Beachbody Company, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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”) and the section entitled “Risk Factors.” Unless otherwise indicated, the terms “Beachbody,” “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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act), including statements about and 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 expenses (including any components of the foregoing), Adjusted EBITDA (as defined below) and our ability to achieve and maintain future profitability; • our anticipated growth rate and market opportunity; • our ability to raise financing in the future; • our success in retaining or recruiting, or changes required in, officers, key employees or directors; • 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; • costs related to the Business Combination and the failure to realize anticipated benefits of the Business Combination or to realize any financial projections or estimated pro forma results and the related underlying assumptions; and • other risk and uncertainties set forth in this Report under the heading “ Risk Factors. ” 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. 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. 28 Table of Contents Overview of Our Business We are the creator of some of the world’s most popular fitness programs, including P90X ® , Insanity ® and 21 Day Fix ® , which transformed the in-home fitness market and disrupted the global fitness industry by making it accessible for people to get results—anytime, anywhere. We have also developed comprehensive nutrition-first programs, Portion Fix ® and 2B Mindset ® , which teach healthy eating habits and promote healthy, sustainable weight loss. All fitness and nutrition programs are available through our Beachbody On Demand ® streaming service. In addition, we offer nutritionals such as Shakeology ® nutrition shakes and BEACHBAR ® snack bars. In the health, wellness and fitness industry, we focus primarily on digital content, connected fitness and consumer health & wellness. Our goal is to continue to provide leading holistic health and wellness content and subscription-based solutions. Leveraging our history of fitness content creation and our network of micro-influencers, whom we call Coaches, we have been successful in identifying market trends and expanding our market share. With our 2021 expansion into connected fitness, through the integration of Myx’s professional grade stationery cycle and 360-degree touch screen tablet connected fitness software, weights, and accessories, we plan to leverage our distribution, marketing and content creation capabilities to reach a wider health, wellness and fitness audience. Historically, our revenue has primarily been generated through a network of micro-influencers, social media marketing channels and direct response advertising. Components of revenue include recurring digital subscription revenue and revenue from the sale of nutritional and other products. In addition to selling individual products on a one-time basis, we also bundle fitness and nutrition products together at discounted prices. On June 25, 2021 we consummated the Business Combination by and among Forest Road, Old Beachbody and Myx. The Business Combination resulted in cash proceeds, net of issuance costs and cash paid for the acquisition of Myx, net of cash acquired of approximately $352.5. In addition it drove increases of $78.1 million in intangible assets and $157.9 million in goodwill as of June 30, 2021, compared to our balance sheet as of December 31, 2020. The following financial information for the three months and six months ended June 30, 2021 includes the financial information and activities for Myx for the period from June 26, 2021 to June 30, 2021. However, the impact of the Business Combination was not material to our results of operations. For the three months ended June 30, 2021, as compared to the three months ended June 30, 2020: • Total revenue was $223.1 million, a 2% increase; • Digital subscriptions were 2.7 million at period end, a 13% increase; 29 Table of Contents • Digital revenue was $94.3 million, a 20% increase; • Nutrition and other revenue was $128.8 million, an 8% decrease; • Net loss was $12.4 million, compared to a net loss of $10.0 million; and • Adjusted EBITDA was $(4.4) million, compared to $0.9 million. For the six months ended June 30, 2021, as compared to the six months ended June 30, 2020: • Total revenue was $449.3 million, a 16% increase; • Digital subscriptions were 2.7 million at period end, a 13% increase; • Digital revenue was $189.5 million, a 34% increase; • Nutrition and other revenue was $259.9 million, a 5% increase; • Net loss was $42.5 million, compared to a net loss of $18.3 million; and • Adjusted EBITDA was $(16.1) million, compared to $3.6 million. For a definition of digital subscriptions see the section titled “—Key Operational and Business Metrics.” See the section titled “—Non-GAAP Information” for information regarding our use of Adjusted EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA. Impact of COVID-19 The novel coronavirus continues to have a significant impact on most businesses, including Beachbody. During the year ended December 31, 2020, we saw strong demand for our digital subscriptions as the government ordered closures and restrictions on gyms and as consumers were reluctant to return to gyms as the COVID-19 pandemic continued. We also experienced modestly slower product fulfillment to customers and supply chain delays. During the second quarter of 2021, the pandemic has resulted in higher shipping, freight, and fulfillment costs and the cancellation of certain Coach events. The ultimate impact of COVID-19 on our financial and operating results is unknown and will depend on the length of time that these restrictions continue and whether the demand for many of our digital subscriptions continue. COVID-19 has had a significant impact and may continue to have a significant impact, the full extent of which is unknown, but which could be material. Although COVID-19 increased consumer demand for our digital solutions, we believe the structural shift towards wellness and fitness solutions like our platform existed before the impact of COVID-19, and we anticipate that this structural change to the fitness industry will continue after COVID-19. Beachbody has business continuity programs in place to ensure that employees are safe and that the businesses continue to function while employees are working remotely. We have been closely monitoring the impact of working from home and the potential strain on internet connectivity but have not seen any adverse impact on the ability of the businesses to function and we have not seen any network connectivity issues that would have an adverse impact on our customers’ ability to access our product offerings. 30 Table of Contents Non-GAAP Information This Report includes Adjusted EBITDA, which is a non-GAAP performance measure that we use to supplement our results presented in accordance with 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 taxes, equity-based compensation, 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 Beachbody’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, equity-based compensation) or are not related to our underlying business performance (for example, in the case of 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) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net loss $ (12,440 ) $ (10,003 ) $ (42,498 ) $ (18,331 ) Adjusted for : Depreciation and amortization 12,215 10,534 25,941 20,678 Amortization of capitalized cloud computing implementation costs 168 — 336 — Amortization of content assets 3,302 1,715 6,119 3,196 Interest expense 305 248 428 343 Income tax benefit (10,857 ) (2,677 ) (11,252 ) (4,290 ) Equity-based compensation 2,522 1,013 5,095 1,908 Transaction costs 1,509 — 2,142 — Other adjustment items (1) 6,038 — 6,038 — Non-operating costs (2) (7,147 ) 60 (8,478 ) 54 Adjusted EBITDA $ (4,385 ) $ 890 $ (16,129 ) $ 3,558 (1) Other adjustment items includes incremental costs associated with COVID-19. (2) Non-operating primarily includes the change in fair value of warrant liabilities, interest income and gain on investment in the Myx convertible instrument. Key Operational and Business Metrics In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions. As of June 30, 2021 2020 Digital Subscriptions (millions) 2.7 2.4 Nutritional Subscriptions (millions) 0.4 0.5 31 Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Average Digital Retention 94.9 % 96.3 % 95.4 % 95.6 % Total Streams (millions) 44.5 55.5 100.4 88.7 DAU/MAU 31.9 % 33.2 % 33.5 % 31.6 % Revenue (millions) $ 223.1 $ 218.5 $ 449.3 $ 387.8 Gross profit (millions) $ 154.3 $ 159.1 $ 312.4 $ 279.6 Gross margin 69 % 73 % 70 % 72 % Net loss (millions) $ (12.4 ) $ (10.0 ) $ (42.5 ) $ (18.3 ) Adjusted EBITDA (millions) (1) $ (4.4 ) $ 0.9 $ (16.1 ) $ 3.6 (1) Please see the section titled “—Non-GAAP Information” 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 Beachbody On Demand, Nutrition+, and Openfit subscriptions. Digital subscriptions include paid and free-to-pay subscriptions. Free-to-pay subscriptions, on average, represent less than 3% of total digital subscriptions. Digital subscriptions are inclusive of all billing plans, currently for annual, semi-annual, quarterly and monthly billing intervals. Nutritional Subscriptions We package and synthesize the content experience of digital subscriptions with nutritional subscriptions that work together. Nutritional Subscriptions are monthly subscriptions to nutritional products such as, Shakeology, Beachbody Performance, BEACHBAR, Bevvy and Ladder Supplements. Average Digital Retention We use month over month digital subscription retention to measure the retention of our digital subscriptions. We define digital subscription retention as the average rate at which a subscription renews for a new billing cycle. Total Streams We measure streams and total streams to quantify the number of fitness or nutrition programs viewed per subscription which is a leading indicator of customer engagement and retention. While the measure of a digital stream may vary across companies, to qualify as a stream on either our Beachbody on Demand or Openfit 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. Components of our Operating Results and Results of Operations We operate and manage our business in two operating segments, Beachbody and Other. For financial reporting purposes, we have one reportable segment, Beachbody. We identified the reportable segment based on the information used by management to monitor performance and make operating decisions. See Notes 1 and 22 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Report for additional information regarding our reportable segment. The following discussion of our results and operations is on a consolidated basis as the Other non-reportable operating segment is not material to the understanding of our business taken as a whole. 32 Table of Contents (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue: Digital $ 94,325 $ 78,357 $ 189,475 $ 140,882 Nutrition and other 128,783 140,127 259,852 246,938 Total revenue 223,108 218,484 449,327 387,820 Cost of revenue: Digital 11,612 9,292 22,734 17,664 Nutrition and other 57,158 50,097 114,153 90,572 Total cost of revenue 68,770 59,389 136,887 108,236 Gross profit 154,338 159,095 312,440 279,584 Operating expenses: Selling and marketing 140,194 134,666 284,890 228,892 Enterprise technology and development 26,949 22,373 54,038 43,706 General and administrative 17,231 14,522 35,177 29,706 Total operating expenses 184,374 171,561 374,105 302,304 Operating loss (30,036 ) (12,466 ) (61,665 ) (22,720 ) Change in fair value of warrant liabilities 5,390 — 5,390 — Interest expense (305 ) (248 ) (428 ) (343 ) Other income, net 1,654 34 2,953 442 Loss before income taxes (23,297 ) (12,680 ) (53,750 ) (22,621 ) Income tax benefit (provision) 10,857 2,677 11,252 4,290 Net loss $ (12,440 ) $ (10,003 ) $ (42,498 ) $ (18,331 ) Revenue Revenue includes digital subscriptions, nutritional supplement subscriptions, one-time nutritional sales, connected fitness products and other fitness-related products. Subscription revenue is recognized ratably over the subscription period (up to 12 months). We often sell bundled products that combine digital subscriptions, nutritional products, and/or other fitness and nutritional programs. 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. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Revenue Digital $ 94,325 $ 78,357 $ 15,968 20 % Nutrition and other 128,783 140,127 (11,344 ) (8 %) Total revenue $ 223,108 $ 218,484 $ 4,624 2 % The increase in digital revenue for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to the growth in digital subscriptions as of June 30, 2021. The decrease in nutrition and other revenue for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to an $11.2 million decrease in revenue from subscriptions to and one-time purchases of Shakeology. Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Revenue Digital $ 189,475 $ 140,882 $ 48,593 34 % Nutrition and other 259,852 246,938 12,914 5 % Total revenue $ 449,327 $ 387,820 $ 61,507 16 % The increase in digital revenue for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily attributable to year-over-year growth in digital subscriptions. 33 Table of Contents The increase in nutrition and other revenue for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily due to a $9.4 million increase in revenue from subscriptions to, and one-time purchases of, Beachbody Performance supplements and Shakeology and a $1.7 million increase in revenue from accessories and other fitness products. Cost of Revenue Digital Cost of Revenue Digital cost of revenue includes costs associated with digital content creation including amortization and revisions of content assets, depreciation of streaming platforms and e-commerce websites, digital streaming costs, and amortization of acquired digital platform intangible assets. It also includes customer service costs, credit card 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 credit card processing fees. It also includes depreciation of nutrition-related e-commerce websites and social commerce platforms, amortization of acquired formulae intangible assets, facilities, and related personnel expenses. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Cost of revenue Digital $ 11,612 $ 9,292 $ 2,320 25 % Nutrition and other 57,158 50,097 7,061 14 % Total cost of revenue $ 68,770 $ 59,389 $ 9,381 16 % Gross profit Digital $ 82,713 $ 69,065 $ 13,648 20 % Nutrition and other 71,625 90,030 (18,405 ) (20 %) Total gross profit $ 154,338 $ 159,095 $ (4,757 ) (3 %) Gross margin Digital 88 % 88 % Nutrition and other 56 % 64 % The increase in digital cost of revenue for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily driven by a $1.6 million increase in content assets amortization due to a content asset library (new and existing content) with higher costs being amortized during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Additional customer service of $0.3 million, credit card processing expenses of $0.2 million, and Openfit live training costs of $0.1 million were variable costs associated with the increase in revenue. The digital gross margin was flat from the three months ended June 30, 2020 to the three months ended June 30, 2021. The increase in nutrition and other cost of revenue for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to a $3.8 million increase in product costs, primarily increased freight expense of $1.9 million and reserve for excess and obsolete inventory of $1.3 million. Other increases include shipping costs by $1.7 million, depreciation by $1.0 million, and fulfillment by $0.6 million. Nutrition and other gross margin decreased as a result of higher freight and shipping rates due to COVID-19 during the three months ended June 30, 2021, a higher reserve for excess and obsolete inventory, and higher depreciation expense for which there is no commensurate revenue. 34 Table of Contents Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Cost of revenue Digital $ 22,734 $ 17,664 $ 5,070 29 % Nutrition and other 114,153 90,572 23,581 26 % Total cost of revenue $ 136,887 $ 108,236 $ 28,651 26 % Gross profit Digital $ 166,741 $ 123,218 $ 43,523 35 % Nutrition and other 145,699 156,366 (10,667 ) (7 %) Total gross profit $ 312,440 $ 279,584 $ 32,856 12 % Gross margin Digital 88 % 87 % Nutrition and other 56 % 63 % The increase in digital cost of revenue for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily driven by a $2.9 million increase in content assets amortization due to a content asset library (new and existing content) with higher costs being amortized during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Additional credit card processing expenses of $0.8 million, customer service of $0.5 million, and Openfit live training costs of $0.2 million were attributable to the increase in revenue. The increase in digital gross margin from the six months ended June 30, 2020 to the six months ended June 30, 2021 was primarily due to the leverage of fixed costs such as depreciation, amortization and personnel-related expenses as revenue increased. The increase in nutrition and other cost of revenue for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was due to a $13.4 million increase in product costs, $5.3 million increase in shipping costs, $1.4 million increase in fulfillment, and $1.4 million increase in customer service expenses partially attributable to the increase in sales volume. Nutrition and other gross margin decreased as a result of higher freight and shipping rates during the six months ended June 30, 2021, a higher reserve for excess and obsolete inventory, and increases in personnel-related costs and depreciation expense for which there is no commensurate revenue. Operating Expenses Selling and Marketing Selling and marketing expenses primarily include the cost of micro-influencer compensation, advertising, royalties, content revisions, promotions and events, and third-party sales commissions as well as the related personnel expenses for employees and consultants. We intend to continue to invest in our selling and marketing capabilities and expect this expense to increase in future periods as we release new products and expand internationally. Selling and marketing expense as a percentage of total revenue may fluctuate from period to period based on total revenue and the timing of our media investments. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Selling and marketing $ 140,194 $ 134,666 $ 5,528 4 % As a percentage of total revenue 62.8 % 61.6 % The increase in selling and marketing expense for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to a $4.5 million increase related to headcount additions and investments in systems focused on driving customer acquisition. Selling and marketing expense increased, as a percentage of total revenue, due to these customer acquisition costs increasing at a faster rate as compared to the growth in revenue. 35 Table of Contents Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Selling and marketing $ 284,890 $ 228,892 $ 55,998 24 % As a percentage of total revenue 63.4 % 59.0 % The increase in selling and marketing expense for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily due to a $22.0 million increase in media costs to build awareness and conversion on our digital platforms. Additionally, increases in micro-influencer compensation and royalties of $17.7 million, expenses for personnel and systems that support customer acquisition activities of $8.5 million, and Coach events expense of $3.4 million. Selling and marketing expense increased, as a percentage of total revenue, primarily due to increased media costs to build awareness and drive subscriptions associated with future revenues. Enterprise technology and development Enterprise technology and development expenses relate primarily 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. This includes maintenance and enhancements of the Company’s enterprise resource planning (ERP) system, which is the core of our accounting, procurement, supply chain and other business support systems. Enterprise technology and development 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 who create improvements to and 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. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Enterprise technology and development $ 26,949 $ 22,373 $ 4,576 20 % As a percentage of total revenue 12.1 % 10.2 % The increase in enterprise technology and development expense for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to a $4.4 million increase in personnel and enterprise systems-related expenses. Enterprise technology and development expense as a percentage of total revenue increased by 190 basis points due to the increases of fixed costs at a faster rate as compared to the growth in revenue. Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Enterprise technology and development $ 54,038 $ 43,706 $ 10,332 24 % As a percentage of total revenue 12.0 % 11.3 % The increase in enterprise technology and development expense for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily due to a $7.7 million increase in personnel-related expenses and a $2.4 million increase in depreciation expense. Enterprise technology and development expense as a percentage of total revenue increased by 70 basis points due to the increases of fixed costs at a faster rate as compared to the growth in revenue. 36 Table of Contents General and Administrative General and administrative expense includes personnel-related expenses and facilities-related costs primarily for our executive, finance, accounting, legal and human resources functions. General and administrative expense also includes fees for professional services principally comprised of legal, audit, tax, and insurance. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) General and administrative $ 17,231 $ 14,522 $ 2,709 19 % As a percentage of total revenue 7.7 % 6.6 % The increase in general and administrative expense for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to an increase in acquisition costs related to the Business Combination and increases in personnel-related expenses and other general corporate expenses. General and administrative expense as a percentage of total revenue increased by 130 basis points due to acquisition costs related to the Business Combination. Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) General and administrative $ 35,177 $ 29,706 $ 5,471 18 % As a percentage of total revenue 7.8 % 7.7 % The increase in general and administrative expense for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily due to an increase in acquisition costs related to the Business Combination and increases in personnel-related expenses and other general corporate expenses. General and administrative expense as a percentage of total revenue was relatively flat primarily due to acquisition costs leveraged by higher revenue. Other Income (Expenses) The change in fair value of warrant liabilities consists of the fair value changes of the Public Warrants and Private Warrants and the transaction costs and advisory fees for the Business Combination allocated to the warrants. Interest expense primarily consists of interest expense associated with our borrowings and amortization of debt issuance costs for our Credit Facility. Other income, net, consists of interest income earned on investments and gains (losses) on foreign currency. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Change in fair value of warrant liabilities $ 5,390 $ — $ 5,390 n/m Interest expense (305 ) (248 ) (57 ) -23 % Other income, net 1,654 34 1,620 4765 % The change in fair value of warrant liabilities of $5.4 million during the three months ended June 30, 2021 results from the changes in fair value of the warrants following consummation of the Business Combination on June 25, 2021, partially offset by the transaction costs and advisory fees for the Business Combination allocated to the warrants. The increase in interest expense for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was primarily due to higher outstanding borrowings and for a longer period in 2021 compared to 2020. The increase in other income, net was primarily due to the gain on the investment in the convertible instrument from Myx prior to June 25, 2021; there was no similar investment during the three months ended June 30, 2020. 37 Table of Contents Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Change in fair value of warrant liabilities $ 5,390 $ — $ 5,390 n/m Interest expense (428 ) (343 ) (85 ) -25 % Other income, net 2,953 442 2,511 568 % The gain on the change in fair value of warrant liabilities of $5.4 million during the six months ended June 30, 2021 results from the changes in fair value of the warrants following consummation of the Business Combination on June 25, 2021, partially offset by the transaction costs and advisory fees for the Business Combination allocated to the warrants. The increase in interest expense for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily due to higher outstanding borrowings and for a longer period in 2021 compared to 2020. The increase in other income, net was primarily due to the gain on the investment in the convertible instrument from Myx prior to June 25, 2021; there was no similar investment during the six months ended June 30, 2020. Income tax benefit Income tax benefit consists of income taxes related to US federal and state jurisdictions as well as those foreign jurisdictions where we have business operations. Three Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Income tax benefit $ 10,857 $ 2,677 $ 8,180 306 % The income tax benefit in the three months ended June 30, 2021 reflects the expected tax benefit, net of valuation allowance on the loss before income taxes for the three months ended June 30, 2021, as compared to the income tax benefit in the three months ended June 30, 2020 which reflects the expected tax benefit on the loss before income taxes for the three months ended June 30, 2020. We recorded deferred tax liabilities in connection with the acquisition of Myx, which was a discrete second quarter 2021 event, which partially reduced our need for a valuation allowance, resulting in income tax benefit recorded during the three months ended June 30, 2021. No valuation allowance was recorded during the three months ended June 30, 2020. Six Months Ended June 30, 2021 2020 $ Change % Change (dollars in thousands) Income tax benefit $ 11,252 $ 4,290 $ 6,962 162 % The income tax benefit in the six months ended June 30, 2021 reflects the expected tax benefit, net of valuation allowance on the loss before income taxes for the six months ended June 30, 2021, as compared to the income tax benefit in the six months ended June 30, 2020 which reflects the expected tax benefit on the loss before income taxes for the six months ended June 30, 2020. We recorded deferred tax liabilities in connection with the acquisition of Myx, which was a discrete second quarter 2021 event, which partially reduced our need for a valuation allowance, resulting in income tax benefit recorded during the six months ended June 30, 2021. No valuation allowance was recorded during the six months ended June 30, 2020. Liquidity and Capital Resources Historically, our operations were financed primarily through cash flow from operating activities and borrowings under our Credit Facility. In connection with the Business Combination, we received cash proceeds, net of issuance costs and cash paid for the acquisition of Myx, net of cash acquired of approximately $352.5 million. As of June 30, 2021, we had cash and cash equivalents of $347.2 million and $32.0 million of borrowing capacity available under our Credit Facility (defined below). We believe our existing cash and cash equivalent balances, cash flow from operations, and amounts available for borrowing under our Credit Facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of growth initiatives, the expansion of selling and marketing activities, the timing of new nutrition product introductions, market acceptance of our nutrition products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. The inability to raise capital would adversely affect our ability to achieve our business objectives. 38 Table of Contents Amended and Restated Credit Agreement On December 14, 2018, Beachbody, LLC, as borrower, and Old Beachbody and certain of Beachbody, LLC’s subsidiaries, as guarantors, entered into a credit agreement with Bank of America, N.A., as lender, administrative agent and letter of credit issuer for a $35 million revolving credit facility with a $10 million sublimit for letters of credit (the “Credit Facility”). During the six months ended June 30, 2021, the Credit Facility was amended to revise certain financial covenants, to extend the maturity date to June 2022, and temporarily increase the Credit Facility by $20 million for a period of either 90 days, or until the consummation of the Business Combination. In connection with the transactions contemplated by the Business Combination Agreement, on June 23, 2021, the Credit Facility was amended, which, among other things, (a) permits the consummation of the Business Combination and certain other transactions contemplated by the Business Combination Agreement, and (b) amends certain terms of the Credit Facility to, among other things, (i) enable Old Beachbody and Beachbody, LLC to consummate the Business Combination and certain other transactions contemplated by the Business Combination Agreement, (ii) require that the Company join the Credit Facility as a parent guarantor thereunder, and (iii) require that Myx join the Credit Facility as a subsidiary guarantor thereunder. As of June 30, 2021 and December 31, 2020, we had no borrowings outstanding under the Credit Facility and a letter of credit was issued for $3.0 million. Borrowings may be either Bloomberg Short-Term Bank Yield Index (“BSBY”) rate loans or base rate loans at our election. BSBY rate loans bear interest at an annual rate equal to the BSBY Rate plus 1.75% to 2.25%, with a minimum BSBY of 0.75%. Base rate loans are at the base rate, as defined in the Credit Facility, plus 0.75% to 1.25%. We also pay a 1.75% to 2.25% fee on the letters of credit outstanding and a 0.375% to 0.5% commitment fee on the unused Credit Facility. The Credit Facility contains certain reporting and financial covenants which require us to maintain a minimum consolidated EBITDA amount and comply with a maximum capital expenditures amount. We were in compliance with all covenants as of June 30, 2021. Cash Flows The following table summarizes our cash flows for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 (dollars in thousands) Net cash provided by (used in) operating activities $ (25,487 ) $ 44,046 Net cash used in investing activities (74,480 ) (18,756 ) Net cash provided by financing activities 389,775 — Operating Activities. Net cash used in operating activities of $25.5 million for the six months ended June 30, 2021 was primarily due to the net loss of $42.5 million and the net change in operating assets and liabilities of $3.3 million, partially offset by non-cash adjustments of $20.3 million. Non-cash adjustments primarily consisted of depreciation and amortization of $25.9 million, deferred income taxes of ($11.3) million, amortization of content assets of $6.1 million, change in fair value of warrant liabilities of ($5.4) million and equity-based compensation of $5.1 million. The change in net operating assets and liabilities was primarily due to a $14.2 million increase in content assets, $2.0 million increase in accounts receivables, $1.8 million increase in prepaid expenses, and $2.2 million decrease in other liabilities; partially offset by a $16.5 million increase in deferred revenue as a result of the increase in digital subscriptions. Net cash provided by operating activities of $44.0 million for the six months ended June 30, 2020 was primarily due to the net loss of $18.3 million, offset by non-cash adjustments of $22.0 million and the net change in operating assets and liabilities of $40.4 million. Non-cash adjustments primarily consisted of depreciation and amortization of $20.7 million, amortization of content assets of $3.2 million, equity-based compensation expense of $1.9 million, net unrealized gains on derivative financial instruments of $0.2 million, and deferred income taxes of ($4.0) million. The increase in net operating assets and liabilities was primarily due to a $40.5 million increase in deferred revenue as a result of an increase in digital subscriptions. 39 Table of Contents Investing Activities. Net used in investing activities for the six months ended June 30, 2021 of $74.5 million was related to $37.3 cash consideration for the acquisition of Myx, net of cash acquired, capital expenditures of $27.2 million, the investment in a convertible instrument of $5.0 million, and an equity investment of $5.0 million. Net cash used in investing activities for the six months ended June 30, 2020 of $18.8 million was related to capital expenditures. Financing Activities. Net cash provided by financing activities of $389.8 million for the six months ended June 30, 2021 was primarily related to the $389.8 million in net proceeds received from the Business Combination. There was no net cash provided by financing activities for the six months ended June 30, 2020; we borrowed and repaid $32.0 million under the Credit Facility. Contractual Obligations and Other Commitments The following table summarizes our contractual cash obligations as of June 30, 2021: Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years (in thousands) Operating lease obligations $ 39,922 $ 4,343 $ 22,963 $ 12,616 $ — Finance lease obligations 368 81 284 3 — Noncancelable service and inventory purchase obligations 135,364 124,020 8,844 2,500 — Total $ 175,654 $ 128,444 $ 32,091 $ 15,119 $ — The commitment amounts in the table above are 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 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of June 30, 2021. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the unaudited condensed consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders, revenue, expenses, and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those noted below. Revenue Recognition We record revenue when we fulfill our performance obligation to transfer control of the goods or services to our customers. Control of shipped items is generally transferred when the product is delivered to the customer. The amount of revenue recognized is the consideration that we expect we will be entitled to receive in exchange for transferring goods or services to its customers. Control of services, which are primarily digital subscriptions, transfers over time, and as such, revenue is recognized ratably over the subscription period (up to 12 months), using a mid-month convention. We sell a variety of 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 allocates 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. Revenue is recorded net of expected returns, discounts and credit card chargebacks, which are estimated using our historical experience. Revenue is presented net of sales and value added taxes collected from customers and remitted to applicable government agencies. 40 Table of Contents Goodwill and Intangible Assets Goodwill represents the excess of the fair value of the consideration transferred over the fair value of the underlying identifiable assets and liabilities acquired in a business combination. Goodwill and intangible assets deemed to have an indefinite life are not amortized, but instead are assessed for impairment annually in the fourth quarter as of October 1. Additionally, if an event or change in circumstances occurs that would more likely than not reduce the fair value of the reporting unit below its carrying value, we would evaluate goodwill and other intangibles at that time. In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If we conclude otherwise, we are required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, an impairment charge will be recorded to reduce the reporting unit to fair value. We also evaluate qualitative factors to determine whether or not its indefinite lived intangible assets have been impaired and then performs a quantitative test if required. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Equity-Based Compensation We measure and recognize expense for all equity-based awards based on their estimated fair values as of the grant date using the Black-Scholes option-pricing model. We recognize the expense on a straight-line basis over the requisite service period, and forfeitures are accounted for as they occur. Equity-based compensation expense is included in cost of revenue, selling and marketing, enterprise technology and development, and general and administrative expense within the unaudited condensed consolidated statements of operations. Equity-based compensation expense for options granted to nonemployees is measured based on the fair value of the options issued, which is more reliably determined than the value of goods and services received. The fair value of the equity instruments issued is measured at the performance completion date. Common Unit Valuations Prior to the Business Combination, we granted common unit options at an exercise price equal to the fair value as determined by the Board of Managers on the date of grant. Given the absence of a public market for our common units, we were required to estimate the fair value of our common units at the time of each grant of an equity-based award. We utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common units. These estimates and assumptions include numerous objective and subjective factors to determine the fair value of our common units at each grant date, including the following factors: • Relevant precedent transaction including our capital units; • the liquidation preferences, rights, preferences, and privileges of our preferred units relative to the common units; • our actual operating and financial performance; • current business conditions and projections; • our stage of development; • the likelihood and timing of achieving a liquidity event for the common units underlying the options, such as an initial public offering, given prevailing market conditions; any adjustment necessary to recognize a lack of marketability of the common units underlying the granted options; • the market performance of comparable publicly traded companies; and • U.S. and global capital market conditions. Subsequent to the Business Combination, the Board determines the fair value of the Common Stock based on the closing market price on or around the date of grant. 41 Table of Contents Income Taxes Effective April 2, 2019, Old Beachbody made an election with the United States taxing authorities to change its entity status to a regarded C-Corporation from a regarded pass-through entity for income tax purposes. The consequences of this election were the recognition of a tax provision on our net income earned after that date and the recording of a net deferred tax asset as of the election date of $16.6 million as a benefit for income taxes from operations. The accumulated deficit and other comprehensive loss as of the election date have been eliminated against common units and preferred units with the allocation determined in accordance with the terms of the Beachbody, LLC Operating Agreement. We are subject to income taxes in the United States, Canada, and the United Kingdom. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. In evaluating its ability to recover deferred tax assets, we consider all available positive and negative evidence, including historical and current operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. Based on the level of losses, we have established a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits in interest expense and other income, net, respectively, in the accompanying unaudited condensed consolidated statements of operations. Accrued interest and penalties are included in accrued expenses and other liabilities in the unaudited condensed consolidated balance sheets. Recent Accounting Pronouncements See Note 1, Organization, Business and Summary of Accounting Policies, of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.