Beachbody Company, Inc. (The Beachbody Company, Inc.) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in millions of dollars unless stated otherwise. The company provides subscription-based fitness and wellness services, nutrition products, and connected fitness equipment.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $128.3 | $166.0 | $408.1 | $544.0 |
| Gross profit | $75.0 | $104.7 | $249.1 | $285.0 |
| Gross margin | 58.5% | 63.1% | 61.0% | 52.4% |
| Operating loss | $(29.0) | $(36.2) | $(80.6) | $(155.0) |
| Net loss | $(32.7) | $(33.9) | $(87.6) | $(149.3) |
| Adjusted EBITDA (non-GAAP) | $(5.8) | $(6.2) | $(11.5) | $(26.8) |
- Q3 revenue fell 23%; digital revenue declined 11% to $64.3 million and nutrition and other revenue fell 35% to $59.0 million. Connected fitness revenue rose 48% to $4.9 million, but the category remained gross-loss-making, with a Q3 gross loss of $5.2 million.
- Nine-month revenue fell 25%. Digital, nutrition and other, and connected fitness revenue declined 16%, 29%, and 52%, respectively. Nine-month gross margin increased year over year, principally reflecting lower connected-fitness inventory reserve adjustments compared with the prior-year period; Q3 margin narrowed.
- Operating expenses were $104.0 million in Q3 and $329.7 million for nine months, down from $140.9 million and $440.0 million, respectively. Lower spending helped reduce operating losses; nine-month net loss also benefited from substantially lower costs and charges than in 2022.
- Cash and cash equivalents were $38.2 million at September 30, versus $80.1 million at December 31, 2022. A further $4.3 million was held in restricted short-term investments. Current assets of $130.7 million were below current liabilities of $172.8 million, which included $101.8 million of deferred revenue.
- For the first nine months, operating cash outflow was $14.6 million, investing outflow $9.7 million, and financing outflow $17.7 million; cash declined by $41.9 million. Capital expenditures were $5.5 million.
- Term Loan principal outstanding, including capitalized paid-in-kind interest, was $35.6 million; balance-sheet debt was reported net of discounts and issuance costs. The loan’s cash interest rate was 12.21% and its effective rate was 19.21% for the nine-month period. Interest expense was $6.8 million for nine months.
Material changes and significant items
- Digital subscriptions decreased to 1.38 million from 2.10 million year over year; nutritional subscriptions declined to 0.18 million from 0.24 million. Management attributed revenue declines primarily to lower demand and fewer subscriptions. Average digital retention was 96.2% in Q3, compared with 95.7% a year earlier.
- In July, the company prepaid $15.0 million of its Term Loan and paid a 5% premium. The transaction generated a $3.2 million accounting loss on partial debt extinguishment. The loan maturity was shortened from August 2026 to February 8, 2026, and the exercise price on related warrants was reduced from $1.85 to $0.41 per share.
- The amended loan requires minimum quarterly revenue of $100 million through the quarter ending March 31, 2024, then $120 million for subsequent quarters through December 31, 2025. Minimum liquidity is $20 million through March 31, 2024 and $25 million thereafter. The company reported compliance as of September 30, 2023.
- The company incurred $6.6 million of restructuring charges in the first nine months, primarily related to headcount reductions and aligning operations with growth priorities. It relaunched its digital platform in March 2023, adding BODi Blocks, mindset content, and digital recipes, and began migrating BOD-only members to BODi at renewal.
- The CEO forfeited 8 million shares without consideration in June. Mark Goldston was appointed Executive Chairman; his award includes options tied to continued service and performance-based share-price goals. The company also repriced 26.6 million employee and consultant options to $0.347 per option, generating $1.6 million of incremental compensation expense.
Outlook, risks, and contingencies
- No specific revenue, earnings, or cash-flow guidance is provided in the filing. Management said existing cash and cost-control initiatives should meet anticipated cash needs, including debt service, for the next 12 months and beyond. It may explore additional equity financing, with no assurance that financing will be available on acceptable terms; any equity issuance could dilute shareholders.
- Key disclosed risks include continued revenue and subscriber declines, competition, liquidity and financing needs, high-cost secured debt and covenant requirements, reliance on key products, and potential impairment if forecasts or market conditions deteriorate. Goodwill fair value exceeded carrying value by approximately 11% in the June 2023 interim test; no impairment was recorded.
- Disclosure controls and procedures were deemed ineffective at September 30, 2023 because of previously identified material weaknesses in internal control over financial reporting. Remediation efforts were ongoing and were not yet considered complete.
- Two legal matters are disclosed: a California class action alleging Partners were misclassified as independent contractors, and a patent infringement suit filed by DISH concerning internet distribution and playback of fitness content. The company denies liability and stated it could not reasonably estimate potential losses for either matter.
- Management stated that ordinary-course litigation and claims were not expected to have a material adverse effect, while noting outcomes cannot be predicted. Foreign currency exposure is managed with derivatives; the filing estimates a hypothetical 10% exchange-rate change would affect cost of revenue and operating expenses by approximately $1.5 million.
Important facts for investors to verify
- Whether subscriber and revenue declines stabilize following the platform relaunch, and whether reported retention translates into new subscriber growth.
- Cash burn, restricted cash availability, liquidity-covenant headroom, and the company’s ability to service and refinance the Term Loan before its February 2026 maturity.
- Whether connected fitness can improve from negative gross margins, particularly given inventory reserves, bike pricing, and delivery trends.
- Progress and testing results for remediation of the material weaknesses, and any subsequent developments in the Partner classification and DISH patent litigation.
- The assumptions underlying management’s liquidity outlook and goodwill valuation, plus any future equity financing or material dilution.