snack bars, as well as a commercial-grade stationary cycle with or without a 360-degree touch screen tablet and connected fitness software. Leveraging our history of fitness content creation, nutrition innovation, and our network of micro-influencers, whom we call “Partners”, we plan to continue market penetration into connected fitness to reach a wider health, wellness and fitness audience.

Our revenue is generated primarily through our network of Partners, social media marketing channels, and direct response advertising. Components of revenue include recurring digital subscription revenue, digital program sales, revenue from the sale of nutritional and other products, and connected fitness revenue. In addition to selling individual products on a one-time basis, we bundle digital and nutritional products together at discounted prices.

On September 30, 2024, the Company announced a restructuring of its network business (the “Pivot”) which will convert the Company’s multi-level marketing model (“MLM”) to a single level affiliate model and will reduce the Company's headcount by approximately 170 employees (33% of the Company’s workforce on that date) in the fourth quarter of 2024.

For the three months ended September 30, 2024, as compared to the three months ended September 30, 2023:

• Total revenue was $102.2 million, a 20% decrease;
• Digital revenue was $53.7 million, a 17% decrease;
• Nutrition and other revenue was $47.4 million, a 20% decrease;
• Connected fitness revenue was $1.1 million, a 78% decrease;
• Operating expenses was $81.8 million, compared to $104.0 million;
• Net loss was $12.0 million, compared to a net loss of $32.7 million; and
• Adjusted EBITDA was $10.1 million, compared to a loss of $5.8 million.

For the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023:

• Total revenue was $332.4 million, an 19% decrease;
• Digital revenue was $174.0 million, a 10% decrease;
• Nutrition and other revenue was $153.0 million, a 23% decrease;
• Connected fitness revenue was $5.4 million, a 66% decrease;
• Operating expenses was $259.8 million, compared to $329.7 million;
• Net loss was $37.1 million, compared to a net loss of $87.6 million; and
• Adjusted EBITDA was $19.6 million, compared to a loss of $11.5 million.

See “Non-GAAP Information” below for information regarding our use of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.

Recent Developments

Pivot Restructuring

On September 30, 2024, the Company announced the Pivot which will convert the Company’s MLM model to a single level affiliate model and will reduce the Company's headcount by approximately 170 employees (33% of the Company’s workforce on that date) in the fourth quarter of 2024. The actions associated with the Pivot are expected to result in approximately $18.4 million in costs, with approximately $9.2 million recorded in the Company's unaudited condensed consolidated statement of operations in the three and nine months ending September 30, 2024 with approximately $9.2 million expected to be recorded in the three months ended December 31, 2024.

The following table details the costs incurred and benefits realized associated with the Pivot in the three and nine months ended September 30, 2024:

(in thousands)

(1) Termination and retention benefits which are included in restructuring expense in the Company's unaudited condensed consolidated statement of operations of approximately $5.1 million were recorded in the three and nine months ended September 30, 2024. The Company expects to record an additional $1.1 million in restructuring expense in the three months ended December 31, 2024.

(2) Due to the Pivot, certain long-lived assets with a net book value of approximately $12.7 million will not be used by the Company after December 31, 2024. The Company performed an impairment review for its long-lived assets, including the long-lived assets that will not be used after December 31, 2024. The Company performed a test of recoverability and concluded that the carrying value of its long-lived assets, which are all in one asset group, were recoverable. The Company decreased the average remaining useful lives for the long-lived assets that were impacted by the Pivot from 25 months prior to the Pivot to 3 months after the Pivot. This resulted in accelerated depreciation expense of $2.9 million that was recorded in the Company's unaudited condensed consolidated statement of operations in the three and nine months ended September 30, 2024 and $8.1 million which is expected to be recorded in the three months ended December 31, 2024. See Note 6, Property and Equipment, Net, for additional information on the accelerated depreciation.

(3) Consists of (a) inventory adjustments recorded associated with the decision by management to no longer sell connected fitness inventory after December 31, 2024, which was recorded in cost of revenue-connected fitness ($1.2 million) and (b) inventory adjustments for nutrition and other inventory impacted by the Pivot which was recorded in cost of revenue-nutrition and other ($0.2 million) in the unaudited condensed consolidated statement of operations in the three and nine months ended September 30, 2024. See Note 4, Inventory, for additional information on the incremental inventory adjustments.

(4) Modification of stock awards for employees who were impacted by the Pivot which includes accelerating the vesting of any options or restricted stock units ("RSU's") that would have vested within six months of the employees termination date, and all vested options will be available for exercise for a total of six months after the employees termination date (that is, three month in addition to the standard three months per original agreement), which resulted in a decrease to equity based compensation expense of $0.3 million in the Company's unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2024. See Note 11, Equity Based Compensation, for more information on the modification of stock awards.

Term Loan Amendment

On October 18, 2024, (the “Sixth Amendment Effective Date”), the Company and Blue Torch entered into Amendment No. 6 to the Financing Agreement (the “Sixth Amendment”), which amended the Company’s existing Financing Agreement. The Sixth Amendment amends, among other things, certain terms of the Financing Agreement including without limitation, to (1) remove the minimum revenue financial covenant, (2) amend the minimum liquidity financial covenants, (3) include a minimum consolidated EBITDA (as defined in the Financing Agreement) financial covenant, (4) increase the quarterly principal payments on the Term Loan over the remaining quarterly periods, payable in monthly installments, until the maturity of the Term Loan, and (5) amend certain financial definitions, reporting covenants and other covenants thereunder.

In connection with the Sixth Amendment, on the Sixth Amendment Effective Date, the Company made partial prepayments on the Term Loan of $3.2 million (which amount was classified as a current obligation at September 30, 2024) along with the related prepayment premium of 2% on $2.0 million of the partial prepayments and accrued interest. The Company also incurred a 1% fee as paid in kind on the outstanding Term Loan balance prior to the prepayment (fee of $0.3 million).

In connection with the Sixth Amendment, the Company also amended and restated the Term Loan Warrants for the purchase of 97,482 shares of the Company’s Class A common stock. The amendment of the Term Loan Warrants amends the exercise price from $9.16 per share to $6.26 per share.

See Note 15, Subsequent Events, for additional information on the Sixth Amendment and amendments to the Term Loan Warrants.

Key Operational and Business Metrics

We use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

(1) Please see “Non-GAAP Information” below for a reconciliation of net loss to Adjusted EBITDA and an explanation for why we consider Adjusted EBITDA to be a helpful metric for investors.

Digital Subscriptions

Our ability to expand the number of digital subscriptions is an indicator of our market penetration and growth. Digital subscriptions include BOD (through March 2023) and BODi. Digital subscriptions include paid and free-to-pay subscriptions, with free-to-pay subscriptions representing less than 1% of total digital subscriptions on average. Digital subscriptions are inclusive of all billing plans, currently for annual, semi-annual, quarterly and monthly billing intervals.

Nutritional Subscriptions

Nutritional subscriptions include monthly subscriptions for nutritional products such as Shakeology, Beachbody Performance and BEACHBAR. We also package and bundle the content experience of digital subscriptions with nutritional subscriptions to optimize customer results.

Average Digital Retention

We use month-over-month digital subscription retention, which is defined as the average rate at which the total subscriber file is retained for the next period, to measure customer retention. For instance, a 95% average digital retention rate would correspond with retaining each month an average of 95% of digital subscribers existing at the beginning of that month. A 95% average digital retention rate would translate into a loss at the end of the quarter of approximately 15% of the subscribers existing at the beginning of the quarter. This calculation excludes new customer acquisitions or subscribers added in a specific month, so this calculation can never exceed 100%.

Total Streams

We use total streams to quantify the number of fitness, nutrition and mindset programs viewed, which is an indicator of customer engagement and retention. While the measure of a digital stream may vary across companies, to qualify as a stream on any of our digital platforms, a program must be viewed for a minimum of 25% of the total running time.

Daily Active Users to Monthly Active Users (DAU/MAU)

We use the ratio of daily active users to monthly active users to measure how frequently digital subscribers are utilizing our service in a given month. We define a daily active user as a unique user streaming content on our platform in a given day. We define a monthly active user as a unique user streaming content on our platform in that same month.

Non-GAAP Information

We use Adjusted EBITDA, which is a non-GAAP performance measure, to supplement our results presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We believe Adjusted EBITDA is useful in evaluating our operating performance, as it is similar to measures reported by our public competitors and is regularly used by security analysts, institutional investors, and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA is not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.

We define and calculate Adjusted EBITDA as net income (loss) adjusted for depreciation and amortization, amortization of capitalized cloud computing implementation costs, amortization of content assets, interest expense, income tax provision, equity-based compensation, restructuring costs, and other items that are not normal, recurring, operating expenses necessary to operate the Company’s business as described in the reconciliation below.

We include this non-GAAP financial measure because it is used by management to evaluate BODi’s core operating performance and trends and to make strategic decisions regarding the allocation of capital and new investments. Adjusted EBITDA excludes certain expenses that are required in accordance with GAAP because they are non-cash (for example, in the case of depreciation and amortization and equity-based compensation) or are not related to our underlying business performance (for example, in the case of restructuring costs, interest income and expense).

The table below presents our Adjusted EBITDA reconciled to our net loss, the closest GAAP measure, for the periods indicated:

(in thousands)

33

(1) Represents the loss related to the $1.0 million, $5.5 million and $4.0 million partial debt prepayments that the Company made on January 9, 2024, February 29, 2024 and April 5, 2024, respectively, and the $15.0 million partial debt prepayment that the Company made on July 24, 2023.

(2) Includes accelerated depreciation expense of $2.9 million for the three and nine months ended September 30, 2024 related to certain long-lived assets that due to the Pivot will not be used by the Company after December 31, 2024.

(3) Includes benefits due to the modification of stock awards of $0.3 million and $0.8 million for the three and nine months ended September 30, 2024, respectively, and approximately zero and $1.0 million for the three and nine months ended September 30, 2023, respectively.

(4) The non-cash charge for employee incentives which were expected to be settled in equity was recorded and included in the Adjusted EBITDA calculation during the year ended December 31, 2022. During the three months ended March 31, 2023, we reclassified the non-cash charge from employee incentives expected to be settled in equity to equity-based compensation because we settled certain employee incentives with RSU awards during the period.

(5) Includes (a) restructuring expense and personnel costs associated with the Pivot of $5.1 million during the three and nine months ended September 30, 2024 and (b) adjustments recorded to nutrition and other inventory of $0.2 million due to the Pivot and adjustments recorded to connected fitness inventory of $1.2 million due to the decision to cease the sale of connected fitness inventory after December 31, 2024, in the three and nine months ended September 30, 2024.

(6) Includes restructuring expense and personnel costs associated with key initiatives of zero and $1.6 million during the three and nine months ended September 30, 2024, respectively, and restructuring expense and personnel costs of $1.3 million and $7.2 million associated with executing our key growth priorities during the three and nine months ended September 30, 2023, respectively

(7) Primarily includes interest income.

Results of Operations

The Company has one operating segment. The following discussion of our results and operations is on a consolidated basis.

(in thousands)

35

Revenue

Revenue includes digital subscriptions, digital program sales, nutritional supplement subscriptions, one-time nutritional sales, connected fitness products, access to our online Partner business management platform, preferred customer program memberships, and other fitness-related products. We often sell bundled products that combine digital subscriptions, nutritional products, and/or other fitness products. We consider these sales to be revenue arrangements with multiple performance obligations and allocate the transaction price to each performance obligation based on its relative stand-alone selling price. We defer revenue when we receive payments in advance of delivery of products or the performance of services. Digital subscription revenue is recognized ratably over the subscription period of up to 38 months.

(dollars in thousands)

The decrease in digital revenue for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily attributable to a $9.6 million decrease in revenue from our digital streaming services due to 20% fewer subscriptions on lower demand partially offset by the transition of all digital subscriptions to the higher priced BODi subscription over the past year, a decrease of $0.8 million in fees from Partners as there was a 27% decrease in the number of Partners and a decrease in digital program sales of $0.4 million. With the Pivot and the transition from an MLM model to an affiliate model, the Company will no longer receive fees from Partners beginning as of November 1, 2024. The Company recorded $2.7 million and $8.6 million of fees from Partners for the three and nine months ended September 30, 2024, respectively.

The decrease in nutrition and other revenue for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily attributable to a $9.4 million decrease in revenue from nutritional products due to 27% fewer nutritional subscriptions on lower demand and a $1.6 million decrease in revenue generated from our preferred customer fees as there was a 28% decrease in preferred customers. With the Pivot and the transition from an MLM model to an affiliate model, the Company will no longer receive preferred customer fees beginning as of November 1, 2024. The Company recorded $3.9 million and $12.4 million of preferred customer fees for the three and nine months ended September 30, 2024, respectively. With the Pivot, the Company will also significantly reduce the number and length of events, which will significantly reduce event ticket sales in 2025. The Company recorded zero and $2.6 million of ticket sales for the three and nine months ended September 30, 2024, respectively.

The decrease in connected fitness revenue for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to an approximate 80% decrease in number of bikes delivered from approximately 6,500 for the three months ended September 30, 2023 to approximately 1,300 for the three months ended September 30, 2024 which was partially offset by an approximate 14% increase in the average sales price for a bike. In the three months ended September 30, 2024, management of the Company determined that it would no longer sell connected fitness inventory after December 31, 2024.

(dollars in thousands)

The decrease in digital revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily attributable to a $19.9 million decrease in revenue from our digital streaming services due to 20% fewer subscriptions on lower demand partially offset by the transition of all digital subscriptions to the higher priced BODi subscription over the past year and a decrease of $1.9 million in fees from Partners due to a 27% decrease in the number of Partners.

The decrease in nutrition and other revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily attributable to a $34.2 million decrease in revenue from nutritional products due to 27% fewer nutritional subscriptions on lower demand, a $6.3 million decrease in revenue generated from our preferred customer fees as there was a 28% decrease in preferred customers, a $2.2 million decrease in event ticket sales due primarily to the decrease in the number of, length of and attendance at events and a $2.0 million decrease in fitness accessories revenue.

The decrease in connected fitness revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to an approximate 62% decrease in the number of bikes delivered from approximately 16,700 for the nine months ended September 30, 2023 to approximately 6,300 for the nine months ended September 30, 2024 and an approximate 11% decrease in the average sales price for a bike.

Cost of Revenue

Digital Cost of Revenue

Digital cost of revenue includes costs associated with digital content creation including amortization and revision of content assets, depreciation of streaming platforms and digital streaming costs. It also includes customer service costs, payment processing fees, depreciation of production equipment, live trainer costs, facilities, and related personnel expenses.

Nutrition and Other Cost of Revenue

Nutrition and other cost of revenue includes product costs, shipping and handling, fulfillment and warehousing, customer service, and payment processing fees. It also includes depreciation of nutrition-related e-commerce websites and social commerce platforms, amortization of acquired formulae intangible assets (in the 2023 period), facilities, and related personnel expenses.

Connected Fitness Cost of Revenue

Connected fitness cost of revenue consists of product costs, including bike and tablet hardware costs, duties and other applicable importing costs, shipping, fulfillment, warehousing and logistics costs, costs associated with service calls and repairs of products under warranty, payment processing and financing fees, customer service expenses, and personnel-related expenses associated with supply chain and logistics.

(dollars in thousands)

The decrease in digital cost of revenue for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to a $1.7 million decrease in depreciation expense as a result of the end of the useful life of certain fixed assets, a $1.6 million decrease in the amortization of content assets as the result of lower production spend and a $1.4 million decrease in digital content revisions. The increase in digital gross margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily as a result of the decrease in expenses as noted above.

The decrease in nutrition and other cost of revenue for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to a $3.0 million decrease in product costs and a $1.8 million decrease in fulfillment, freight and shipping expenses related to the decrease in nutrition and other revenue, a $0.8 million decrease in depreciation expense as a result of the end of the useful life of certain fixed assets and a $0.4 million decrease in customer service expense due to a decrease in the volume of contacts related to nutrition and other revenue. The increase in nutrition and other gross margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily as a result of a decrease in inventory adjustments and a decrease in depreciation expense.

The decrease in connected fitness cost of revenue for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was driven by a $2.7 million decrease in freight, fulfillment and shipping expenses and a $1.4 million decrease in product costs, as the result of an approximate 80% decrease in the number of bikes delivered, and lower inventory adjustments of $2.2 million. The decrease in connected fitness gross margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily as a result of fixed expenses on lower connected fitness revenue.

(dollars in thousands)

The decrease in digital cost of revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was due to a $4.7 million decrease in depreciation expense as a result of the end of the useful life of certain fixed assets, a $4.0 million decrease in digital content amortization as a result of lower production spend and a $2.8 million decrease in digital content revisions. The increase in digital gross margin for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily as a result of the decrease in expenses as noted above.

The decrease in nutrition and other cost of revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to a $7.9 million decrease in product costs and a $5.8 million decrease in fulfillment, freight and shipping expenses related to the decrease in nutrition and other revenue, a $3.7 million decrease in depreciation expense as a result of the end of the useful life of certain fixed assets, a $2.1 million decrease in customer service expense due to a decrease in the volume of contacts related to nutrition and other revenue and lower inventory adjustments of $2.0 million. Nutrition and other gross margin increased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily as a result of the decrease in depreciation expense and a decrease in inventory adjustments.

The decrease in connected fitness cost of revenue for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was driven by a $5.6 million decrease in product costs and a $5.1 million decrease in freight, fulfillment, and shipping expenses, as the result of an approximate 62% decrease in the number of bikes delivered and lower inventory adjustments of $4.6 million. The decrease in connected fitness gross margin for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was due primarily to fixed expenses on lower connected fitness revenue.

Operating Expenses

Selling and Marketing

Selling and marketing expenses primarily include the cost of Partner compensation, advertising, royalties, promotions and events, and third-party sales commissions as well as the personnel expenses for employees and consultants who support these areas. Selling and marketing expense as a percentage of total revenue may fluctuate from period to period based on total revenue, timing of new content and nutritional product launches, and the timing of our media investments to build awareness around launch activity.

(dollars in thousands)

The decrease in selling and marketing expense for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to a $12.2 million decrease in Partner compensation as a result of the decrease in the number of Partners, lower commissionable revenue and a decrease in the commission rate paid to Partners that started at the beginning of January 2024, a $3.2 million decrease in media expenses due to management's focus on reducing expense, a $3.1 million decrease in personnel-related expenses due to lower headcount primarily related to the non-Pivot related restructuring activities that occurred in the past year and the modification of certain stock awards for employees who were impacted by the Pivot, a $2.1 million decrease in event expenses due primarily to no events in the three months ended September 30, 2024, and a $1.1 million decrease in the amortization of intangible assets due to the impairment of the remaining intangible asset balance in the fourth quarter of 2023. With the Pivot and the transition from the MLM model to an affiliate model, the Company will significantly reduce the number and length of events for Partners and these event expenses are expected to be reduced significantly in 2025. The Company recorded approximately zero and $5.5 million of event expenses for the three and nine months ended September 30, 2024, respectively. The Company also expects a decrease in personnel-related expenses due to the headcount reductions associated with the Pivot.

Selling and marketing expense as a percentage of total revenue decreased by 930 basis points ("bps") primarily due to the decrease in Partner compensation, media expenses and event expenses.

(dollars in thousands)

The decrease in selling and marketing expense for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to a $35.1 million decrease in Partner compensation as a result of the decrease in the number of Partners, lower commissionable revenue and a decrease in the commission rate paid to Partners that started at the beginning of January 2024, a $10.4 million decrease in event expenses due primarily to a decrease in the number of, length of and attendance at events, a $5.8 million decrease in personnel-related expenses due to lower headcount primarily related to the non-Pivot related restructuring activities that occurred in the past year and due to the modification of certain stock awards for employees who were impacted by the Pivot, a $3.4 million decrease in the amortization of intangible assets due to the impairment of the remaining intangible asset balance in the fourth quarter of 2023 and a $2.4 million decrease in media expenses due to management's focus on reducing expense.

Selling and marketing expense as a percentage of total revenue decreased by 590 bps primarily due to the decrease in Partner compensation and event expenses.

Enterprise Technology and Development

Enterprise technology and development expenses includes maintenance and enhancements of the Company’s enterprise resource planning system, which is the core of our accounting, procurement, supply chain and other business support systems and primarily relate to enterprise systems applications, hardware, and software that serve as the technology infrastructure for the Company and are not directly related to services provided or tangible goods sold. Enterprise technology and development expenses also includes reporting and business analytics tools, security systems such as identity management and payment card industry compliance, office productivity software, research and development tracking tools, and other non-customer facing applications. Enterprise technology and development expenses include personnel-related expenses for employees and consultants to maintain technology systems and are involved in the research and development of new and existing nutritional products, depreciation of enterprise technology-related assets, software licenses, hosting expenses, and technology equipment leases.

(dollars in thousands)

The increase in enterprise technology and development expenses for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to a $2.0 million increase in depreciation expense as a result of accelerated depreciation of $2.9 million recorded related to certain long-lived assets that due to the Pivot will no longer be used by the Company after December 31, 2024 partially offset by a $1.3 million decrease in personnel-related expenses due to lower headcount primarily related to the non-Pivot related restructuring activities that occurred in the past year. With the Pivot and the transition from the MLM model to an affiliate model, the Company expects a decrease in personnel-related expenses in 2025, due to the headcount reductions associated with the Pivot, and a significant decrease in depreciation expense in 2025 due to the long-lived assets impacted by Pivot which will be fully depreciated by December 31, 2024.

Enterprise technology and development expense as a percentage of total revenue increased by 430 bps due to the accelerated depreciation on the long-lived assets impacted by the Pivot, as well as a decrease in revenue at a faster pace than the reduction in enterprise technology and development expenses.

(dollars in thousands)

The decrease in enterprise technology and development expenses for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to a $1.6 million decrease in personnel-related expenses due to lower headcount primarily related to the non-Pivot related restructuring activities that occurred in the past year and a $0.4 million decrease in depreciation expense as a result of the end of the useful life of certain fixed assets, which was partially offset by accelerated depreciation of $2.9 million recorded related to certain long-lived assets that due to the Pivot will no longer be used by the Company after December 31, 2024.

Enterprise technology and development expense as a percentage of total revenue increased by 240 bps due to the accelerated depreciation on the long-lived assets impacted by the Pivot, as well as a decrease in revenue at a faster pace than the reduction in enterprise technology and development expenses.

General and Administrative

General and administrative expenses includes personnel-related expenses and facilities-related costs primarily for our executive, finance, accounting, legal and human resources functions. General and administrative expenses also includes fees for professional services principally comprised of legal, audit, tax, and insurance.

(dollars in thousands)

The decrease in general and administrative expenses for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to a $1.5 million decrease in professional and accounting fees due to a management focus on decreasing spending and a decrease in equity based compensation of $1.0 million due primarily to the decrease in headcount and the modification of certain stock awards for employees who were impacted by the Pivot.

General and administrative expenses as a percentage of total revenue was unchanged from the prior year.

(dollars in thousands)

The decrease in general and administrative expenses for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to a $3.8 million decrease in professional and accounting fees due to a management focus on decreasing spending, a $1.7 million decrease in insurance expense as some of our insurance is based on the level of the Company's revenues or the number of employees, which both have declined in the current period compared to the prior period, a decrease in equity based compensation of $1.6 million due primarily to the decrease in headcount and the modification of certain stock awards for employees who were impacted by the Pivot, and a $0.8 million gain on the sale of the Van Nuys facility which was recorded as a reduction of general and administrative expenses in the three months ended March 31, 2024.

General and administrative expense as a percentage of total revenue increased by 40 bps due to the decrease in revenue at a faster pace than the reduction in general and administrative expenses.

Restructuring

In 2024, restructuring charges primarily relate to the Pivot which was announced by the Company on September 30, 2024 (see Note 12, Restructuring, for more information on the Pivot) and key initiatives. Restructuring charges in 2023 relate to activities focused on aligning our operations with our key growth priorities, including a reduction in headcount. The charges incurred primarily consist of employee termination costs.

(dollars in thousands)

(dollars in thousands)

Other Income (Expense)

The change in fair value of warrant liabilities consists of the fair value changes of the public, private placement, Term Loan And Common Stock warrants. Interest expense primarily consists of interest expense associated with our borrowings and amortization of debt discount and issuance costs for our Term Loan (as defined below). Other income, net, consists of interest income earned on investments and gains (losses) on foreign currency.

(dollars in thousands)

The loss on partial debt extinguishment for the three months ended September 30, 2023 was due to the partial prepayment of $15.0 million on the Term Loan as of July 24, 2023. The change in fair value of warrant liabilities during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, primarily resulted from the decline in our stock price during the current quarter and an increase in the number of outstanding warrants due to the Common Stock Warrants that were issued in December 2023. The decrease in interest expense was primarily due to principal prepayments of $25.5 million on the outstanding Term Loan balance from July 1, 2023 to September 30, 2024. The increase in other income was primarily due to a $1.2 million gain on the sale of a legal claim for a litigation settlement in the current quarter.

(dollars in thousands)

The change in the loss on partial debt extinguishment for the nine months ended September 30, 2024 was due to partial prepayments of $10.5 million on the Term Loan that occurred in the nine months ended September 30, 2024 as compared to partial prepayments of $15.0 million in the nine months ended September 30, 2023. The change in fair value of warrant liabilities during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily resulted from a lower decrease in our stock price during the current period as compared to the decrease in our stock price in the prior year period. The decrease in interest expense was primarily due to principal prepayments of $25.5 million on the outstanding Term Loan balance from July 1, 2023 to September 30, 2024. The increase in other income was primarily due to a $1.2 million gain on the sale of a legal claim for a litigation settlement in the quarter ended September 30, 2024.

Income Tax Provision

Income tax provision consists of income taxes related to U.S. federal and state jurisdictions as well as those foreign jurisdictions where we have business operations.

(dollars in thousands)

The income tax provision increase for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily driven by changes in our valuation allowance and an increase in the net expense from discrete events.

(dollars in thousands)

The income tax provision increase for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily driven by changes in our valuation allowance and an increase in the net expense from discrete events.

Liquidity and Capital Resources

(in thousands)

As of September 30, 2024, we had cash and cash equivalents totaling $32.3 million.

Net cash provided by (used in) operating activities was $9.3 million and $(14.6) million for the nine months ended September 30, 2024 and 2023, respectively. The increase in net cash provided by operating activities during the nine months ended September 30, 2024, compared to the prior year period, was primarily due to a decrease in net loss of $50.5 million, an increase in cash provided by other assets of $15.7 million and a decrease in cash used for accrued expenses of $12.0 million partially offset by a decrease in cash provided by deferred revenue of $13.3 million, a decrease in depreciation and amortization expense of $12.6 million, a decrease in cash provided by inventory of $7.7 million, a decrease in provision for inventory and inventory purchase commitments of $6.6 million, a decrease in cash provided by equity based compensation of $6.5 million and in increase in cash used in other liabilities of $4.2 million.

Net cash provided by (used in) investing activities was $1.6 million and $(9.7) million for the nine months ended September 30, 2024 and 2023, respectively. The increase in net cash provided by investing activities was due to proceeds received from the sale of the Van Nuys facility of $5.6 million and a decrease in capital expenditures of $1.5 million due to increased focus by management on capital expenditures, in particular related to technology.

Net cash used in financing activities was $11.8 million and $17.7 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in net cash used in financing activities was primarily due to a decrease in debt repayments on our Term Loan in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

On August 8, 2022, the Company, Beachbody, LLC, a Delaware limited liability company and wholly-owned direct subsidiary of the Company (the “Borrower”), and certain subsidiaries of the Company (together with the Company, the “Guarantors”), entered into a financing agreement (as amended, the “Financing Agreement”) with the lenders party thereto and Blue Torch Finance, LLC, ("Blue Torch") as administrative agent and collateral agent for such lenders, providing for a senior secured term loan facility in an initial aggregate principal amount of $50.0 million (the “Term Loan”). Obligations under the Financing Agreement are guaranteed by the Guarantors, and secured by a lien on and security interest in substantially all of the assets of the Borrower and the Guarantors (together with the Borrower, the “Loan Parties”), subject to customary exceptions. On July 24, 2023, the Company and Blue Torch entered into the Second Amendment. In connection with the Second Amendment, on the Second Amendment Effective Date, the Company made a partial prepayment on the Term Loan of $15.0 million. On January 9, 2024, February 29, 2024 and April 5, 2024, the Company made partial prepayments of $1.0 million, $5.5 million and $4.0 million, respectively, on the Term Loan in connection with the Third, Fourth and Fifth Amendments. As of September 30, 2024, the principal balance outstanding (including capitalized paid in kind interest) under the Term Loan was $25.3 million. On October 18, 2024, the Company and Blue Torch entered into the Sixth Amendment. In connection with the Sixth Amendment, on the Sixth Amendment Effective Date, the Company made partial prepayments on the Term Loan of $3.2 million (which was classified as a current obligation at September 30, 2024). During the nine months ended September 30, 2024, the Term Loan was a secured overnight financing rate ("SOFR") loan, with an effective interest rate of 23.35% and a cash interest rate of 12.77% for the nine months ended September 30, 2024.

The Financing Agreement contains financial covenants, customary representations, warranties, covenants and customary events of default. In particular, the Financing Agreement contains a minimum liquidity financial covenant of $18.0 million as of September 30, 2024, which was amended in the Sixth Amendment to (a) $9.5 million from the Sixth Amendment Effective Date through December

31, 2024 and (b) $13.0 million from January 1, 2025 to the maturity of the Term Loan. We were in compliance with the financial covenants as of September 30, 2024. See Note 15, Subsequent Events, for additional information on the amendments to the Term Loan including amendments to the financial covenants. We expect to remain in compliance with the amended financial covenants based on our current expectation of future results of operations. Unexpected weakness in the demand for our products may interfere with our ability to remain in compliance with the amended covenants, in particular the minimum liquidity financial covenant for which the cushion in passing is expected to narrow in upcoming quarters. Failure to comply with the financial and other covenants under the Financing Agreement, would constitute a condition of default and would allow Blue Torch to accelerate the maturity of all indebtedness under the Financing Agreement. If such acceleration were to occur, we would likely have to seek an amendment and/or waiver of the impacted financial covenant or repay the debt with proceeds from the issuance of new debt or equity, or asset sales, if necessary. We may be unable to amend the Financing Agreement or raise sufficient capital to repay such obligations in the event the maturity is accelerated. See Note 9, Debt, and Note 15, Subsequent Events, for additional information on the Term Loan.

As of September 30, 2024, we have $19.2 million of lease obligations and purchase commitments associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. See Note 8, Commitments and Contingencies, for discussion of our contractual commitments that are primarily due within the next year.

Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth and overall economic conditions. We continue to assess and efficiently manage our working capital and expect to generate additional liquidity through continued cost control initiatives. We believe that existing cash and cash equivalents and cost control initiatives will provide the Company with sufficient liquidity to meet our anticipated cash needs, including debt service requirements, for the next twelve months as well as for the longer-term (i.e., beyond the next twelve months).

We may explore additional debt or equity financing to supplement our anticipated working capital balances and further strengthen our financial position, but do not at this time know which form it will take or what the terms will be. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financial covenants that would restrict our operations. The sale of additional equity would result in additional dilution to our shareholders. There can be no assurances that we will be able to raise additional capital in amounts or on terms acceptable to us.

Critical Accounting Policies and Estimates

There have been no material changes to the Company's critical accounting policies and estimates discussed in the 2023 Annual Report on Form 10-K in Item 7 under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates other than noted below.

Goodwill and Long-Lived Assets Impairment

Goodwill and intangible assets deemed to have an indefinite life are not amortized, but instead are assessed for impairment annually at December 31 and between annual tests if an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit ("RU") below its carrying value or indicate that it is more likely than not that an indefinite-lived intangible asset is impaired. We carry our definite-lived intangible assets at cost less accumulated amortization. If an event or change in circumstances occurs that indicates the carrying value may not be recoverable, we would evaluate our definite-lived intangible assets for impairment at that time.

We test goodwill for impairment at a level within the Company referred to as the RU. Due to the continued sustained decline in our market capitalization in the three and nine months ended September 30, 2024 and the impact of the Pivot, which was approved by the Board of Directors of the Company in late September 2024, the Company performed an interim test for impairment of its goodwill as of September 30, 2024.

In performing the interim impairment test for goodwill, the Company elected to bypass the optional qualitative assessment test and proceeded to perform a quantitative test by comparing the carrying value of its RU to its estimated fair value. The Company previously tested its RU for impairment as of December 31, 2023. Fair value is estimated using a combination of a market approach and an income approach, with significant assumptions related to guideline company financial multiples used in the market approach and significant assumptions about revenue growth, long-term growth rates and discount rates used in a discounted cash flow model in the income approach. The estimates used to determine fair value for the RU may change based on the results of operations, macro-economic conditions, stock price fluctuations or other factors. Changes in these estimates could materially affect our assessment of the fair value and goodwill impairment for the RU. As of September 30, 2024, management concluded that the fair value of its RU exceeded its carrying value by approximately 10%, or $5.6 million, resulting in no impairment. It is possible that our goodwill could become impaired if we determine in a subsequent period that the fair value of our RU was less than its carrying value which could result in a material charge and adversely affect our results of operations.

Due to reduced revenue and margin forecasts, we tested the related asset group for recoverability as of September 30, 2024. In testing for recoverability, we compared the carrying value of the asset group to its forecasted undiscounted cash flows to determine whether it was recoverable. The Company performed a test for recoverability at September 30, 2024 and concluded that the carrying value of its long-lived assets was recoverable.

Management will continue to monitor its RU and long-lived asset group for changes in the business environment that could impact its fair value. Examples of events or circumstances that could result in changes to the underlying key assumptions and judgments used in our goodwill impairment tests, and ultimately impact the estimated fair value of our RU may include supply chain disruptions and demand for at-home fitness solutions; adverse macroeconomic conditions; volatility in the equity and debt markets which could result in higher weighted-average cost of capital and our subscriber growth rates. Changes in any of the assumptions used in the valuation of the RU, or changes in the business environment could materially affect the expected cash flows, and such impacts could potentially result in a material non-cash impairment charge.

Recent Accounting Pronouncements

See Note 1, Description of Business and Summary of Significant Accounting Policies, of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Report for recently adopted accounting pronouncements.

Foreign Currency Risk

We are exposed to foreign currency exchange risk related to transactions in currencies other than the U.S. Dollar, which is our functional currency. Our foreign subsidiaries, sales, certain inventory purchases and operating expenses expose us to foreign currency exchange risk. For the nine months ended September 30, 2024 and 2023, approximately 10% of our revenue was in foreign currencies. These sales were primarily denominated in Canadian dollars and British pounds.

We may use derivative instruments to manage the effects of fluctuations in foreign currency exchange rates on our net cash flows. We primarily enter into option contracts to hedge forecasted payments, typically for up to 12 months, for cost of revenue, selling and marketing expenses, general and administrative expenses and intercompany transactions not denominated in the local currencies of our foreign operations. We designate some of these instruments as cash flow hedges and record them at fair value as either assets or liabilities within the consolidated balance sheets. Some of these instruments are freestanding derivatives for which hedge accounting does not apply.

In the year ended December 31, 2023, management made a determination to cease entering into any further foreign exchange options at this time, which resulted in a decrease in the notional amount of the Company's outstanding foreign exchange options to zero at September 30, 2024 as all of the foreign exchange options expired prior to March 31, 2024. As part of the Pivot, the Company has decided to exit the sale of nutritional and other physical products in the United Kingdom (the "UK") and France. Nutrition and other revenue in the UK and France is not significant.

Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income (loss) until the hedged forecasted transaction affects earnings. Deferred gains and losses associated with cash flow hedges of third-party payments are recognized in cost of revenue, selling and marketing or general and administrative expenses, as applicable, during the period when the hedged underlying transaction affects earnings. Changes in the fair value of certain derivatives for which hedge accounting does not apply are immediately recognized directly in earnings to cost of revenue.

A hypothetical 10% change in exchange rates, with the U.S. dollar as the functional and reporting currency, would result in an approximate $2.8 million increase or decrease in cost of revenue and operating expenses. The higher exposure to changes in foreign currency from previous periods was due to management's decision to cease entering into foreign exchange options at this time.

The aggregate notional amount of foreign exchange derivative instruments at September 30, 2024 and year ended December 31, 2023 was zero and $4.4 million, respectively.

Management’s Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2024. Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met.

There have been no material developments with respect to the information previously reported under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 other than as noted below. These risk factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

On September 30, 2024, we announced strategic initiatives to transition from our Multi-Level Marketing ("MLM") model to a single level affiliate model (the "Pivot"). As part of the Pivot, we will continue to execute an omni channel selling strategy including direct response marketing, retail partnerships and transition our direct selling channel from our current MLM model to a new business model focused on a single level affiliate model.

The announced Pivot involves numerous risks, including, but not limited to:

• our current Partners may not choose to continue to partner with us as affiliates, or, if they do continue to partner with the Company, may not sell as much of our products;
• we may be unable to recruit new affiliates or be able to offer a competitive compensation plan for our affiliates;
• changes to our business model may be disruptive to our operations and may cause our revenues to decline or result in lower decreases to our expenses than expected;
• change to our business model may result in increased churn of the Company's subscriber base;
• the impact on our revenues as a result of the reduction or elimination of preferred customer membership fees and fees paid to the Company by its direct selling Partners;
• changes to commission rates in connection with the Pivot may result in unexpected fluctuations in our expenses;
• changes in our results of operations and financial position may result in our failure to comply with financial and other covenants contained in our existing and/or future debt agreements and may result in a default under our debt agreements;
• exposure to unknown, contingent or other liabilities, including litigation arising in connection with the Pivot;
• negative impacts on our business relationships, including relationships with our customers, suppliers, vendors, Partners and employees;
• difficulty retaining or recruiting officers, key employees or directors;
• material weaknesses in our internal controls over financial reporting resulting from a reduced workforce, including members of our accounting and/or internal audit staff; and
• unintended negative consequences from changes to our business profile.

If any of these or other factors impair our ability to successfully implement the Pivot, we may not be able to realize other business opportunities as we may be required to spend additional time and incur additional expenses related to the Pivot that otherwise would be used on the development and expansion of our business.