UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ________
Commission File Number: 001-41610
INTERACTIVE STRENGTH INC.
(Exact name of registrant as specified in its charter)
Delaware | 82-1432916 |
( State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
1005 Congress Ave, Suite 925 Austin, Texas | 78701 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (512) 885-0035
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common stock, $0.0001 par value per share |
| TRNR |
| The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
Emerging growth company |
| ☒ |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 13, 2024, the registrant had 625,067 shares of common stock, $0.0001 par value per share, outstanding.
Unless otherwise indicated, all share numbers and per share totals have been adjusted to reflect the 1-for-40 reverse stock split that was effective on June 14, 2024.
TABLE OF CONTENTS
Risk Factor Summary |
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Part I. Financial Information |
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|
|
1 | |
|
|
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations | 42 |
|
|
Item 3 Quantitative and Qualitative Disclosures About Market Risk | 58 |
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|
58 | |
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Part II. Other Information |
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|
60 | |
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|
60 | |
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60 | |
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61 |
i
Item 1. Financial Statements
INTERACTIVE STRENGTH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except share and per share amounts)
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,269 |
|
| $ | — |
|
Accounts receivable, net of allowances |
|
| 519 |
|
|
| 1 |
|
Inventories, net |
|
| 4,773 |
|
|
| 2,607 |
|
Derivatives |
|
| 19 |
|
|
| — |
|
Vendor deposits |
|
| 1,976 |
|
|
| 1,815 |
|
Prepaid expenses and other current assets |
|
| 684 |
|
|
| 933 |
|
Total current assets |
|
| 10,240 |
|
|
| 5,356 |
|
Property and equipment, net |
|
| 164 |
|
|
| 444 |
|
Right-of-use-assets |
|
| 492 |
|
|
| 283 |
|
Intangible assets, net |
|
| 7,184 |
|
|
| 2,254 |
|
Long-term inventories, net |
|
| 3,198 |
|
|
| 2,908 |
|
Vendor deposits long term |
|
| 310 |
|
|
| 309 |
|
Goodwill |
|
| 13,519 |
|
|
| — |
|
Other assets |
|
| 2,646 |
|
|
| 5,248 |
|
Total Assets |
| $ | 37,753 |
|
| $ | 16,802 |
|
Liabilities, preferred stock and stockholders' equity (deficit) |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ | 12,880 |
|
| $ | 10,562 |
|
Accrued expenses and other current liabilities |
|
| 3,174 |
|
|
| 906 |
|
Operating lease liability, current portion |
|
| 302 |
|
|
| 54 |
|
Deferred revenue |
|
| 104 |
|
|
| 77 |
|
Loan payable current portion |
|
| 5,298 |
|
|
| 5,806 |
|
Senior secured notes |
|
| — |
|
|
| 3,096 |
|
Income tax payable |
|
| 7 |
|
|
| 7 |
|
Derivatives |
|
| — |
|
|
| 122 |
|
Convertible note payable |
|
| 4,784 |
|
|
| 904 |
|
Total current liabilities |
|
| 26,549 |
|
|
| 21,534 |
|
Operating lease liability, net of current portion |
|
| 210 |
|
|
| 229 |
|
Other long term liabilities |
|
| 1,050 |
|
|
| — |
|
Warrant liabilities |
|
| 156 |
|
|
| 591 |
|
Loan payable noncurrent |
|
| 3,996 |
|
|
| — |
|
Total liabilities |
| $ | 31,961 |
|
| $ | 22,354 |
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
| ||
Stockholders' equity (deficit) |
|
|
|
|
|
| ||
Series A preferred stock, par value $0.0001; 10,000,000 and 0 shares authorized as of September 30, 2024 and December 31, 2023, respectively; 5,368,865 and 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively. |
|
| 1 |
|
|
| — |
|
Series B preferred stock, par value $0.0001; 1,500,000 and 0 shares authorized as of September 30, 2024 and December 31, 2023, respectively; 1,500,000 and 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively. |
|
| — |
|
|
| — |
|
Series C preferred stock, par value $0.0001; 5,000,000 and 0 shares authorized as of September 30, 2024 and December 31, 2023, respectively; 2,861,128 and 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively. |
|
| — |
|
|
| — |
|
Common stock, par value $0.0001; 900,000,000 shares authorized as of September 30, 2024 and December 31, 2023, respectively; 17,170,456 and 354,802 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively. |
|
| 8 |
|
|
| 7 |
|
Additional paid-in capital |
|
| 202,509 |
|
|
| 161,252 |
|
Accumulated other comprehensive (loss) income |
|
| (105 | ) |
|
| 100 |
|
Accumulated deficit |
|
| (196,621 | ) |
|
| (166,911 | ) |
Total stockholders' equity (deficit) |
|
| 5,792 |
|
|
| (5,552 | ) |
Total liabilities, preferred stock and stockholders' equity (deficit) |
| $ | 37,753 |
|
| $ | 16,802 |
|
1
INTERACTIVE STRENGTH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(In thousands, except share and per share amounts)
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| |||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fitness product revenue |
| $ | 1,617 |
|
| $ | 206 |
|
| $ | 1,927 |
|
| $ | 502 |
|
Membership revenue |
|
| 224 |
|
|
| 38 |
|
|
| 586 |
|
|
| 94 |
|
Training revenue |
|
| 173 |
|
|
| 62 |
|
|
| 484 |
|
|
| 183 |
|
Total revenue |
|
| 2,014 |
|
|
| 306 |
|
|
| 2,997 |
|
|
| 779 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of fitness product revenue |
|
| (1,349 | ) |
|
| (360 | ) |
|
| (2,075 | ) |
|
| (1,529 | ) |
Cost of membership |
|
| (768 | ) |
|
| (960 | ) |
|
| (2,768 | ) |
|
| (2,861 | ) |
Cost of training |
|
| (185 | ) |
|
| (109 | ) |
|
| (522 | ) |
|
| (300 | ) |
Total cost of revenue |
|
| (2,302 | ) |
|
| (1,429 | ) |
|
| (5,365 | ) |
|
| (4,690 | ) |
Gross loss |
|
| (288 | ) |
|
| (1,123 | ) |
|
| (2,368 | ) |
|
| (3,911 | ) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Research and development |
|
| 2,212 |
|
|
| 2,357 |
|
|
| 6,708 |
|
|
| 7,796 |
|
Sales and marketing |
|
| 194 |
|
|
| 282 |
|
|
| 562 |
|
|
| 1,473 |
|
General and administrative |
|
| 5,060 |
|
|
| 6,313 |
|
|
| 15,438 |
|
|
| 30,043 |
|
Total operating expenses |
|
| 7,466 |
|
|
| 8,952 |
|
|
| 22,708 |
|
|
| 39,312 |
|
Loss from operations |
|
| (7,754 | ) |
|
| (10,075 | ) |
|
| (25,076 | ) |
|
| (43,223 | ) |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense), net |
|
| 256 |
|
|
| (179 | ) |
|
| (506 | ) |
|
| 25 |
|
Interest expense |
|
| (1,831 | ) |
|
| (154 | ) |
|
| (6,750 | ) |
|
| (1,382 | ) |
Gain upon debt forgiveness |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,595 |
|
Loss on issuance of warrants |
|
| (4,780 | ) |
|
| — |
|
|
| (5,551 | ) |
|
| — |
|
Gain (loss) upon extinguishment of debt and accounts payable |
|
| 110 |
|
|
| — |
|
|
| (1,622 | ) |
|
| — |
|
Change in fair value of convertible notes |
|
| — |
|
|
| — |
|
|
| (316 | ) |
|
| (252 | ) |
Change in fair value of earnout |
|
| — |
|
|
| — |
|
|
| 1,300 |
|
|
| — |
|
Change in fair value of derivatives |
|
| 956 |
|
|
| — |
|
|
| 201 |
|
|
| — |
|
Change in fair value of warrants |
|
| 5,902 |
|
|
| — |
|
|
| 9,148 |
|
|
| 2,266 |
|
Total other income (expense), net |
|
| 613 |
|
|
| (333 | ) |
|
| (4,096 | ) |
|
| 3,252 |
|
Loss before provision for income taxes |
|
| (7,141 | ) |
|
| (10,408 | ) |
|
| (29,172 | ) |
|
| (39,971 | ) |
Income tax expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net loss attributable to common stockholders |
| $ | (7,141 | ) |
| $ | (10,408 | ) |
| $ | (29,172 | ) |
| $ | (39,971 | ) |
Net loss per share - basic and diluted |
| $ | (1.53 | ) |
| $ | (29.35 | ) |
| $ | (15.22 | ) |
| $ | (136.06 | ) |
Weighted average common stock outstanding—basic and diluted |
|
| 4,653,452 |
|
|
| 354,656 |
|
|
| 1,916,375 |
|
|
| 293,773 |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| |||||
Net loss |
| $ | (7,141 | ) |
| $ | (10,408 | ) |
| $ | (29,172 | ) |
| $ | (39,971 | ) |
Other comprehensive (loss) gain: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation (loss) gain |
|
| (242 | ) |
|
| 172 |
|
|
| (205 | ) |
|
| (79 | ) |
Total comprehensive loss |
| $ | (7,383 | ) |
| $ | (10,236 | ) |
| $ | (29,377 | ) |
| $ | (40,050 | ) |
2
INTERACTIVE STRENGTH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(In thousands, except share amounts)
| Convertible Preferred Stock Series B |
| Convertible Preferred Stock Series A |
| Convertible Preferred Stock Series B |
| Convertible Preferred Stock Series C |
| Common Stock |
| Class A Common Stock |
| Class B Common Stock |
| Subscription Receivable Preferred Stock Series A |
| Additional Paid-In Capital |
| Accumulated Other Comprehensive Income (Loss) |
| Accumulated Deficit |
| Total Stockholders' (Deficit) Equity |
| |||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balances at December 31, 2022 |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| 60,417 |
|
| 4 |
|
| 856 |
| $ | — |
|
| — |
|
| 112,436 |
|
| 365 |
|
| (115,538 | ) |
| (2,733 | ) |
Issuance of Common stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 216,923 |
|
| 3 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,449 |
|
| — |
|
| — |
|
| 4,452 |
|
Issuance of Common stock upon conversion of Class A Common Stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 60,417 |
|
| 4 |
|
| (60,417 | ) |
| (4 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Issuance of Class B common stock upon exercise of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 16,161 |
|
| — |
|
| — |
|
| 14 |
|
| — |
|
| — |
|
| 14 |
|
Issuance of Common stock upon conversion of Class B Common Stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 17,017 |
|
| — |
|
| — |
|
| — |
|
| (17,017 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 15,057 |
|
| — |
|
| — |
|
| 15,057 |
|
Net exercise of options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 323 |
|
| — |
|
| — |
|
| 323 |
|
Foreign currency translation gain (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (115 | ) |
| — |
|
| (115 | ) |
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (15,961 | ) |
| (15,961 | ) |
Balances at March 31, 2023 |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| 294,357 |
| $ | 7 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | 132,279 |
| $ | 250 |
| $ | (131,499 | ) | $ | 1,037 |
|
Initial public offering, net of issuance cost of $1.2 million |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,500 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,820 |
|
| — |
|
| — |
|
| 10,820 |
|
Initial public offering costs |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,607 | ) |
| — |
|
| — |
|
| (4,607 | ) |
Issuance of Common stock upon conversion of convertible notes |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 14,129 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,521 |
|
| — |
|
| — |
|
| 4,521 |
|
Exercise of stock warrants |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 8,477 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,468 |
|
| — |
|
| — |
|
| 2,468 |
|
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,510 |
|
| — |
|
| — |
|
| 4,510 |
|
Foreign currency translation gain (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (136 | ) |
| — |
|
| (136 | ) |
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (13,602 | ) |
| (13,602 | ) |
Balances at June 30, 2023 |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| 354,463 |
| $ | 7 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | 149,991 |
| $ | 114 |
| $ | (145,101 | ) | $ | 5,011 |
|
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,951 |
|
| — |
|
| — |
|
| 4,951 |
|
Foreign currency translation gain (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 172 |
|
| — |
|
| 172 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,408 | ) |
| (10,408 | ) |
Balances at September 30, 2023 |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| 354,463 |
| $ | 7 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | 154,942 |
| $ | 286 |
| $ | (155,509 | ) | $ | (274 | ) |
3
INTERACTIVE STRENGTH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(In thousands, except share amounts)
| Convertible Preferred Stock Series B |
| Convertible Preferred Stock Series A |
| Convertible Preferred Stock Series B |
| Convertible Preferred Stock Series C |
| Common Stock |
| Class A Common Stock |
| Class B Common Stock |
| Subscription Receivable Preferred Stock Series A |
| Additional Paid-In Capital |
| Accumulated Other Comprehensive Income (Loss) |
| Accumulated Deficit |
| Total Stockholders' (Deficit) Equity |
| |||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balances at December 31, 2023 |
| — |
| $ | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 354,802 |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 161,252 |
|
| 100 |
|
| (166,911 | ) |
| (5,552 | ) |
Issuance of preferred stock Series A upon conversion of debt |
| — |
|
| — |
|
| 3,430,895 |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,082 |
|
| — |
|
| — |
|
| 10,082 |
|
Subscription receivable for issuance of Series A preferred stock |
| — |
|
| — |
|
| 1,500,000 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,000 | ) |
| — |
|
| — |
|
| — |
|
| (3,000 | ) |
Issuance of preferred stock series B upon acquisition of CLMBR, Inc. |
| 1,500,000 |
|
| 2,688 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Issuance of common stock upon acquisition of CLMBR, Inc. |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 35,723 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,014 |
|
| — |
|
| — |
|
| 1,014 |
|
Issuance of Common stock upon waiver to enter into Note Agreement |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,250 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 177 |
|
| — |
|
| — |
|
| 177 |
|
Issuance of shares upon issuance of convertible notes |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 18,750 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 547 |
|
| — |
|
| — |
|
| 547 |
|
Issuance of Common stock from equity line of credit |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 32,777 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 692 |
|
| — |
|
| — |
|
| 692 |
|
Issuance of Common stock upon conversion of convertible notes |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,149 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 866 |
|
| — |
|
| — |
|
| 866 |
|
Issuance of Common stock upon exercise of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 394 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,586 |
|
| — |
|
| — |
|
| 3,586 |
|
Foreign currency translation gain (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 39 |
|
| — |
|
| 39 |
|
Net loss |
|
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (11,394 | ) |
| (11,394 | ) | ||
Balances at March 31, 2024 |
| 1,500,000 |
| $ | 2,688 |
|
| 4,930,895 |
| $ | 1 |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| 485,845 |
| $ | 7 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | (3,000 | ) | $ | 178,216 |
| $ | 139 |
| $ | (178,305 | ) | $ | (2,942 | ) |
Issuance of preferred stock Series A upon conversion of debt |
| — |
|
| — |
|
| 1,562,970 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,368 |
|
| — |
|
| — |
|
| 2,368 |
|
Subscription receivable for issuance of Series A preferred stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,000 |
|
| — |
|
| — |
|
| — |
|
| 3,000 |
|
Reclassification of series B preferred stock to permanent equity |
| (1,500,000 | ) |
| (2,688 | ) |
| — |
|
| — |
|
| 1,500,000 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,955 |
|
| — |
|
| — |
|
| 2,955 |
|
1 for 40 reverse stock split share round up |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 100,312 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Registered direct offering, net of issuance costs of $0.2 million |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 142,046 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 809 |
|
| — |
|
| — |
|
| 809 |
|
Registered direct offering costs |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (74 | ) |
| — |
|
| — |
|
| (74 | ) |
Issuance of Common stock from At the Market offering, net of issuance costs of $0.1 million |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 162,378 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 405 |
|
| — |
|
| — |
|
| 405 |
|
At the Market offering costs |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (50 | ) |
| — |
|
| — |
|
| (50 | ) |
Issuance of Common stock from equity line of credit |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7,918 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 65 |
|
| — |
|
| — |
|
| 65 |
|
Issuance of Common stock upon conversion of convertible notes |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 251,084 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,084 |
|
| — |
|
| — |
|
| 1,084 |
|
Issuance of shares upon conversion of warrants |
| — |
|
| — |
|
| 375,000 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 480 |
|
| — |
|
| — |
|
| 480 |
|
Issuance of Common stock upon exercise of warrants |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 23,112 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 92 |
|
| — |
|
| — |
|
| 92 |
|
Issuance of Common stock upon exercise of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 82 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,860 |
|
| — |
|
| — |
|
| 2,860 |
|
Foreign currency translation gain (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (2 | ) |
| — |
|
| (2 | ) |
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,637 | ) |
| (10,637 | ) |
Balances at June 30, 2024 |
| — |
| $ | — |
|
| 6,868,865 |
| $ | 1 |
|
| 1,500,000 |
| $ | 0 |
|
| — |
| $ | — |
|
| 1,172,777 |
| $ | 7 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | 189,210 |
| $ | 137 |
| $ | (188,942 | ) | $ | 413 |
|
Issuance of Common stock from Best Efforts Offering |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 210,000 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 296 |
|
| — |
|
| — |
|
| 296 |
|
Best Efforts offering costs |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (16 | ) |
| — |
|
| — |
|
| (16 | ) |
Series A Preferred dividends declared and paid in kind |
| — |
|
| — |
|
| 59,668 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 538 |
|
| — |
|
| (538 | ) |
| — |
|
Issuance of preferred stock series C upon conversion of preferred series A and conversion of debt |
| — |
|
| — |
|
| (1,559,668 | ) |
| — |
|
| — |
|
| — |
|
| 2,861,128 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,720 |
|
| — |
|
| — |
|
| 2,720 |
|
Issuance of Common stock from At the Market offering |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 11,873,761 |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,668 |
|
| — |
|
| — |
|
| 3,669 |
|
Issuance of Common stock upon exercise of warrants |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,626,880 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,563 |
|
| — |
|
| — |
|
| 2,563 |
|
Issuance of Common stock upon extinguishment of debt |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,286,957 |
|
| 0 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 373 |
|
| — |
|
| — |
|
| 373 |
|
Issuance of Common stock upon exercise of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 81 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,157 |
|
| — |
|
| — |
|
| 3,157 |
|
Foreign currency translation gain (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (242 | ) |
| — |
|
| (242 | ) |
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,141 | ) |
| (7,141 | ) |
Balances at September 30, 2024 |
| — |
| $ | — |
|
| 5,368,865 |
| $ | 1 |
|
| 1,500,000 |
| $ | 0 |
|
| 2,861,128 |
| $ | 0 |
|
| 17,170,456 |
| $ | 8 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | 202,509 |
| $ | (105 | ) | $ | (196,621 | ) |
| 5,792 |
|
4
INTERACTIVE STRENGTH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(In thousands)
| Nine Months Ended September 30, |
| ||||||
| 2024 |
|
| 2023 |
| |||
Cash Flows From Operating Activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (29,172 | ) |
| $ | (39,971 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
| ||
Foreign currency |
|
| 218 |
|
|
| 64 |
|
Depreciation |
|
| 418 |
|
|
| 743 |
|
Amortization |
|
| 4,687 |
|
|
| 4,188 |
|
Non-cash lease expense |
|
| 203 |
|
|
| 66 |
|
Inventory valuation loss and inventory step up amortization |
|
| 141 |
|
|
| 261 |
|
Stock-based compensation |
|
| 9,448 |
|
|
| 23,773 |
|
Loss on extinguishment of debt and accounts payable |
|
| 1,622 |
|
|
| — |
|
Gain upon debt forgiveness |
|
| — |
|
|
| (2,595 | ) |
Fair value of common stock issued with Best Efforts Offering |
|
| 299 |
|
|
| — |
|
Interest expense |
|
| 2,147 |
|
|
| 77 |
|
Amortization of debt discount |
|
| 4,603 |
|
|
| 1,305 |
|
Common stock issued to lender in connection with entering Equity Line of Credit Agreement |
|
| 368 |
|
|
| — |
|
Change in fair value of convertible notes |
|
| 316 |
|
|
| 252 |
|
Loss on issuance of warrants |
|
| 5,894 |
|
|
| 442 |
|
Loss on exchange of warrants for equity |
|
| 358 |
|
|
| — |
|
Change in fair value of earnout |
|
| (1,300 | ) |
|
| — |
|
Change in fair value of derivatives |
|
| (201 | ) |
|
| — |
|
Change in fair value of warrants |
|
| (9,148 | ) |
|
| (2,266 | ) |
Changes in operating assets and liabilities |
|
|
|
|
|
| ||
Accounts receivable |
|
| (1,134 | ) |
|
| (7 | ) |
Inventories |
|
| 684 |
|
|
| (442 | ) |
Prepaid expenses and other current assets |
|
| 342 |
|
|
| 464 |
|
Vendor deposits |
|
| (101 | ) |
|
| 323 |
|
Warrant liabilities |
|
| — |
|
|
| — |
|
Other assets |
|
| (13 | ) |
|
| (10 | ) |
Accounts payable |
|
| (3 | ) |
|
| 585 |
|
Accrued expenses and other current liabilities |
|
| 862 |
|
|
| (780 | ) |
Deferred revenue |
|
| (234 | ) |
|
| 37 |
|
Operating lease liabilities |
|
| (213 | ) |
|
| (70 | ) |
Net cash used in operating activities |
|
| (8,909 | ) |
|
| (13,561 | ) |
Cash Flows From Investing Activities: |
|
|
|
|
|
| ||
Acquisition of internal use software |
|
| — |
|
|
| (349 | ) |
Acquisition of business, cash paid, net of cash acquired |
|
| (1,447 | ) |
|
| — |
|
Acquisition of software and content |
|
| 40 |
|
|
| (797 | ) |
Net cash used in investing activities |
|
| (1,407 | ) |
|
| (1,146 | ) |
Cash Flows From Financing Activities: |
|
|
|
|
|
| ||
Payments of loans |
|
| (831 | ) |
|
| — |
|
Proceeds from loans |
|
| 1,280 |
|
|
| — |
|
Proceeds from related party loans |
|
| 650 |
|
|
| 465 |
|
Payments of related party loans |
|
| (527 | ) |
|
| (483 | ) |
Proceeds from issuance of common stock and pre-funded warrants upon offering, net of offering costs |
|
| 4,510 |
|
|
| 10,820 |
|
Payments of offering costs |
|
| (90 | ) |
|
| (1,453 | ) |
Proceeds from senior secured notes |
|
| — |
|
|
| 3,030 |
|
Payments of senior secured notes |
|
| — |
|
|
| (2,000 | ) |
Redemption on convertible notes |
|
| (212 | ) |
|
| — |
|
Proceeds from issuance of convertible notes, net of issuance costs |
|
| 4,756 |
|
|
| — |
|
Proceeds from the issuance of Class A common stock |
|
| — |
|
|
| 4,247 |
|
Proceeds from issuance of common stock from At the Market Offering, net of issuance costs |
|
| 4,023 |
|
|
| — |
|
Interest paid on loans and convertible notes |
|
| (1,093 | ) |
|
| — |
|
Proceeds from the exercise of common stock options and warrants |
|
| 92 |
|
|
| 30 |
|
Proceeds from the issuance of common stock from equity line of credit |
|
| 389 |
|
|
| — |
|
Net cash provided by financing activities |
|
| 12,947 |
|
|
| 14,656 |
|
Effect of exchange rate on cash |
|
| (362 | ) |
|
| (145 | ) |
Net Change In Cash and Cash Equivalents |
|
| 2,269 |
|
|
| (196 | ) |
Cash and restricted cash at beginning of the period |
|
| - |
|
|
| 226 |
|
Cash and restricted cash at end of period |
| $ | 2,269 |
|
| $ | 30 |
|
Supplemental Disclosure Of Cash Flow Information: |
|
|
|
|
|
| ||
Interest expense due but not paid |
|
| 1,054 |
|
|
| — |
|
Non-Cash Investing and Financing Information: |
|
|
|
|
|
| ||
Property & equipment in accounts payable |
|
| 18 |
|
|
| 18 |
|
Issuance of common stock and series B preferred stock for the acquisition of business |
|
| 3,969 |
|
|
| — |
|
Offering costs in accounts payable and accrued expenses |
|
| 69 |
|
|
| 3,155 |
|
Issuance of preferred stock through conversion of debt |
|
| 15,170 |
|
|
| — |
|
Exercise and exchange of stock warrants |
|
| 480 |
|
|
| 2,468 |
|
Conversion of convertible notes into common stock |
|
| 1,949 |
|
|
| 4,521 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
| — |
|
|
| 313 |
|
Decrease in right-of-use asset and operating lease liabilities due to lease termination |
|
| — |
|
|
| 61 |
|
Issuance of common stock from convertible notes and conversion of debt |
|
| 920 |
|
|
| — |
|
Issuance of common stock from rights offering |
|
| — |
|
|
| 202 |
|
Net exercise of options |
|
| — |
|
|
| 323 |
|
Non cash settlement of accounts receivable and debt |
|
| 750 |
|
|
| — |
|
Stock-based compensation capitalized in intangible asset and other assets |
|
| 155 |
|
|
| 745 |
|
5
INTERACTIVE STRENGTH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Description and Organization
Interactive Strength Inc. (the "Company") is the parent company of two leading brands serving the commercial and at-home markets with specialty fitness equipment and virtual training: CLMBR and FORME. CLMBR manufactures vertical climbing equipment and provides a unique digital and on-demand training platform. FORME is a hardware manufacturer and digital fitness service provider that combines award-winning smart gyms with live 1:1 personal training (from real humans) to deliver an immersive experience ("Connected Fitness Products"). The combination of technology with expert training leads to better outcomes for both consumers and trainers alike. CLMBR and FORME offer unique fitness solutions for both the commercial and at-home markets. Our Members are defined as any individual who has a FORME or CLMBR account through a paid connected fitness membership.
Reverse Stock Split
On June 13, 2024, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, $0.0001 par value per share, at a rate of 1-for-40 (the “Reverse Stock Split”), effective as of 9:00 a.m. Eastern Time on June 14, 2024.
The Reverse Stock Split decreased the number of shares of Common Stock issued and outstanding from 26,581,056 shares to 664,526 shares, subject to adjustment for the rounding up of fractional shares. Accordingly, each holder of Common Stock now owns fewer shares of Common Stock as a result of the Reverse Stock Split. However, the Reverse Stock Split affected all holders of Common Stock uniformly and did not affect any stockholder’s percentage ownership interest in the Company, except to the extent that the Reverse Stock Split resulted in an adjustment to a stockholder’s ownership of Common Stock due to the treatment of fractional shares in the Reverse Stock Split. Therefore, voting rights and other rights and preferences of the holders of Common Stock were not affected by the Reverse Stock Split (other than as a result of the treatment of fractional shares). Common stock issued pursuant to the Reverse Stock Split remains fully paid and nonassessable, without any change in the par value per share.
The Common Stock began trading on a Reverse Stock Split-adjusted basis on The Nasdaq Capital Market on June 14, 2024. The trading symbol for the Common Stock remains “TRNR.” The new CUSIP number for the Common Stock following the Reverse Stock Split is 45840Y203.
Initial Public Offering
In May 2023, the Company closed its initial public offering ("IPO") in which we issued and sold 37,500 shares of common stock at a public offering price of $320.00 per share and excluding shares sold in the IPO by certain of our existing stockholders. Total proceeds, after deducting underwriting commissions of $1.2 million and other offering expenses of $4.6 million, was $6.2 million.
Acquisition of CLMBR, Inc.
On October 6, 2023, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with CLMBR and CLMBR1, LLC (collectively, the “Sellers”) to purchase and acquire substantially all of the assets and assume certain liabilities of the Sellers. On January 22, 2024, the Company and the Sellers entered into an amended and restated Asset Purchase Agreement (the “Amended Agreement”). On February 2, 2024, pursuant to the Amended Agreement, the Company completed the acquisition for a total purchase price of approximately $16.1 million, consisting of (i) cash of $30,000, (ii) 1,428,922 shares of the Company’s common stock with a fair value in the aggregate of $1.0 million, (iii) 1,500,000 shares of the Company’s non-voting Series B preferred stock with a fair value in the aggregate of $3.0 million, (iv) contingent consideration with a fair value of $1.3 million, and (v) the retirement of $9.4 million of senior debt and $1.4 million in related fees, such retirement to be in the form of a $1.4 million cash payment to the lender of the senior debt and the issuance of an $8.0 million promissory note to such lender (the “Acquisition”).
The Acquisition was accounted for under the acquisition method of accounting under ASC 805, Business Combinations. Assets acquired and liabilities assumed were recorded in the condensed consolidated balance sheet at their estimated fair values as of February 2, 2024, with the remaining unallocated purchase price recorded as goodwill. See Note 21. that outlines the Company’s consideration transferred and the identifiable net assets acquired at their estimated fair value as of February 2, 2024.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements include the accounts of Interactive Strength Inc.
6
and its subsidiaries in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, cash flows, and the changes in equity for the interim period.
Liquidity and Capital Resources
In accordance with Accounting Standards Update ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), or ASU 205-40, management evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying condensed consolidated financial statements were issued.
As an emerging growth company, the Company is subject to certain inherent risks and uncertainties associated with the development of an enterprise. In this regard, since the Company’s inception, substantially all of management’s efforts have been devoted to making investments in research and development including the development of revenue generating products and services and the development of a commercial organization, all at the expense of short-term profitability.
As of the date the accompanying condensed consolidated financial statements were issued (the “issuance date”), management evaluated the following adverse conditions and events present at the Company in accordance with ASU 205-40:
7
The Company believes that it will stay compliant with the Rule through the end of the fiscal year and beyond because, since September 30, 2024, the Company has issued more shares of common stock pursuant to the At The Market offering and the extinguishment of debt.
These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
8
Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements as certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 1, 2024.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated annual financial statements for the years ended December 31, 2023 and 2022 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company’s condensed consolidated balance sheet as of September 30, 2024 the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2024 and 2023, the condensed consolidated statement of convertible preferred stock and stockholders' equity (deficit) as of September 30, 2024 and condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2024 and 2023 are unaudited. The results for the three and nine months ended September 30, 2024, are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim periods, or any future year or period.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, the realizability of inventory, fair value measurements, useful lives of long lived assets, including property and equipment and finite lived intangible assets, product warranty, stock-based compensation expense, warrant liabilities, accrual of acquisition earn-outs, estimated legal accruals, valuation of deferred taxes, valuation of derivatives, fair value of goodwill and other intangible assets, and commitments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results may differ from these estimates.
Segment Information
Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. The Company has one operating segment, the development and sale of its at-home fitness technology platform. The Company’s chief operating decision maker, its chief executive officer, manages the Company’s operations on a consolidated basis for the purpose of allocating resources. As the Company has one reportable segment, all required segment financial information is presented in the condensed consolidated financial statements. The Company currently operates in the United States, the United Kingdom, and Taiwan. As of September 30, 2024 and 2023, substantially all of the Company’s long-lived assets are held in the United States.
Significant Accounting Policies
During the nine months ended September 30, 2024, there were no significant changes to the Company’s significant accounting policies as described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2023 except as described below:
Goodwill
Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. The Company follows the provisions of ASC Topic 350, “Intangibles —Goodwill and Other”, which requires an annual impairment test for goodwill. The Company may first choose to perform a qualitative evaluation of the likelihood of goodwill and intangible assets impairment. For the goodwill that was the result of current year acquisitions, the Company chose to perform a qualitative evaluation. If the Company determined a quantitative evaluation was necessary, the goodwill at the reporting unit was subject to a two-step impairment test. The first step compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, the Company completes the second step in order to determine the amount of goodwill impairment loss that should be recorded. In the second step, the Company determines an implied fair value of the reporting unit’s goodwill by allocating
9
the fair value of the reporting unit to all of the assets and liabilities other than goodwill. As of September 30, 2024 there was no goodwill impairment. For additional information refer to Note 6.—Goodwill and Intangible Assets.
Identifiable Intangible Assets
The Company follows the provisions of ASC Topic 360, “Property, Plant and Equipment”, which establishes accounting standards for the impairment of long-lived assets such as property, plant and equipment and intangible assets subject to amortization. The Company reviews long-lived assets to be held and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset. The Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. During the nine months ended September 30, 2024 and 2023, there was no impairment of the identified intangible assets.
The Company’s intangible assets subject to amortization consist of developed technology, customer related intangibles, trademark and tradenames, and content that are amortized on a straight-line basis over the estimated useful lives of the related intangible asset. The estimated useful lives of the respective intangible assets range from 3 years to 13 years.
The Company estimates the fair value of intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates for this category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. For the periods presented, the Company did not recognize any impairment of intangible assets.
Business Combinations
The Company accounts for business combinations under the provisions of ASC 805, Business Combinations, which requires that the acquisition method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. ASC 805 also specifies criteria that intangible assets acquired in a business combination must be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date with changes in the fair value recorded through earnings.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s condensed consolidated financial statements upon adoption. The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and has elected not to “opt out” of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will adopt the new or revised standard at the time public companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. As noted below, certain new or revised accounting standards were early adopted.
Accounting Pronouncements Not Yet Adopted
ASU 2020-04 and ASU 2022-06
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The amendments are elective and are effective upon issuance. In December 2022, the FASB issued ASU 2022-06, “Reference rate reform (Topic 848): Deferral of the sunset date of Topic 848” which defers the expiration date for Topic 848 from December 31, 2022 until December 31, 2024. The Company is currently evaluating the potential impact of adopting this new
10
accounting guidance, but does not expect the adoption of the standard to have a material impact on its consolidated financial statements.
ASU 2023-09
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU modifies income tax disclosures by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliations and (ii) the disclosure of income taxes paid disaggregated by jurisdiction, among other requirements. This ASU is effective for fiscal years beginning after December 31, 2024 and should be applied on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. We are currently evaluating the impact of the new standard, which is limited to financial statement disclosures.
ASU 2023-07
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in the ASU improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit and loss, and provide new segment disclosure requirements for entities with a single reportable segment, among other disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years after December 15, 2024 and should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. We are currently evaluating the impact of the new standard, which is limited to financial statement disclosures.
ASU 2024-03
In November 2024, the FASB issued ASU 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses". The amendments in ASU 2024-03 address investor requests for more detailed expense information and require additional disaggregated disclosures in the notes to financial statements for certain categories of expenses that are included on the face of the income statement. This guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
The Company’s primary source of revenue is solely derived from the United States from sales of its Connected Fitness Products and related accessories and associated recurring Membership revenue, as well as from sales of personal training services recorded within Training revenue.
The Company determines revenue recognition through the following steps:
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s revenue is reported net of sales returns, discounts and incentives as a reduction of the transaction price. The Company estimates its liability for product returns and concessions based on historical trends by product category, impact of seasonality, and an evaluation of current economic and market conditions and records the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of revenue. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.
The Company applies the practical expedient as per ASC 606-10-50-14 and does not disclose information related to remaining performance obligations due to their original expected terms being one year or less.
The Company expenses sales commissions on its Connected Fitness Products when incurred because the amortization period would have been less than one year. These costs are recorded in Sales and marketing in the Company’s condensed consolidated statements of operations and comprehensive loss.
11
Connected Fitness Products
Connected Fitness Products include the Company’s portfolio of Connected Fitness Products and related accessories, delivery and installation services, and extended warranty agreements. The Company recognizes Connected Fitness Product revenue net of sales returns and discounts when the product has been delivered to the customer, except for extended warranty revenue which is recognized over the warranty period. The Company allows customers to return products within thirty days of purchase, as stated in its return policy.
Amounts paid for payment processing fees for credit card sales for Connected Fitness Products are included as a reduction to fitness product revenue in the Company’s condensed consolidated statements of operations and comprehensive loss.
Membership
The Company’s memberships provide unlimited access to content in its library of on-demand fitness classes. The Company’s memberships are offered on a month-to-month basis.
Amounts paid for membership fees are included within deferred revenue on the Company’s condensed consolidated balance sheets and recognized ratably over the membership term. The Company records payment processing fees for its monthly membership charges within cost of membership in the Company’s condensed consolidated statements of operations and comprehensive loss.
Training
The Company’s training services are personal training services delivered through the Connected Fitness Products, third-party mobile devices and in-studio classes. Training revenue is recognized at the time the services are delivered.
Standard Product Warranty
The Company offers a standard product warranty that its Connected Fitness Products and related accessories will operate under normal, non-commercial use for a period of one year which covers the touchscreen, frame and all incorporated elements, and related accessories from the date of original delivery. The Company has the obligation, at its option, to either repair or replace the defective product. At the time revenue is recognized, an estimate of future warranty costs are recorded as a component of cost of revenue. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies and business practices.
The Company also offers the option for customers in some markets to purchase a third-party extended warranty and service contract that extends or enhances the technical support, parts, and labor coverage offered as part of the base warranty included with the Connected Fitness Product for an additional period of 24 to 48 months.
For third-party extended warranty service sold along with the Company’s Connected Fitness Products, the Company does not obtain control of the warranty before transferring it to the customers. Therefore, the Company accounts for revenue related to the fees paid to the third-party extended warranty provider on a net basis, by recognizing only the net commission it retains. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product.
Inventories consist of the following:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Finished products |
| $ | 4,773 |
|
| $ | 2,607 |
|
Finished products - Long Term |
|
| 2,620 |
|
|
| 2,376 |
|
Raw materials - Long Term |
|
| 578 |
|
|
| 532 |
|
Total inventories, net |
| $ | 7,971 |
|
| $ | 5,515 |
|
Finished products - Long Term represents inventory not expected to be sold in the next twelve months. Raw materials - Long Term represents the components and parts currently being stored in our Taiwan facility that will be shipped to our manufacturing partners and will not be used within one year.
12
Total inventory of $3.5 million was acquired in the Acquisition and recorded at fair value on the acquisition date. Refer to Note 21 Acquisitions for more information.
Property and equipment consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Pre-production tooling |
| $ | 3,094 |
|
| $ | 3,094 |
|
Machinery and equipment |
|
| 191 |
|
|
| 125 |
|
Leasehold improvements |
|
| 186 |
|
|
| 113 |
|
Furniture and fixtures |
|
| 25 |
|
|
| 25 |
|
Exercise equipment |
|
| 13 |
|
|
| 13 |
|
Total |
|
| 3,509 |
|
|
| 3,370 |
|
Less: Accumulated depreciation |
|
| (3,345 | ) |
|
| (2,926 | ) |
Total property and equipment, net |
| $ | 164 |
|
| $ | 444 |
|
Depreciation expense amounted to $0.1 million and $0.2 million for each of the three months ended September 30, 2024 and 2023, respectively. Depreciation expense amounted to $0.4 million and $0.7 million for each of the nine months ended September 30, 2024 and 2023, respectively.
Identifiable intangible assets, net consist of the following:
|
| As of September 30, |
|
| As of December 31, |
| ||||||||||||||||||
| 2024 |
|
| 2023 |
| |||||||||||||||||||
(in thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
| ||||||
Internal-use software |
| $ | 6,248 |
|
| $ | (5,386 | ) |
| $ | 862 |
|
| $ | 6,248 |
|
| $ | (3,994 | ) |
| $ | 2,254 |
|
Developed technology |
|
| 1,500 |
|
|
| (164 | ) |
|
| 1,336 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Customer related |
|
| 4,400 |
|
|
| (310 | ) |
|
| 4,090 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Trademark and trade name |
|
| 800 |
|
|
| (60 | ) |
|
| 740 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Content |
|
| 200 |
|
|
| (44 | ) |
|
| 156 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total identifiable intangible assets |
| $ | 13,148 |
|
| $ | (5,964 | ) |
| $ | 7,184 |
|
| $ | 6,248 |
|
| $ | (3,994 | ) |
| $ | 2,254 |
|
Amortization expense amounted to $0.6 million and $0.5 million for each of the three months ended September 30, 2024 and 2023, respectively. Amortization expense amounted to $2.0 million and $1.5 million for each of the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024 and 2023, there was no intangible asset impairment.
As of September 30, 2024, estimated annual amortization expense for each of the next five fiscal years is as follows:
2024 (remaining) |
|
| 481 |
|
2025 |
|
| 1,389 |
|
2026 |
|
| 815 |
|
2027 |
|
| 648 |
|
2028 |
|
| 582 |
|
Thereafter |
|
| 3,269 |
|
Total |
| $ | 7,184 |
|
Total goodwill of $13.5 million and intangible assets of $6.9 million were acquired in the Acquisition and were recorded at fair value on the acquisition date. As of September 30, 2024, there was no goodwill impairment. Refer to Note 21. Acquisitions for more information.
13
Changes in goodwill for the nine months ended September 30, 2024 are as follows:
(in thousands) |
| CLMBR, Inc. |
| |
Balance as of December 31, 2023 |
| $ | — |
|
Goodwill acquired |
|
| 13,165 |
|
Purchase accounting adjustments to goodwill |
|
| 354 |
|
Balance as of September 30, 2024 |
| $ | 13,519 |
|
Prepaid expenses and other current assets consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Security deposit |
|
| 96 |
|
|
| 66 |
|
Prepaid licenses |
|
| — |
|
|
| 20 |
|
Research and development tax credit |
|
| 444 |
|
|
| 516 |
|
Other receivables |
|
| 20 |
|
|
| 20 |
|
Insurance |
|
| 18 |
|
|
| 246 |
|
Other prepaid |
|
| 106 |
|
|
| 65 |
|
Total prepaid expenses and other current assets |
| $ | 684 |
|
| $ | 933 |
|
Other assets, net consisted of the following:
|
| As of September 30, |
|
| As of December 31, |
| ||||||||||||||||||
| 2024 |
|
| 2023 |
| |||||||||||||||||||
(in thousands) |
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Cost |
|
| Accumulated Amortization |
|
| Net Book Value |
| ||||||
Capitalized content costs |
| $ | 6,589 |
|
| $ | (5,667 | ) |
| $ | 922 |
|
| $ | 6,589 |
|
| $ | (4,237 | ) |
| $ | 2,352 |
|
Capitalized software |
| $ | 5,994 |
|
| $ | (4,270 | ) |
| $ | 1,724 |
|
| $ | 5,879 |
|
| $ | (2,983 | ) |
| $ | 2,896 |
|
Total other assets |
| $ | 12,583 |
|
| $ | (9,937 | ) |
| $ | 2,646 |
|
| $ | 12,468 |
|
| $ | (7,220 | ) |
| $ | 5,248 |
|
Amortization expense amounted to $0.8 million and $0.9 million and $2.7 million and $2.7 million for the three and nine months ended September 30, 2024 and 2023, respectively.
Accrued expenses consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Accrued bonus |
| $ | 188 |
|
| $ | 25 |
|
Accrued payroll |
|
| 396 |
|
|
| 26 |
|
Accrued PTO |
|
| 21 |
|
|
| 21 |
|
Accrued legal settlement |
|
| 1,150 |
|
|
| — |
|
Accrued royalties |
|
| 221 |
|
|
| 208 |
|
Accrued professional fees |
|
| 339 |
|
|
| 235 |
|
Customer deposits |
|
| 286 |
|
|
| 46 |
|
Other accrued expenses and current liabilities |
|
| 573 |
|
|
| 345 |
|
Total accrued expenses and other current liabilities |
| $ | 3,174 |
|
| $ | 906 |
|
Accrued legal settlement of $1.1 million represents the current portion of payment due following settlement of a lawsuit which was an assumed liability as part of the Acquisition and is further discussed in Note 14. Commitments and Contingencies.
14
Debt consisted of the following:
|
| September 30, |
|
| December 31, |
|
| ||
(in thousands) |
| 2024 |
|
| 2023 |
|
| ||
Principal stockholder promissory notes |
| $ | 5,146 |
|
| $ | 5,085 |
|
|
Other related party promissory notes |
|
| 152 |
|
|
| 721 |
|
|
Total Loan Payable |
|
| 5,298 |
|
|
| 5,806 |
|
|
June 2023 notes |
|
| — |
|
|
| 1,379 |
|
|
November 2023 bridge notes |
|
| — |
|
| $ | 1,717 |
|
|
Total Senior secured notes |
| $ | — |
|
| $ | 3,096 |
|
|
Derivatives |
| $ | — |
|
| $ | 122 |
|
|
December 2023 convertible note |
|
| — |
|
|
| 904 |
|
|
Other related party convertible notes |
|
| 188 |
|
|
| — |
|
|
Other convertible notes |
|
| 745 |
|
|
| — |
|
|
February 2024 convertible note |
|
| 3,851 |
|
|
| — |
|
|
Total Convertible note payable |
| $ | 4,784 |
|
| $ | 904 |
|
|
Total debt current |
| $ | 10,082 |
|
| $ | 9,928 |
|
|
Term Loan |
|
| 3,996 |
|
| $ | — |
|
|
Total debt long term |
| $ | 3,996 |
|
| $ | — |
|
|
Total debt |
| $ | 14,078 |
|
| $ | 9,928 |
|
|
Principal Stockholder Promissory Notes
During 2019, 2020, and 2021, the Company entered into promissory notes with a then-principal stockholder (the "former principal stockholder”) of the Company. See Note 20. Related Party Transactions.
Other Related Party Promissory Notes
During 2019, 2020, 2021, 2022, and 2023, the Company entered into promissory notes with other related parties. See Note 20. Related Party Transactions.
Term Loan
On February 1, 2024, the Company entered into a Credit Agreement (the "Term Loan") with Vertical Investors LLC, (the “Lender”) pursuant to which the Company agreed to borrow from the Lender a term loan in the aggregate principal amount of approximately $8.0 million. The term loan bears interest at Daily Simple Secured Overnight Financing Rate ("SOFR-Based Rate"), and the Company shall pay a guarantee fee of $2.3 million due on the maturity date. The guarantee fee was treated as a debt discount and accreted through interest expense through maturity date. The maturity date of the Term Loan was originally June 28, 2024. On March 29, 2024, the Company issued 1,500,000 shares of the Company’s Series A Convertible Preferred Stock to the Lender in exchange for reduction of outstanding debt of $3.0 million.
On April 24, 2024, (the “Effective Date”) the Company entered into a Loan Modification Agreement (the “Modification Agreement”) with the Lender reducing the outstanding debt by $3.0 million and extending the maturity date to December 31, 2024. The maturity date was further extended to December 31, 2025 on September 30, 2024.
Pursuant to the Modification Agreement, the Company agreed to make monthly payments of interest in the amount of $60,000 to the Lender. In addition, the Company agreed to make mandatory principal payments simultaneously with the closing of all future capital raises by the Company or any affiliate of the Company. The first principal payment will be the greater of (i) $3.0 million (the “Minimum Payment”) or (ii) 20% of the net amount raised from any source of debt, equity, synthetic equity instruments or otherwise less any reasonable expenses paid to third parties (the “Net Capital Raise”). At each capital raise thereafter, the Company shall make a mandatory principal payment to the Lender of 20% of the Net Capital Raise. As of the Effective Date, the outstanding principal amount of the Loan was approximately $5.0 million.
On April 24, 2024, the Company entered into a Loan Restoration Agreement with the Lender (the “Restoration Agreement”). Pursuant to the Restoration Agreement, in the event the aggregate amount of funds received by the Lender (net of all commissions, transfer fees or other transaction fees of any kind and taxes paid or payable as a result thereof) arising out of the disposition of the Preferred Stock, shares of the Company’s Common Stock issuable upon conversion of the Preferred Stock, if converted by the Lender, or any other securities of the Company issued to the Lender as a result of its holding the Preferred Stock (the aggregate amount of funds, the “Net Trade Value”) received by the Lender on or before December 31, 2024 is less than $3.0 million within ten (10) business days of written demand therefor, the Company shall pay the Lender the amount that is equal to $3.0 million less the Net Trade Value. In the event the Net Trade Value is greater than $3.1 million, any amount in excess of $3.1 million being the “Excess Amount”, the Excess Amount shall be applied by the Lender as follows:
15
($2,400,000 / $3,000,000) x 50% = 40% (being the Discount Percentage)
$3,000,000 x 60% (being 1 – 0.40) = $1,800,000 (being the Minimum Payment)
The Company bifurcated the Restoration Agreement and recorded the Restoration Agreement as a short term derivative in the Company’s condensed consolidated balance sheet in accordance with FASB ASC 815, Derivatives and Hedging. The derivative liability or asset will be remeasured at each reporting period using a Monte Carlo simulation with changes in fair value recorded in the condensed consolidated statements of operations in change in fair value of derivatives. See Note 12. for further details.
The Company entered into a number of exchange agreements with the Lender. In total, the Company and Lender agreed to reduce the Loan Amount by $0.6 million in exchange for the issuance of 1,286,957 shares of the Company’s Common Stock, par value $0.0001 per share (the “Common Stock”). On September 30, 2024, the Lender was issued 59,668 shares of Series A Preferred Stock as a dividend in kind on the shares of Series A Preferred Stock owned by the Lender (the 59,668 shares of Series A Preferred Stock combined with the 1,500,000 shares of Series A Preferred Stock already owned by the Lender is referred to herein as the “Series A Preferred Shares”). As of September 30, 2024, the outstanding principal amount of the Loan was $4,309,186 (the “Loan Amount”). On September 30, 2024, the Company and the Lender entered into an Exchange and Settlement Agreement (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the Company and Lender agreed to exchange (a) the Series A Preferred Shares and (b) the Loan Amount (minus $2 million) for a total of 2,861,128 shares of the Company’s Series C Preferred Stock (“Series C Preferred Shares”).In connection with the Exchange Agreement, on September 30, 2024, the Company and the Lender reduced the principal amount of the Note Purchase Agreement previously entered into by the Company and the Lender to $2.0 million.
On September 30, 2024, the Company and the Lender entered into an amendment (the “Amendment”) to the previously disclosed Loss Restoration Agreement, dated as of April 24, 2024. The Amendment revised the definition of Preferred Stock to “2,861,128 shares of Series C Preferred Stock”. Prior to the Amendment, the definition of Preferred Stock read “1,500,000 shares of Series A Preferred Stock”. The definition of Net Trade Value was amended and restated in its entirety to read as follows “means the aggregate amount of funds received by Lender (net of all commissions, transfer fees or other transaction fees of any kind and taxes paid or payable as a result thereof) arising out of the disposition of the Preferred Stock, the disposition of the shares of Common Stock issued pursuant to the exchange agreements entered into by and between the Borrower and the Lender prior to the Amendment Effective Date, the disposition of the shares of Common Stock issued pursuant to all exchange agreements entered into by and between the Borrower and the Lender after the Amendment Effective Date, the disposition of the shares of Common Stock issuable upon conversion of the Preferred Stock, if such Preferred Stock is converted to Common Stock by Lender, or the disposition of any other securities of the Borrower issued to the Lender as a result of its holding the Preferred Stock. For the avoidance of doubt, the Net Trade Exhibit 10.2 Value shall be determined by Lender.” Furthermore, the Amendment revised the date on which the Net Trade Value received will be calculated from December 31, 2024 to December 31, 2025.
The carrying value of the Term Loan is as follows:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Principal and interest |
| $ | 1,997 |
|
| $ | — |
|
Guarantee fees |
|
| 2,348 |
|
|
| — |
|
Unamortized debt discount |
|
| (349 | ) |
|
| — |
|
Aggregate carrying value |
| $ | 3,996 |
|
| $ | — |
|
Interest expense recognized on the Term Loan is as follows:
16
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands) |
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Contractual interest expense |
| $ | 166 |
|
| $ | — |
|
| $ | 450 |
|
| $ | — |
|
Amortization of debt discount |
|
| 129 |
|
|
| — |
|
|
| 589 |
|
|
| — |
|
Total |
| $ | 295 |
|
| $ | — |
|
| $ | 1,039 |
|
| $ | — |
|
Senior Secured Notes
Bridge Secured Notes
In March 2023, the Company issued an aggregate of $2.0 million of senior secured notes to three investors, including one related party, with associated warrants to purchase the Company’s common stock at an exercise price of $0.0001, in lieu of future cash interest payments under the senior secured notes issued to such investors. In May 2023, the Company repaid the $2.0 million in senior secured notes.
June 2023 Notes
In June 2023, the Company entered into a note purchase agreement (the "June 2023 Notes") pursuant to which the Company agreed to issue up to $15.8 million in aggregate principal amount of 10% senior secured notes due June 25, 2025 at their sole discretion. The June 2023 Notes are the senior secured obligations of the Company, bear interest at a rate of 10.0% per annum, and contain customary events of default. The maturity date was June 25, 2025, subject to earlier repurchase by the Company. The Company may redeem the June 2023 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the June 2023 Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest), but excluding, the redemption date. Additional senior secured notes may become available at the sole discretion of the June Lender. As of September 30, 2023, the Company defaulted on the payment of interest due on the June 2023 Notes. On November 3, 2023, the Lender waived their rights to seek remedies resulting from an event of default. The note was amended in January 2024, and subsequently amended in February 2024, to include a conversion provision whereby at any time prior to maturity date the lender has the right to convert any outstanding and unpaid principal and accrued interest of the note into shares of the Company's Series A Preferred Stock at a conversion price of $1.82 per share. In February 2024, the June 2023 Notes were converted into 769,567 shares of Series A Preferred Stock. The Company recognized a loss equal to $0.0 million and $0.4 million on the extinguishment of debt upon conversion to Series A Preferred Stock for three and nine months ended September 30, 2024.
November 2023 Bridge Notes
On November 10, 2023, the Company issued secured promissory notes (the "November 2023 Bridge Notes") in the aggregate principal amount of approximately $1.9 million, of which approximately $0.8 million was with a related party, with an original issuance discount of 15%, due November 10, 2024. Interest on the outstanding principal of the notes accrues initially at a rate of 3% per annum, with a step-up interest rate of 8% per annum after January 31, 2024 until maturity. The Company elected the fair value option for the notes under ASC Topic 825, Financial Instruments, with changes in fair value recorded in earnings each reporting period.
The notes were amended in January 2024, and subsequently amended in February 2024, to include a conversion provision whereby at any time prior to maturity date the lender has the right to convert any outstanding and unpaid principal and accrued interest of the note into shares of the Company's Series A Preferred Stock at a conversion price of $1.82 per share. In February 2024, a portion of the convertible notes were converted into 219,780 shares of Series A Preferred Stock. In March 2024, the notes were amended at a conversion price of $1.50. In March 2024, the remaining portion of the convertible notes were converted into 538,039 shares of Series A Preferred Stock. The Company recognized a loss equal to $0.0 million and $0.3 million on the extinguishment of debt and loss on change in fair value of $0.0 million and $0.3 million upon conversion to Series A Preferred Stock for three and nine months ended September 30, 2024.
Q2 2024 Convertible Notes
In April and May 2024, the Company issued senior secured convertible preferred notes (the "Q2 2024 Convertible Notes"), in the aggregate principal amount of approximately $1.7 million, due April and May 2025. Interest on the outstanding principal of the notes accrued initially at a rate of 12% per annum. The Company paid a portion of the convertible notes of $0.3 million as of September 30, 2024. In April and May 2024, a portion of the Q2 Convertible Notes were converted into 1,407,186 shares of the Company's Series A Preferred Stock at a blended conversion price of $1.03 per share. The Company recognized a loss equal to $0.0 million and $0.9 million on the extinguishment of debt for the three and nine months ended September 30, 2024.
17
The carrying value of the Senior Secured Notes are as follows:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
June 2023 |
| $ | — |
|
| $ | 1,379 |
|
November 2023 |
|
| — |
|
|
| 1,717 |
|
Aggregate carrying value |
| $ | — |
|
| $ | 3,096 |
|
The change in the balance of the Senior Secured Notes is as follows:
|
| November 2023 |
|
| June 2023 |
|
| Q2 2024 |
|
|
|
| ||||
(in thousands) |
| Bridge Notes |
|
| Notes |
|
| Convertible Notes |
|
| Total |
| ||||
Carrying value at December 31, 2023 |
| $ | 1,717 |
|
| $ | 1,379 |
|
| $ | — |
|
| $ | 3,096 |
|
Issuance of promissory notes |
|
| — |
|
|
| — |
|
|
| 1,680 |
|
|
| 1,680 |
|
Loss on extinguishment of debt |
|
| 275 |
|
|
| 377 |
|
|
| 904 |
|
|
| 1,556 |
|
Change in estimated fair value of convertible notes |
|
| 316 |
|
|
| — |
|
|
| — |
|
|
| 316 |
|
Interest Expense |
|
| — |
|
|
| 21 |
|
|
| 89 |
|
|
| 110 |
|
Repayment of promissory notes |
|
| — |
|
|
| — |
|
|
| (318 | ) |
|
| (318 | ) |
Conversion to Series A Preferred Stock |
|
| (2,308 | ) |
|
| (1,777 | ) |
|
| (2,355 | ) |
|
| (6,440 | ) |
Carrying value at September 30, 2024 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Convertible Notes
Other Related Party Convertible Notes
On February 18, 2020, the Company entered into a $0.1 million note with interest at the rate of 12.0% per annum and a maturity date of February 18, 2021. The note was amended in January 2024 to include a conversion provision whereby at any time while outstanding the lender has the right to convert any outstanding and unpaid principal and accrued interest of the note into shares of the Company's Series A Preferred Stock at a conversion price of $2.00 per share. The total outstanding balance at September 30, 2024 and December 2023, including accrued interest, was $0.2 million and $0.2 million, respectively, and is included in convertible note payable on the condensed consolidated balance sheet.
Other Convertible Notes
In connection with the acquisition of CLMBR, Inc., the Company assumed three promissory notes for a total of $1.9 million in principal and accrued interest.
In August 2023, CLMBR, Inc. issued secured promissory notes in the aggregate principal amount and accrued interest of approximately $0.7 million, due August 31, 2026. Interest on the outstanding principal of the notes accrues initially at a rate of 15% per annum. The note was assumed by the Company in January 2024. The note was amended in January 2024, and subsequently amended in February 2024, to include a conversion provision whereby at any time prior to maturity date the lender has the right to convert any outstanding and unpaid principal and accrued interest of the note into shares of the Company's Series A Preferred Stock at a conversion price of $1.82 per share. In February 2024, the convertible note was converted into 398,352 shares of Series A Preferred Stock. The Company recognized a loss equal to $0.0 million and $0.2 million on the extinguishment of debt upon conversion to Series A Preferred Stock for the three and nine months ended September 30, 2024.
In October 2023, CLMBR, Inc. issued secured promissory notes in the aggregate principal amount and accrued interest of approximately $0.5 million, due October 15, 2026. Interest on the outstanding principal of the notes accrues initially at a rate of 15% per annum. The note was assumed by the Company in January 2024. The note was amended in January 2024, and subsequently amended in February 2024, to include a conversion provision whereby at any time prior to maturity date the lender has the right to convert any outstanding and unpaid principal and accrued interest of the note into shares of the Company's Series A Preferred Stock at a conversion price of $1.82 per share. In February 2024, the convertible note was converted into 258,929 shares of Series A Preferred Stock. The Company recognized a loss equal to $0.0 million and $0.2 million on the extinguishment of debt upon conversion to Series A Preferred Stock three and nine months ended September 30, 2024.
In November 2023, CLMBR, Inc. issued secured promissory notes in the aggregate principal amount and accrued interest of approximately $0.7 million, due January 31, 2025. Interest on the outstanding principal of the notes accrues initially at a rate of 12% per annum. The note was assumed by the Company in February 2024 in connection with the acquisition of CLMBR, Inc. The note was amended in February 2024, to include a conversion provision whereby at any time prior to maturity date the lender has the right to convert any outstanding and unpaid principal and accrued interest of the note into shares of the Company's Series A Preferred Stock at
18
a conversion price of $1.80 per share. Total outstanding principal balance including accrued interest as of September 30, 2024 was $0.7 million.
The change in the balance of the Promissory notes as converted to convertible notes is as follows:
|
| August 2023 |
|
| October 2023 |
|
| November 2023 |
|
|
|
| ||||
(in thousands) |
| Promissory Notes |
|
| Promissory Notes |
|
| Promissory Notes |
|
| Total |
| ||||
Carrying value at December 31, 2023 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Promissory notes assumed in connection with acquisition of CLMBR, Inc. |
|
| 725 |
|
|
| 471 |
|
|
| 691 |
|
|
| 1,887 |
|
Loss on extinguishment of debt |
|
| 195 |
|
|
| 127 |
|
|
| — |
|
|
| 322 |
|
Interest Expense |
|
| — |
|
|
| — |
|
|
| 54 |
|
|
| 54 |
|
Conversion to Series A Preferred Stock |
|
| (920 | ) |
|
| (598 | ) |
|
| — |
|
|
| (1,518 | ) |
Carrying value at September 30, 2024 |
| $ | — |
|
| $ | — |
|
| $ | 745 |
|
| $ | 745 |
|
November 2022 Convertible Notes
In November 2022, the Company issued convertible notes (the “November 2022 Convertible Notes”) with an aggregate principal amount of $4.4 million, pursuant to a private placement offering. The November 2022 Convertible Notes bore interest at 6% per annum and had a schedule maturing date of 12 months from issuance, at which time the principal and accrued interest would be due and payable. The Company elected the fair value option for the November 2022 Convertible Notes under ASC Topic 825, Financial Instruments, with changes in fair value recorded in earnings each reporting period.
The November 2022 Convertible Notes did not include any financial covenants and are subject to acceleration upon the occurrence of specified events of default. The November 2022 Convertible Notes were subject to the following conversion features:
The conversion price with respect to an automatic conversion upon the occurrence of a qualified financing is equal to the lesser of i) the price per share in the Next Financing round, or ii) the Original Issue Price of the Company’s Series A-2 Preferred Stock, which is $47.67. The conversion price with respect to an elective conversion at the time of maturity is equal to the Cap Price.
The Company recognized losses equal to $0.0 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, related to changes in fair value for the November 2022 Convertible Notes.
In May 2023, upon closing of the Company's IPO, the November 2022 Convertible notes were converted into an aggregate of 14,129 shares of common stock.
December 2023 Convertible Note
On December 7, 2023, the Company issued a convertible note (the "December 2023 Note") to an accredited investor (the "Note Investor") with an aggregate principal amount of $2.2 million. The December 2023 Note carries an original issue discount of 8.0% and accrues interest at a rate of 7.0% per annum. The maturity date of the December 2023 Note is December 7, 2024 (the “Maturity Date”). Interest payments are guaranteed through the Maturity Date regardless of whether the December 2023 Note is earlier converted or redeemed.
The December 2023 Note is convertible (in whole or in part) at any time prior to the Maturity Date into the number of shares of Common Stock equal to (x) the sum of (i) the portion of the principal amount to be converted or redeemed, (ii) all accrued and unpaid interest with respect to such principal amount, and (iii) all accrued and unpaid Late Charges (as defined in the December 2023 Convertible Note Purchase Agreement) with respect to such principal and interest amounts, if any, divided by (y) a conversion price of $1.25 per share (such shares, the “Note Conversion Shares”). In addition, the Note Investor may, at any time and at its option, convert the Note (in whole or in part) into shares of Common Stock pursuant to the formula included in the preceding sentence at an alternate
19
conversion price equal to 92% of the lowest dollar volume-weighted average price (“VWAP”) during the ten trading days immediately preceding the date of conversion, subject to a conversion price floor, or, any time following an Event of Default (as defined below), equal to 80% of the lowest VWAP during the ten trading days immediately preceding the date of conversion, in each case subject to the additional terms and conditions set forth in the Note.
The Note sets forth certain standard events of default (each such event, an “Event of Default”), upon the occurrence of which the Company is required to deliver written notice to the Note Investor within one business day (an “Event of Default Notice”). At any time after the earlier of (a) the Note Investor’s receipt of an Event of Default Notice, and (b) the Note Investor becoming aware of an Event of Default, the Note Investor may require the Company to redeem all or any portion of the Note. Upon an Event of Default, the Note shall bear interest at a rate of 14.0% per annum.
In connection with the Company’s issuance of its December 2023 Note, the Company bifurcated the embedded conversion option and redemption rights and recorded embedded conversion option and redemption rights as a short term derivative liability in the Company’s condensed consolidated balance sheet in accordance with FASB ASC 815, Derivatives and Hedging. The convertible debt and the derivative liability associated with the December 2023 Notes is presented on the condensed consolidated balance sheet as the convertible debt and derivative liability. The convertible debt is carried at amortized cost. The derivative liability will be remeasured at each reporting period using the lattice model with changes in fair value recorded in the condensed consolidated statements of operations in change in fair value of convertible notes.
Total conversions for the nine months ended September 30, 2024 was $1.9 million for a total of 288,233 shares of common stock.
The Company recognized gains equal to $0.0 million and $0.1 million for the three and nine months ended September 30, 2024, respectively, related to changes in fair value of the embedded derivative for the December 2023 Note.
The December Note was paid off in July 2024 for $0.2 million and the outstanding balance is $0 as of September 30, 2024.
The carrying value of the December 2023 Note is as follows:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Principal and interest |
| $ | — |
|
| $ | 2,169 |
|
Unamortized debt discount |
|
| — |
|
|
| (801 | ) |
Unamortized issuance costs |
|
| — |
|
|
| (464 | ) |
Aggregate carrying value |
| $ | — |
|
| $ | 904 |
|
Interest expense recognized on the December 2023 Note is as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands) |
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Contractual interest expense |
| $ | — |
|
| $ | — |
|
| $ | 142 |
|
| $ | — |
|
Amortization of debt discount |
|
| — |
|
|
| — |
|
|
| 800 |
|
|
| — |
|
Amortization of debt issuance costs |
|
| 92 |
|
|
| — |
|
|
| 532 |
|
|
| — |
|
Total |
| $ | 92 |
|
| $ | — |
|
| $ | 1,474 |
|
| $ | — |
|
February 2024 Convertible Notes
On February 1, 2024, the Company entered into a Senior Secured Convertible Promissory Note (the "February 2024 Convertible Note") with Treadway Holdings LLC, a lender, in the aggregate principal amount of $6.0 million, which is convertible into shares of Common Stock. The Note accrues interest at a rate of 2.0% per month.
The maturity date of the February 2024 Convertible Note is December 15, 2024. Interest payments are guaranteed through the Maturity date regardless of whether the February 2024 Convertible Note is earlier converted or redeemed. The February 2024 Convertible Note is convertible (in whole or in part) at any time prior to the Maturity Date into the number of shares of Common Stock equal to the quotient resulting by dividing the outstanding principal balance of the February 2024 Convertible Note to be converted by a conversion price of $2.00 per share. The February 2024 Convertible Note sets forth certain standard events of default upon the occurrence of which the Company is required to deliver written notice to the Treadway Holdings LLC within two (2) business days. At any time after the earlier of (a) Treadway Holdings LLC’s receipt of a notice of default and (b) Treadway Holdings LLC becoming aware of the event of default, the Treadway Holdings LLC may require the Company to redeem all or any portion of the February 2024 Convertible Note. Upon an event of default, the February 2024 Convertible Note shall bear interest at a rate of 4.0% per month.
20
Total payments for the three and nine months ended September 30, 2024 was $1.5 million and $2.1 million, respectively. The Company entered into a deposit account control agreement (the “DACA”),with Treadway Holdings, LLC whereby cash received from CLMBR sales are automatically transferred to Treadway Holdings, LLC until the February 2024 Convertible Note is paid off.
The carrying value of the February 2024 Convertible Note is as follows:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Principal and interest |
| $ | 4,708 |
|
| $ | — |
|
Unamortized debt discount |
|
| (569 | ) |
|
| — |
|
Unamortized issuance costs |
|
| (288 | ) |
|
| — |
|
Aggregate carrying value |
| $ | 3,851 |
|
| $ | — |
|
Interest expense recognized on the February 2024 Convertible Note is as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands) |
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Contractual interest expense |
| $ | 305 |
|
| $ | — |
|
| $ | 905 |
|
| $ | — |
|
Amortization of debt discount |
|
| 679 |
|
|
| — |
|
|
| 1,779 |
|
|
| — |
|
Amortization of debt issuance costs |
|
| 344 |
|
|
| — |
|
|
| 902 |
|
|
| — |
|
Total |
| $ | 1,328 |
|
| $ | — |
|
| $ | 3,586 |
|
| $ | — |
|
The following is a schedule of changes in warrants issued and outstanding from December 31, 2023 to September 30, 2024:
| Common |
|
| Common |
|
| Common |
|
| Common |
|
| Common |
|
| Common |
|
| Common |
|
| Common |
|
| Common |
|
| Total Common Stock Warrants |
| |||||||||||
Outstanding as of December 31, 2023 |
|
| 23,112 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,112 |
|
Warrants issued |
|
| 265,788 |
|
|
| 75,000 |
|
|
| 20,000 |
|
|
| 10,653 |
|
|
| 142,046 |
|
|
| 2,626,880 |
|
|
| 2,836,880 |
|
|
| 2,836,880 |
|
|
| 212,766 |
|
|
| 9,026,893 |
|
Warrants exercised |
|
| (23,112 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,626,880 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,649,992 | ) |
Warrants canceled |
|
| (265,788 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (265,788 | ) |
Outstanding as of September 30, 2024 |
|
| — |
|
|
| 75,000 |
|
|
| 20,000 |
|
|
| 10,653 |
|
|
| 142,046 |
|
|
| — |
|
|
| 2,836,880 |
|
|
| 2,836,880 |
|
|
| 212,766 |
|
|
| 6,134,225 |
|
November 2023 Bridge Warrants
In connection with the November Bridge Notes discussed further in Note 10, the Company entered into a warrant agreement whereby the holders are eligible to receive warrants based on the occurrence of future events as defined in the agreement. No warrants have been issued as of September 30, 2024. The Company recognized gains equal to $0.002 million and $0.2 million for the three and nine months ended September 30, 2024, respectively, related to changes in fair value of the warrants.
December 2023 Warrants
On December 7, 2023, the Company issued an aggregate 23,112 warrants to purchase shares of common stock to an accredited investor in conjunction with the issuance of its December 2023 Note. Each warrant has a strike price of $50.00 per share. The warrant may be exercised during the period commencing December 7, 2023 and ending June 7, 2029. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $0.0 million and $0.3 million for the three and nine months ended September 30, 2024, respectively, related to the change in fair value of the warrants issued in December 2023.
Pursuant to the warrant agreement entered into with an accredited investor in December 2023, the number of shares of common stock issuable under the warrants increased to 77,020 following dilutive issuances in May 2024 whereas the exercise price was reduced to an amount equal to the new issuance price. In June 2024, the exercise price was reduced to $4.00 and the number of shares of common stock issuable increased to 288,900. In June 2024, 3i exercised 23,112 warrant shares for $0.09 million. The remaining 265,788
21
warrants were exchanged for 375,000 shares of Series A Preferred Stock in June 2024 and the Company recognized a loss equal to $0.0 million and $0.4 million for three and nine months ended September 30, 2024.
February 2024 Warrants
On February 1, 2024, the Company issued an aggregate 75,000 warrants to purchase shares of common stock to an accredited investor in conjunction with the issuance of its $6.0 million February 2024 Note. The Warrants are exercisable for 37,500 shares of Common Stock, at a price of $50.00 per share (“Warrant 1”) and $70.00 per share (“Warrant 2” and, together with Warrant 1, the “Warrants”) (the “Exercise Prices”). The Warrants may be exercised during the period commencing February 1, 2024 and ending on February 1, 2034. The Exercise Prices are subject to voluntary adjustments and adjustments upon subdivision or combinations of shares of Common Stock. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $0.05 million and $1.8 million for the three and nine months ended September 30, 2024, respectively, related to the change in fair value of the warrants issued in February 2024.
Woodway Warrants
On February 20, 2024, the Company issued 20,000 warrants in connection with an Exclusive Distribution Agreement with WOODWAY USA, INC ("Woodway"). Each warrant has a strike price of $50.00 per share. The warrants may be exercised during the period commencing February 20, 2024 and ending February 20, 2034. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $0.005 million and $0.3 million for the three and nine months ended September 30, 2024, respectively, related to the change in fair value of the warrants issued in February 2024.
Registered Direct Placement Agent Warrants
On May 8, 2024, the Company entered into an engagement agreement with H.C. Wainwright & Co., LLC (the "Placement Agent"), pursuant to which the Placement Agent agreed to act as the exclusive placement agent in connection with the Registered Offering. The Company has agreed to issue the Placement Agent or its designees as compensation in connection with the Offering, warrants to purchase up to an aggregate of 10,653 shares of Common Stock (equal to 7.5% of the aggregate number of Shares sold in the Registered Offering) and will have a term of five years from the commencement of sales in the Registered Offering and an exercise price of $8.80 per share. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $0.005 million and $0.05 million for the three and nine months ended September 30, 2024, related to the change in fair value of the warrants issued in May 2024.
Registered Direct Offering Warrants
Pursuant to the securities purchase agreement, in a concurrent private placement (together with the Registered Offering, the “Offering”), the Company has also agreed to issue to the Investors unregistered warrants to purchase up to an aggregate of 142,046 shares of Common Stock, which represent 100% of the shares of Common Stock to be issued and sold in the Registered Offering. The Warrants have an exercise price of $7.04 per share, and will expire five and one-half years from the Stockholder Approval Date on May 31, 2024. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $0.1 million and $0.7 million for the three and nine months ended September 30, 2024, related to the change in fair value of the warrants issued in May 2024.
Best Efforts Offering Pre-Funded Warrants
On July 1, 2024, the Company issued pre-funded warrants to purchase up to an aggregate of 2,626,880 shares of common stock. The public offering price for each Pre-Funded Warrant and was $1.409. The Pre-Funded Warrants have an exercise price of $0.001 per share, are were exercised in full in July 2024. The fair value of the warrants of $3.7 million was recorded as a long-term liability upon issuance. The Company recorded a change in fair value of warrants of $1.1 million and $1.1 million for the three and nine months ended September 30, 2024. The fair value of the warrants was $0.0 million as of September 30, 2024, as the warrants were exercised in full in July 2024.
Best Efforts Offering A-1 and A-2 Warrants
On July 1, 2024, the Company issued Series A-1 warrants to purchase up to an aggregate of 2,836,880 shares of common stock and Series A-2 warrants to purchase up to an aggregate of 2,836,880 shares of common stock. The public offering price for each Share and accompanying Warrants was $1.41 (which is the last reported sale price of the Common Stock on The Nasdaq Capital Market on June 28, 2024). Each Warrant has an exercise price of $1.41 per share and is exercisable beginning on the effective date of stockholder
22
approval on August 30, 2024. The Series A-1 Warrant will expire on the five-year anniversary of the initial issuance date. The Series A-2 Warrant will expire on the eighteen-month anniversary of the initial issuance date. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $4.4 million and $4.4 million for the three and nine months ended September 30, 2024, related to the change in fair value of the A-1 and A-2 Warrants issued in July 2024.
Best Efforts Placement Agent Warrants
The Company entered into an engagement agreement with H.C. Wainwright & Co., LLC (the "Placement Agent"), pursuant to which the Placement Agent agreed to act as the exclusive placement agent in connection with the Best Efforts Offering. The Company has agreed to issue the Placement Agent or its designees as compensation in connection with the Offering, warrants to purchase up to an aggregate of 212,766 shares of Common Stock (equal to 7.5% of the aggregate number of Shares sold in the Best Efforts Offering) and will have a term of five years from the commencement of sales in the Best Efforts Offering and an exercise price of $1.7625 per share. The warrants are classified as other long-term liabilities within the condensed consolidated balance sheets and are carried at fair value, with changes in fair value recorded in earnings. The Company recognized a gain equal to $0.2 million and $0.2 million for the three and nine months ended September 30, 2024, related to the change in fair value of the warrants issued in July 2024.
The following is a schedule of changes in warrants issued and outstanding from December 31, 2022 to September 30, 2023:
| Class A Common |
|
| Class B Common |
|
| Total Warrants |
| ||||
Outstanding as of December 31, 2022 |
|
| 2,307 |
|
|
| 144 |
|
|
| 2,451 |
|
Warrants issued |
|
| — |
|
|
| — |
|
|
| — |
|
Warrants exercised |
|
| (2,307 | ) |
|
| (144 | ) |
|
| (2,451 | ) |
Outstanding as of September 30, 2023 |
|
| - |
|
|
| — |
|
|
| - |
|
Class A Common Stock Warrants
On November 13, 2022, the Company issued an aggregate 2,307 warrants to purchase Class A Common Stock to various third-party investors in conjunction with the issuance of its November 2022 Convertible Notes. Each warrant has a strike price of $0.40 per share and has a contractual term of ten years. The fair value of the warrants issued in 2022 was recorded as a liability on the condensed consolidated balance sheet and expensed to other (expense) income, net on the Statement of Operations and Comprehensive Loss, at the time of issuance. The Company recognized a loss equal $0.1 million and a gain of $2.3 million for the three and nine months ended September 30, 2023, respectively related to changes in fair value for the warrants issued in November 2022. In May 2023, upon closing of the Company's IPO, the warrants were exercised and converted into shares of common stock.
Class B Common Stock Warrants
The Company issued warrants in 2021 to purchase Class B Common Stock to various employees and non-employees. Each warrant has a strike price of $0.40 and has a contractual term of seven years. In May 2023, upon closing of the Company's IPO, the warrants were exercised and converted into shares of common stock. The Company recognized a change in fair value equal $0.0 million and $0.0 million for the three and nine months ended September 30, 2023.
The Company’s financial instruments consist of its notes held at fair value, derivatives, contingent consideration and warrants.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 were as follows:
| Fair value measurements as of September 30, 2024 |
| ||||||||||||||
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 2,269 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,269 |
|
Derivatives |
|
| — |
|
|
| — |
|
|
| 19 |
|
|
| 19 |
|
Total |
| $ | 2,269 |
|
| $ | — |
|
| $ | 19 |
|
| $ | 2,288 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants |
|
| — |
|
|
| — |
|
|
| 156 |
|
|
| 156 |
|
23
| Fair value measurements as of December 31, 2023 |
| ||||||||||||||
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives |
| $ | — |
|
| $ | — |
|
| $ | 122 |
|
| $ | 122 |
|
Bridge Notes |
|
| — |
|
|
| — |
|
|
| 1,717 |
|
|
| 1,717 |
|
Warrants |
|
| — |
|
|
| — |
|
|
| 591 |
|
|
| 591 |
|
Total |
| $ | — |
|
| $ | — |
|
| $ | 2,430 |
|
| $ | 2,430 |
|
During the nine months ended September 30, 2024, there were no transfers between Level 1 and Level 2, nor into and out of Level 3. The carrying values of the Company’s prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.
The following summarizes the activity for the Company Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2024.
December 2023 Derivative
In connection with the Company’s issuance of its December 2023 Convertible Note, the Company bifurcated the embedded conversion option and redemption rights and recorded embedded conversion option and redemption rights as a short term derivative liability ("December 2023 Derivative") in the Company’s condensed consolidated balance sheet in accordance with FASB ASC 815, Derivatives and Hedging. The fair value of the embedded derivative was determined using a lattice model.
The Company recognized a gain equal to $0.0 million and $0.1 million for the three and nine months ended September 30, 2024, respectively, related to change in fair value of the December 2023 Derivative recorded in the condensed consolidated statements of operations in change in fair value of derivatives. The December 2023 Derivative is $0 as of September 30, 2024 as the December 2023 Convertible Note was paid off as of September 30, 2024.
Loss Restoration Derivative
In connection with the Company entering into the Loss Restoration Agreement the Company recorded the Loss Restoration Derivative as a derivative asset or a derivative liability in the Company’s condensed consolidated balance sheet depending on the fair value in accordance with FASB ASC 815, Derivatives and Hedging. The fair value of the Loss Restoration Derivative as of April 24, 2024 was $0.06 million and was determined using a Monte Carlo model. Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, discount rate, dividend rate and risk-free interest rate. The assumptions used to estimate the fair value of the Loss Restoration Derivative are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 4.7 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 1.25 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 116.7 | % |
|
| — | % |
Expected dividend yield |
|
| 15.0 | % |
|
| — | % |
The Company recognized a gain equal to $1.0 million and $0.1 million for the three and nine months ended September 30, 2024, respectively, related to change in fair value of the Loss Restoration Derivative recorded in the condensed consolidated statements of operations in change in fair value of derivatives. The Loss Restoration Derivative as of September 30, 2024 of $0.02 million is included in condensed consolidated balance sheets as Derivatives in current assets.
Accrued Earn Out
As part of the Acquisition of CLMBR, Inc., the Sellers shall be entitled to receive a contingent payment in the form of shares of Common Stock (collectively, the “Earn-Out Shares”) calculated in the manner set forth in the Asset Purchase Agreement based on the 2024 Unit Sales (as defined in the Asset Purchase Agreement) and the volume-weighted average price (“VWAP”) for the Company’s common stock based on the 10 consecutive trading days ending on (and including) December 31, 2024, subject to the VWAP Collar. In addition, there were 2 contingent payments (1) based on total CLMBR sales in 2024 (5,000 units sold in 2024) and (2) based on CLMBR sales through B2B channel in 2024 (2,400 in B2B channel in 2024). Contingent payment (1) was determined at inception to be remote and therefore, $0 was recognized for the earn out as of the acquisition date. Contingent payment (2) was probable and a contingent liability of $1.3 million was recorded based on in the event the 2024 Unit Sales include at least 2,400 Units sold in the business-to-business channel, the Sellers shall be entitled to an additional number of Earn-Out Shares calculated in the manner set forth in the Asset Purchase Agreement subject to total maximum number of 566,642 Earn-Out Shares. The Company assessed the fair
24
value as of September 30, 2024 and it was determined based on current sales that achieving the projection and likelihood of contingent payment (2) was deemed remote and as a result the Company marked the contingent liability to $0. The Company recognized a gain equal to $1.3 million for the nine months ended September 30, 2024 related to change in fair value of the earn out recorded in the condensed consolidated statements of operations in change in fair value of earnout.
November 2023 Bridge Notes
On November 10, 2023, the Company issued the November Bridge Notes. The fair value of the bridge notes was determined using a discounted cash flow analysis at a discount rate of 21.0%. The fair value of the bridge notes of $1.7 million was recorded as a current liability upon issuance.
The Company amended the Bridge notes into convertible notes in January 2024 and subsequently converted the notes into Preferred Stock Series A in February 2024 and March 2024. In February 2024 and March 2024, the Company recognized a loss equal to $0.3 million on the extinguishment of debt and loss on change in fair value of $0.3 million upon conversion to Series A Preferred Stock.
|
| November 2023 |
| |
(in thousands) |
| Bridge Notes |
| |
Fair value at December 31, 2023 |
| $ | 1,717 |
|
Loss on extinguishment of debt |
|
| 275 |
|
Change in estimated fair value of convertible notes |
|
| 316 |
|
Conversion to Series A Preferred Stock |
|
| (2,308 | ) |
Fair value at September 30, 2024 |
| $ | — |
|
Warrants
The following table summarizes the activity for the Company Level 3 warrant liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2024:
|
| November 2023 |
|
| December 2023 |
|
| February 2024 |
|
| Woodway |
|
| Registered Direct |
|
| Registered Direct Placement Agent |
|
| Best Efforts Pre-Funded |
|
| Best Efforts A-1 |
|
| Best Efforts A-2 |
|
| Best Efforts Placement Agent |
|
| Total |
|
| |||||||||||
(in thousands) |
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| Warrants |
|
| |||||||||||
Fair value at December 31, 2023 |
| $ | 165 |
|
| $ | 426 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 591 |
|
|
Issuance of warrants |
|
| — |
|
|
| — |
|
|
| 1,800 |
|
|
| 344 |
|
|
| 721 |
|
|
| 50 |
|
|
| 3,704 |
|
|
| 2,687 |
|
|
| 1,903 |
|
|
| 189 |
|
|
| 11,398 |
|
|
Change in estimated fair value of warrants |
|
| (165 | ) |
|
| (304 | ) |
|
| (1,797 | ) |
|
| (344 | ) |
|
| (719 | ) |
|
| (50 | ) |
|
| (1,141 | ) |
|
| (2,577 | ) |
|
| (1,869 | ) |
|
| (182 | ) |
|
| (9,148 | ) |
|
Loss on cancelation of warrants |
|
| — |
|
|
| 358 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 358 |
|
|
Exercise of stock warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,563 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,563 | ) |
|
Conversion to Series A Preferred Stock |
|
|
|
|
| (480 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (480 | ) |
| |
Fair value at September 30, 2024 |
| $ | — |
|
| $ | — |
|
| $ | 3 |
|
| $ | — |
|
| $ | 2 |
|
| $ | — |
|
| $ | — |
|
| $ | 110 |
|
| $ | 34 |
|
| $ | 7 |
|
| $ | 156 |
|
|
November 2023 Warrants
On November 10, 2023, the Company issued warrants to two accredited investors to purchase shares of Common Stock. The fair value of the warrants was determined using the Monte Carlo Simulation, given the variable number of shares issuable upon exercise of the warrant. For the outstanding warrants as of September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) and risk free rate. The fair value of the warrants was $0.0 million and $0.2 million as of September 30, 2024 and December 31, 2023, respectively. The Company recorded a change in fair value of warrants of $0.002 million and $0.2 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the November 2023 Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 4.3 | % |
|
| 3.8 | % |
Weighted-average expected term (in years) |
|
| 4.67 |
|
|
| 5.35 |
|
Weighted-average expected volatility |
|
| 81.2 | % |
|
| 68.20 | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
December 2023 Warrants
On December 7, 2023, the Company issued warrants in connection with the issuance of the December 2023 Convertible Notes. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as of September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of
25
conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants was $0.0 million and $0.4 million as of September 30, 2024 and December 31, 2023, respectively. The warrants were no longer outstanding at September 30, 2024. The Company recorded a change in fair value of warrants of $0.0 million and $0.3 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the December 2023 Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| — | % |
|
| 3.8 | % |
Weighted-average expected term (in years) |
|
| — |
|
|
| 5.43 |
|
Weighted-average expected volatility |
|
| — | % |
|
| 67.90 | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
Pursuant to the warrant agreement entered into with accredited investor in December 2023, the warrant to purchase shares of common stock increased to 77,020 following dilutive issuances in May 2024 whereas the exercise price was reduced to an amount equal to the new issuance price. In June 2024, the exercise price was reduced to $4.00 and the warrant shares increased to 288,900. In June 2024, 3i exercised 23,112 warrant shares for $0.09 million. The remaining 265,788 warrants were exchanged for 375,000 shares of Series A Preferred Stock in June 2024 and the Company recognized a loss equal to $0.0 million and $0.4 million for three and nine months ended September 30, 2024.
February 2024 Warrants
On February 1, 2024, the Company issued an aggregate 75,000 warrants to purchase shares of common stock to an accredited investor in conjunction with the issuance of its $6.0 million February 2024 Note. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as of September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $1.8 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.003 million as of September 30, 2024. The Company recorded a change in fair value of warrants of $0.05 million and $1.8 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the February 2024 Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 4.4 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 9.48 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 93.3 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
Woodway Warrants
On February 20, 2024, the Company issued warrants in connection with an Exclusive Distribution Agreement with WOODWAY USA, INC. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $0.3 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.0 million as of September 30, 2024. The Company recorded a change in fair value of warrants of $0.005 million and $0.3 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the Woodway Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 4.3 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 9.53 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 66.6 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
26
Registered Direct Placement Agent Warrants
On May 8, 2024, the Company issued warrants in connection with an agreement with the Placement Agent, pursuant to which the Placement Agent agreed to act as the exclusive placement agent in connection with the Registered Offering. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, and (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $0.05 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.0 million as of September 30, 2024. The Company recorded a change in fair value of warrants of $0.005 million and $0.05 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the Placement Agent Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 4.3 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 4.70 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 81.5 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
Registered Direct Offering Warrants
On May 20, 2024, the Company issued warrants in connection with a securities purchase agreement with certain institutional investors. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $0.7 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.002 million as of September 30, 2024. The Company recorded a change in fair value of warrants of $0.1 million and $0.7 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the Registered Offering Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 4.3 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 5.22 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 77.8 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
Best Efforts Offering Pre-Funded Warrants
On July 1, 2024, the Company issued warrants in connection with a securities purchase agreement with certain institutional investors. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $3.7 million was recorded as a long-term liability upon issuance. The Company recorded a change in fair value of warrants of $1.1 million and $1.1 million for the three and nine months ended September 30, 2024. The fair value of the warrants was $0.0 million as of September 30, 2024, as the warrants were exercised in full in July 2024.
Best Efforts A-1 Warrants
On July 1, 2024, the Company issued warrants in connection with a securities purchase agreement with certain institutional investors. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $2.7 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.1 million as of September 30, 2024. The Company recorded a change in fair value
27
of warrants of $2.6 million and $2.6 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the Best Efforts A-1 Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 3.6 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 4.82 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 80.0 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
Best Efforts A-2 Warrants
On July 1, 2024, the Company issued warrants in connection with a securities purchase agreement with certain institutional investors. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $1.9 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.04 million as of September 30, 2024. The Company recorded a change in fair value of warrants of $1.9 million and $1.9 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the Best Efforts A-2 Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 3.8 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 1.28 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 116.7 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
Best Efforts Placement Agent Warrants
On July 1, 2024, the Company issued warrants in connection with a securities purchase agreement with certain institutional investors. The fair value of the warrants was determined using a Black-Scholes-Merton model, in which the probability and timing of potential future events is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as September 30, 2024 and December 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, (3) dividend yield and (4) a risk free rate. The fair value of the warrants of $0.2 million was recorded as a long-term liability upon issuance. The fair value of the warrants was $0.007 million as of September 30, 2024. The Company recorded a change in fair value of warrants of $0.2 million and $0.2 million for the three and nine months ended September 30, 2024. The assumptions used to estimate the fair value of the Best Efforts Placement Agent Warrants are as follows:
|
| September 30, |
|
| December 31, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate |
|
| 3.6 | % |
|
| — | % |
Weighted-average expected term (in years) |
|
| 4.82 |
|
|
| — |
|
Weighted-average expected volatility |
|
| 80.0 | % |
|
| — | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
The following summarizes the activity for the Company Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2023:
Convertible Notes
The Company entered into several convertible note arrangements with certain investors during 2022. The Company recorded the liability related to the convertible notes at fair value and subsequently remeasured the instruments to fair value using level 3 fair value measurements. The Company recorded a change in fair value adjustment of $0.0 million and $0.3 million for the three and nine months ended September 30, 2023, respectively.
In May 2023, upon closing of the Company's IPO, the November 2022 Convertible notes were converted into an aggregate of 14,129 shares of common stock.
28
(in thousands) |
| Convertible Notes |
| |
Fair value at December 31, 2022 |
| $ | 4,270 |
|
Issuance of convertible notes |
|
| — |
|
Change in estimated fair value of financial instruments |
|
| 252 |
|
Exercise of stock warrants |
|
| (4,521 | ) |
Fair value at September 30, 2023 |
| $ | — |
|
Warrants
On November 13, 2022, the Company issued 2,307 Class A common stock warrants in connection with the issuance of the November 2022 Convertible Notes. The Company recorded the liability related to the warrants at fair value and subsequently remeasured the instruments to fair value using level 3 fair value measurements. The Company recorded a change in the fair value of warrants of $0.0 million and $2.3 million for the three and nine months ended September 30, 2023, respectively. In May 2023, upon closing of the Company's IPO, the warrants were exercised and converted into shares of common stock.
|
| November 2022 |
| |
(in thousands) |
| Warrants |
| |
Fair value at December 31, 2022 |
| $ | 3,004 |
|
Issuance of warrants |
|
| — |
|
Change in estimated fair value of financial instruments |
|
| (2,266 | ) |
Exercise of stock warrants |
|
| (738 | ) |
Fair value at September 30, 2023 |
| $ | — |
|
Lease Obligations
The Company adopted ASC 842 on January 1, 2022, using the effective date transition method, which requires a cumulative-effect adjustment to the opening balance of retained earnings on the effective date.
The Company has made certain assumptions and judgements when applying ASC 842 including the adoption of the package of practical expedients available for transition. The practical expedients allowed the Company to not reassess (i) whether expired or existing contracts contained leases, (ii) lease classification for expired or existing leases and (iii) previously capitalized initial direct costs. The Company also elected not to recognize right-of-use assets and lease liabilities for short-term leases (leases with a term of twelve months or less).
Operating lease arrangements primarily consist of office and warehouse leases expiring at various years through 2028. The facility leases have original lease terms of two to seven years and contain options to extend the lease up to 5 years or terminate the lease. Options to extend are included in leased right-of-use assets and lease liabilities in the condensed consolidated balance sheet when the Company is reasonably certain it will renew the underlying leases. Since the implicit rate of such leases is unknown and the Company is not reasonably certain to renew its leases, the Company has elected to apply a collateralized incremental borrowing rate to facility leases on the original lease term in calculating the present value of future lease payments.
As of September 30, 2024, the weighted average discount rate for operating leases was 9.49% and the weighted average remaining lease term for operating leases was 2.4 years, respectively. As of December 31, 2023, the weighted average discount rate for operating leases was 9.49% and the weighted average remaining lease term for operating leases was 4.42 years, respectively.
The Company has entered into various short-term operating leases for office and warehouse space, with an initial term of twelve months or less. These short-term leases are not recorded on the Company’s condensed consolidated balance sheet. The components of lease expense and other information for the three and nine months ended September 30, 2024 and 2023 were as follows.
29
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
|
| ||||
|
| (in thousands) |
|
| (in thousands) |
|
| ||||||||||
Operating lease costs |
| $ | 122 |
|
| $ | 25 |
|
| $ | 282 |
|
| $ | 67 |
|
|
Short-term lease costs |
|
| 10 |
|
|
| 3 |
|
|
| 31 |
|
|
| 61 |
|
|
Total lease costs |
|
| 132 |
|
|
| 28 |
|
|
| 313 |
|
|
| 128 |
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash paid for amounts included in the measurement of operating lease liability |
| $ | 122 |
|
| $ | 25 |
|
| $ | 282 |
|
| $ | 67 |
|
|
Right-of-use assets of $0.0 million and $0.3 million were obtained in exchange for lease liabilities during the nine months ended September 30, 2024 and 2023 respectively.
Total right-of-use assets of $0.4 million and operating lease liabilities of $0.4 million were acquired in the Acquisition and recorded at fair value on the acquisition date.
The following represents the Company’s minimum annual rental payments under operating leases for each of the next five years and thereafter:
Fiscal Year Ending December 31, |
| Operating |
| |
|
| (in thousands) |
| |
2024 (remaining) |
|
| 89 |
|
2025 |
|
| 282 |
|
2026 |
|
| 78 |
|
2027 |
|
| 78 |
|
2028 |
|
| 33 |
|
Thereafter |
|
| — |
|
Total future minimum lease payments |
|
| 560 |
|
Less: imputed interest |
|
| (48 | ) |
Present value of operating lease liability |
| $ | 512 |
|
|
|
| ||
Less: current portion of lease liability |
|
| 302 |
|
Non-current portion of lease liability |
|
| 210 |
|
Present value of operating lease liability |
| $ | 512 |
|
Royalty Agreement
In 2017, the Company entered into a royalty agreement with Fuseproject and agreed to pay 3% of cumulative FORME net sales up to $5.0 million and 1% of cumulative FORME net sales above $5.0 million, up to a maximum total royalty of $1.0 million. Regardless of the level of cumulative net sales, a guaranteed minimum payment of $0.2 million shall be paid in the first 12 months after the product's initial retail release as an advance towards the royalty payments which was accrued as of September 30, 2024. The Company recorded royalty expense of $0.005 million and $0.02 million for the three and nine months ended September 30, 2024.
Legal Proceedings
On March 7, 2024, a petition was filed by Tung Keng Enterprise Co., Ltd. d/b/a DK City Co., Ltd. (“DK City”) against CLMBR. and the Company in the United States District Court for the District of Colorado to enforce a monetary arbitration award of approximately $2.25 million against CLMBR (the “Petition”). The Company was not involved in that prior arbitration, which involved alleged breaches of an equipment manufacturing agreement between CLMBR and DK City. On June 25, 2024, CLMBR and the Company collectively resolved the dispute via a Confidential Settlement Agreement and Mutual Release with DK City. Pursuant to that agreement, the Company is required to make certain payments to DK City, CLMBR and the Company will be released from liability, and the Petition will be voluntarily dismissed without prejudice. Total payments greater than one year from September 30, 2024 of $1.1 million are included in Other long term liabilities in the condensed consolidated balance sheet.
30
The Company is involved in legal proceedings in the normal course of business. The Company currently believes that any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Common Stock
The Company’s authorized common stock consisted of 900,000,000 shares at $0.0001 par value, as of September 30, 2024 and December 31, 2023. The issued and outstanding common stock was 17,170,456 shares and 354,802 shares as of September 30, 2024 and December 31, 2023, respectively.
In February 2023, the Company completed a rights offering involving the sale of Class A common stock to all existing accredited investors as of December 19, 2022, at a price equal to approximately $20.40 per share. In connection with the rights offering, the Company issued a total of 243,736 shares of Class A common stock, of which 26,811 was issued in December 2022, and 216,925 was issued in January and February 2023.
In January 2024 through May 2024, the Company issued 40,695 shares of common stock, par value $0.0001, from equity line of credit.
In May 2024, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to issue and sell, in a registered direct offering priced at-the-market under the rules of The Nasdaq Stock Market an aggregate of 142,046 shares of common stock, par value $0.0001, of the Company, at an offering price of $7.04 per share.
In July 2024, the Company commenced a best efforts public offering of an aggregate of 210,000 shares of common stock, par value $0.0001 per share, of the Company, at an offering price of $1.41 and issued 2,626,880 shares of common stock from exercise of pre-funded warrants of common stock, par value $0.0001, of the Company, at an offering price of $1.409 per share.
In June 2024 through September 2024, the Company issued 12,036,139 shares of common stock, par value $0.0001, from At the Market offering.
Preferred Stock
In January 2024, our board authorized the proposed issuance of shares of non-voting Series A and Series B convertible preferred stock. The Company's authorized preferred stock consists of 200,000,000 shares at $0.0001 par value as of September 30, 2024. The Series A Certificate designated 5,000,000 shares of the Company’s preferred stock as Series A Preferred Stock. The Series B Certificate designated 1,500,000 shares of the Company’s preferred stock as Series B Preferred Stock. In September 2024, our board authorized the proposed issuance of shares of non-voting Series C convertible preferred stock. The Series C Certificate designated 5,000,000 shares of the Company’s preferred stock as Series C Preferred Stock. The remaining unissued shares of our authorized preferred stock are undesignated. On April 18, 2024, the Series A Certificate was amended increasing designated shares from 5,000,000 to 7,000,000. On June 28, 2024 the Series A Certificate was amended increasing designated shares from 7,000,000 to 10,000,000.
The Series A convertible preferred stock is subject to certain rights, preferences, privileges, and obligations, including voluntary and mandatory conversion provisions, as well as beneficial ownership restrictions and share issuance caps, as described below and as set forth in the Series A Certificate. The Series A convertible preferred stock can be issued at any time and any subsequent mandatory or voluntary conversion into common stock shall be at a conversion price at least equal to or above the closing price per share of the Common Stock as reported on Nasdaq on the last trading day immediately preceding the date that the Series A Certificate was approved by our board of directors, subject to customary adjustments for stock splits and combinations.
The Series A convertible preferred stock includes the following:
31
Pursuant to the Certificate of Designations of Series A Preferred Stock, on September 30, 2024, the Board of Directors of the Company declared a dividend on the shares of Series A Preferred Stock issued and outstanding as of the record date for such dividend, as a dividend in kind, in the form of 269,334 shares of Series A Preferred Stock. The Company issued 59,668 Dividend Shares on September 30, 2024 and 209,666 Dividend Shares on October 1, 2024.
The Series B convertible preferred stock includes the following:
The Company classifies Series B Preferred Stock in accordance with ASC 480, Distinguishing Liabilities from Equity, as there are conversion features that are subject to shareholder approval which is outside of the Company and therefore the securities should be classified outside of permanent stockholders’ deficit. Upon shareholder approval on May 31, 2024, the Company classified the Series B Preferred Stock as permanent equity as of September 30, 2024.
The Series C convertible preferred stock includes the following:
32
The Company has not declared or paid any dividends on our Series C Preferred Stock as of September 30, 2024.
2023 and 2020 Equity Incentive Plan
Presented below is a summary of the compensation cost recognized in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2024 and 2023.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands) |
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Research and development |
| $ | 1,206 |
|
| $ | 1,347 |
|
| $ | 3,527 |
|
| $ | 4,803 |
|
Sales and marketing |
|
| 2 |
|
|
| 87 |
|
|
| (5 | ) |
|
| 407 |
|
General and administrative |
|
| 1,949 |
|
|
| 3,402 |
|
|
| 5,926 |
|
|
| 18,563 |
|
Total |
| $ | 3,157 |
|
| $ | 4,836 |
|
| $ | 9,448 |
|
| $ | 23,773 |
|
For the three and nine months ended September 30, 2024 and 2023, $0.0 million and $0.1 million and $0.2 million and $0.7 million of stock-based compensation was capitalized as software costs, respectively.
During the nine months ended September 30, 2024, the Company did not grant any shares under the 2023 and 2020 Plan. The Company has not granted any restricted stock or stock appreciation rights.
In December 2022, the Company enacted a restructuring cost savings initiative which resulted in employee terminations in both December 2022 and January 2023. In association with January 2023 terminations, the Company accelerated the vesting of a number of individual option awards, resulting in the accelerated vesting of 148 shares on the date of modification. Also in January 2023, the Company repriced 7,538 option awards. Both the accelerated vesting and repricing were accounted for as an equity award modification under ASC Topic 718 which resulted in adjustment of the award value to reflect the fair value at the modification date and acceleration of the recognition schedule in the case of awards which were modified to have accelerated vesting. The adjustment resulted in additional expense of $0.5 million.
In June 2023, the Company granted 32,375 options to non-employee directors, selected executives and other key employees where vesting is contingent on the Company's share price meeting certain targets. The fair value of each option granted was estimated on the date of grant using the Monte Carlo valuation model and assumes that share price targets are achieved.
The following summary sets forth the stock option activity under the 2023 and 2020 Plan:
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value (in thousands) |
| |||||
Outstanding as of December 31, 2023 |
|
| 85,448 |
|
| $ | 101.18 |
|
|
| 9.3 |
|
| $ | 547 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Exercised |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Cancelled or forfeited |
|
| (4,597 | ) |
|
| 84.28 |
|
|
|
|
|
|
| ||
Outstanding as of September 30, 2024 |
|
| 80,851 |
|
| $ | 102.14 |
|
|
| 8.5 |
|
| $ | — |
|
Options exercisable as of September 30, 2024 |
|
| 34,362 |
|
| $ | 63.11 |
|
|
| 8.4 |
|
| $ | — |
|
Options unvested as of September 30, 2024 |
|
| 49,079 |
|
| $ | 143.95 |
|
|
| 8.6 |
|
| $ | — |
|
The aggregate intrinsic value of options outstanding, exercisable and unvested were calculated as the difference between the exercise price of the options and the estimated fair market value of the Company’s common stock, as of September 30, 2024.
A summary of unvested common stock from early option exercises that are subject to repurchase by the Company under the 2020 Plan is as follows:
33
| Early Option Exercises |
| ||||||||||
| Number of options |
|
| Weighted average exercise price |
|
| Repurchase liability (in thousands) |
| ||||
Unvested common stock as of December 31, 2023 |
|
| 343 |
|
| $ | — |
|
| $ | 8 |
|
Issued |
|
| — |
|
|
| — |
|
|
| — |
|
Vested |
|
| (244 | ) |
|
| — |
|
|
| — |
|
Repurchased |
|
| — |
|
|
| — |
|
|
| — |
|
Unvested common stock as of September 30, 2024 |
|
| 99 |
|
|
|
|
| $ | 3 |
|
During the nine months ended September 30, 2024, the Company did not grant any shares under the 2023 and 2020 Plan. For the nine months ended September 30, 2023, the weighted-average grant date fair value per option was $506.80. The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:
|
| September 30, |
|
| September 30, |
| ||
| 2024 |
|
| 2023 |
| |||
Weighted-average risk-free interest rate (1) |
|
| — | % |
|
| 3.7 | % |
Weighted-average expected term (in years) |
|
| — |
|
|
| 5.93 |
|
Weighted-average expected volatility (2) |
|
| — | % |
|
| 62.3 | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
With respect to the 2023 and 2020 Plan, the Company recognized stock compensation expense of $3.2 million and $5.0 million and $9.6 million and $24.5 million for the three and nine months ended September 30, 2024 and 2023, respectively, of which $0.0 million and $0.1 million and $0.2 million and $0.7 million of stock-based compensation was capitalized as software costs, respectively. As of September 30, 2024 and December 31, 2023, the Company had $7.5 million and $17.1 million of unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average period of 1.0 years and 1.7 years, respectively.
For financial reporting purposes for the awards granted in January 2023, we applied a straight-line calculation between the $1,200.00 per share determined in the contemporaneous third-party valuation as of December 31, 2022 and the $243.20 per share determined in the contemporaneous third-party valuation as of March 31, 2023 to determine the fair value of our common stock on the grant date. Using the benefit of hindsight, we determined that the straight-line calculation would provide the most appropriate conclusion for the valuation of our common stock on the interim dates between valuations because we did not identify any single event or series of events that occurred during this interim period that would have caused a material change in fair value. Based on this calculation, we assessed the fair value of our common stock for awards granted in January 2023 to be $770.80 per share.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with high-quality financial institutions, the compositions and maturities of which are regularly monitored by management.
For the nine months ended September 30, 2024 there was one customer representing greater than 10% of the Company’s total revenue. For the nine months ended September 30, 2023 there were no customer representing greater than 10% of the Company’s total revenue.
The Company had three vendors representing greater than 10% of total finished goods purchases for the nine months ended September 30, 2023. The Company had no vendors representing greater than 10% of total finished goods for the nine months ended September 30, 2024.
The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Matching contributions to the plan may be made at the discretion of the Company’s board of directors. During the nine months ended September 30, 2024 and 2023, the Company did not make any contributions to the plan.
34
The computation of loss per share is as follows:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| |||||
(in thousands, except share and per share amounts) |
| (in thousands, except share and per share amounts) |
|
| (in thousands, except share and per share amounts) |
| ||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (7,141 | ) |
| $ | (10,408 | ) |
| $ | (29,172 | ) |
| $ | (39,971 | ) |
Net loss attributable to common stockholders |
| $ | (7,141 | ) |
| $ | (10,408 | ) |
| $ | (29,172 | ) |
| $ | (39,971 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common stock outstanding - |
|
| 4,653,452 |
|
|
| 354,656 |
|
|
| 1,916,375 |
|
|
| 293,773 |
|
Net loss per share attributable to common |
| $ | (1.53 | ) |
| $ | (29.35 | ) |
| $ | (15.22 | ) |
| $ | (136.06 | ) |
The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
| September 30, |
|
| ||||||
| 2024 |
|
| 2023 |
|
| |||
Warrants to purchase common stock |
|
| 6,134,225 |
|
|
| — |
|
|
Series A Preferred Stock conversion to common stock |
|
| 7,615,411 |
|
|
| — |
|
|
Series B Preferred Stock conversion to common stock |
|
| 91,388 |
|
|
| — |
|
|
Series C Preferred Stock conversion to common stock |
|
| 5,722,256 |
|
|
| — |
|
|
Stock options to purchase common stock |
|
| 80,851 |
|
|
| 77,703 |
|
|
Total |
|
| 19,644,132 |
|
|
| 77,703 |
|
|
In the ordinary course of business, we may enter into transactions with directors, principal officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as “related parties”).
Principal Stockholder Promissory Notes
During 2019, 2020, and 2021 the Company entered into the following promissory notes with a then-principal stockholder (the "former principal stockholder”) of the Company:
35
As of September 30, 2024, all outstanding promissory notes with respect to the former principal stockholder are included within the loan payable on the condensed consolidated balance sheet for a total of $5.1 million, including accrued interest and default interest of $1.7 million. As the 2019, 2020 and 2021 notes were not paid upon maturity, these loans were in default as of September 30, 2024, and on August 4, 2023, the Company received a notice of default from the principal stockholder. The Company accrued for the default fee on the date of default and the additional default interest following that date. Interest expense, including default interest, recorded in the condensed consolidated statement of operations was $0.1 million and $0.3 million for the three and nine months ended September 30, 2024 and $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. As of December 31, 2022, the former principal stockholder and certain related parties waived their rights to seek remedies resulting from an event of default due to a failure to make payments of principal or interest at the stated maturity or due date, respectively. On October 30, 2023, the Company entered into an agreement with the former principal stockholder regarding a mutually agreed upon repayment schedule with respect to the outstanding promissory notes issued to such former principal stockholder.
Other Related Party Promissory Notes
During 2019, 2020, 2021, 2022 and 2023, the Company entered into the following promissory notes with other related parties:
36
As of September 30, 2024, $0.2 million of other related party promissory notes were outstanding and included within the loan payable on the condensed consolidated balance sheet.
Loan payable consisted of the following as of September 30, 2024 and December 31, 2023:
|
| September 30, |
|
| December 31, |
| ||
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Principal stockholder promissory notes |
|
| 5,146 |
|
|
| 5,085 |
|
Other related party promissory notes |
|
| 152 |
|
|
| 721 |
|
Total principal stockholder and related party promissory notes |
| $ | 5,298 |
|
| $ | 5,806 |
|
Other Related Party Transactions
In 2017, the Company entered into a royalty agreement with Fuseproject and agreed to pay 3% of cumulative net FORME fitness product sales up to $5.0 million and 1% of cumulative net FORME fitness product sales above $5.0 million, up to a maximum total royalty of $1.0 million. Regardless of the level of cumulative net sales, a guaranteed minimum payment of $0.2 million shall be paid in the first 12 months after the products initial retail release as an advance towards the royalty payments which was accrued as of September 30, 2024. As of September 30, 2024 the Company has accrued $0.2 million in royalty payments. The Company recorded royalty expense of $0.005 million and $0.02 million for the three and nine months ended September 30, 2024.
In March 2023, the Company issued $0.5 million of senior secured notes to a related party, with associated warrants, in lieu of future cash interest payments under the senior secured notes issued to such investor. In May 2023, the Company repaid the $0.5 million in senior secured notes to a related party.
As discussed further in Note 10, in November 2023, the Company issued secured promissory notes of approximately $0.8 million with a related party. As discussed further in Note 11, in connection with issued secured promissory notes the Company entered into warrant agreements whereby the holders are eligible to receive warrants based on the occurrence of future events as defined in the agreement. No warrants were issued as of December 31, 2023.
The Company assumed secured promissory notes in connection with the acquisition of CLMBR, Inc. of approximately $0.5 million with a related party. The secured promissory notes were converted to Series A Preferred Stock in February 2024.
In April and May 2024. the Company issued promissory notes of approximately $0.4 million with a related party. In May 2024, the Company converted $0.2 million into Series A Preferred Stock. In June 2024, the Company repaid the $0.2 million in promissory notes to a related party.
37
In August 2024, the Company borrowed $0.2 million from a related party. The total outstanding principal balance including accrued interest as of September 30, 2024 was $0.2 million.
On October 6, 2023, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with CLMBR and CLMBR1, LLC (collectively, the “Sellers”) to purchase and acquire substantially all of the assets and assume certain liabilities of the Sellers. On January 22, 2024, the Company and the Sellers entered into an amended and restated Asset Purchase Agreement (the “Amended Agreement”). On February 2, 2024, pursuant to the Amended Agreement, the Company completed the acquisition for a total purchase price of approximately $16.1 million, consisting of (i) cash of $30,000, (ii) 1,428,922 shares of the Company’s common stock with an aggregate fair value of $1.0 million, (iii) 1,500,000 shares of the Company’s non-voting Series B preferred stock with an aggregate fair value of $3.0 million, (iv) contingent consideration with a fair value of $1.3 million (as further described below), and (v) the retirement of $9.4 million of senior debt and $1.4 million in related fees, such retirement to be in the form of a $1.4 million cash payment to the lender of the senior debt and the issuance of an $8.0 million promissory note to such lender (the “Acquisition”).
The CLMBR acquisition was a strategic acquisition that helped accelerate the Company’s commercialization path and help achieve immediate scale, resulting in a high growth, profitable platform that sells connected fitness equipment and digital fitness services across B2B and B2C channels.
The CLMBR acquisition was accounted for as a purchase business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying condensed consolidated balance sheet at their estimated fair values as of February 2, 2024, with the remaining unallocated purchase price recorded as goodwill. The following table outlines the Company’s consideration transferred and the identifiable net assets acquired at their estimated fair value as of February 2024.
The purchase price allocation is preliminary and subject to change, including the valuation of intangible assets. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date.
Consideration |
| (in thousands) |
| |
Cash Paid to Seller |
|
| 30 |
|
Common stock issued |
|
| 1,015 |
|
Series B preferred stock issued |
|
| 2,954 |
|
Payoff of Vertical debt (plus accrued interest) |
|
| 1,447 |
|
Retirement of Vertical Debt (including fees) |
|
| 9,379 |
|
Fair value of earn-out consideration |
|
| 1,300 |
|
Total |
|
| 16,125 |
|
|
|
|
| |
Acquisition related costs (including in general and administrative in the condensed consolidated statement of operations and comprehensive loss) |
|
| 1,380 |
|
|
|
|
| |
Recognized amounts of identifiable assets acquired and liabilities assumed |
|
|
| |
Cash |
|
| 50 |
|
Accounts receivable, net of allowances |
|
| 134 |
|
Inventories, net |
|
| 3,490 |
|
Vendor deposits |
|
| 61 |
|
Prepaid expenses and other current assets |
|
| 93 |
|
Property and equipment, net |
|
| 139 |
|
Right-of-use-assets |
|
| 412 |
|
Intangible assets, net |
|
| 6,900 |
|
Accounts payable |
|
| (3,692 | ) |
Accrued expenses and other current liabilities |
|
| (2,437 | ) |
Operating lease liability, current portion |
|
| (263 | ) |
Deferred revenue |
|
| (215 | ) |
Loan payable |
|
| (1,887 | ) |
Operating lease liability, net of current portion |
|
| (179 | ) |
Total identifiable net assets |
|
| 2,606 |
|
Goodwill |
|
| 13,519 |
|
Total |
|
| 16,125 |
|
38
Acquisition-related costs of $0.9 million and $1.4 million were included in general and administrative expenses in the Company's statement of operations for the three and nine months ended September 30, 2024, respectively.
Compensation Arrangements
In connection with the acquisition CLMBR, Inc. the Company has agreed to pay additional consideration in future periods. Certain employees of CLMBR, Inc. will be paid a total of $0.5 million of which $0.3 million was paid as of September 30, 2024. These payments are accounted for as transactions separate from the business combination as the payments are contingent upon continued employment and will be recorded as post-combination compensation expense in the Company's financial statements during the service period in general and administrative expenses for the nine months ended September 30, 2024.
Accrued Earn Out
As part of the Acquisition of CLMBR, Inc., the Sellers shall be entitled to receive a contingent payment in the form of shares of Common Stock (collectively, the “Earn-Out Shares”) calculated in the manner set forth in the Asset Purchase Agreement based on the 2024 Unit Sales (as defined in the Asset Purchase Agreement) and the volume-weighted average price (“VWAP”) for the Company’s common stock based on the 10 consecutive trading days ending on (and including) December 31, 2024, subject to the VWAP Collar. In addition, there were 2 contingent payments (1) based on total CLMBR sales in 2024 (5,000 units sold in 2024) and (2) based on CLMBR sales through B2B channel in 2024 (2,400 in B2B channel in 2024). Contingent payment (1) was determined at inception to be remote and therefore, $0 was recognized for the earn out as of the acquisition date. Contingent payment (2) was probable and a contingent liability of $1.3 million was recorded based on in the event the 2024 Unit Sales include at least 2,400 Units sold in the business-to-business channel, the Sellers shall be entitled to an additional number of Earn-Out Shares calculated in the manner set forth in the Asset Purchase Agreement subject to total maximum number of 566,642 Earn-Out Shares. The Company assessed the fair value as of September 30, 2024 and it was determined based on current sales that achieving the projection and likelihood of contingent payment (2) was deemed remote and as a result the Company marked the contingent liability to $0. The Company recognized a gain equal to $1.3 million for the nine months ended September 30, 2024 related to change in fair value of the earn out recorded in the condensed consolidated statements of operations in change in fair value of earnout.
The following unaudited pro forma condensed consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 present condensed consolidated information of the Company as if the CLMBR, Inc. acquisition had occurred as of January 1, 2023 (in thousands):
|
| Proforma |
|
| Proforma |
|
| ||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
|
| ||||
|
| (in thousands) |
|
| (in thousands) |
|
| ||||||||||
Revenue |
| $ | 2,014 |
|
| $ | 652 |
|
| $ | 3,107 |
|
| $ | 2,844 |
|
|
Operating Loss |
|
| (7,754 | ) |
|
| (11,203 | ) |
|
| (25,268 | ) |
|
| (46,890 | ) |
|
Net Loss |
|
| (7,141 | ) |
|
| (11,918 | ) |
|
| (29,386 | ) |
|
| (44,782 | ) |
|
Net loss per share – basic and diluted |
| $ | (1.53 | ) |
| $ | (29.13 | ) |
| $ | (15.33 | ) |
| $ | (128.59 | ) |
|
Weighted average common stock outstanding – basic |
|
| 4,653,452 |
|
|
| 409,130 |
|
|
| 1,916,375 |
|
|
| 348,247 |
|
|
The unaudited pro forma consolidated results for the three month and nine month periods were prepared using the acquisition method of accounting and are based on the historical financial information of CLMBR, Inc. and the Company. The unaudited pro forma consolidated results incorporate historical financial information for all significant acquisitions pursuant to SEC regulations since January 1, 2023. The historical financial information has been adjusted to give effect to pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had it completed these acquisitions on January 1, 2023.
The following unaudited condensed consolidated results of operations included in the condensed consolidated statements of loss for the three and nine months ended September 30, 2024.
39
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| ||
|
|
|
|
|
|
|
| ||
|
| 2024 |
|
| 2024 |
|
| ||
Revenue |
| $ | 1,801 |
|
| $ | 2,494 |
|
|
Operating Loss |
|
| 24 |
|
|
| (788 | ) |
|
Net Loss |
|
| (368 | ) |
|
| (1,477 | ) |
|
40
The Company has evaluated subsequent events through the financial statement issuance date, pursuant to ASC 855-10 Subsequent Events.
Debt
On October 2, 2024, the Company paid off the assumed secured promissory note in connection with the acquisition of CLMBR, Inc. of $0.7 million.
Debt to Equity
On October 24, 2024, the Company and Lender agreed to reduce the Term Loan by $0.2 million in exchange for the issuance of 1,500,000 shares of common stock to the Lender at a price per Exchange Share of $0.1625 (a price per share equal to the $0.1625 Nasdaq Official Closing Price of September 30, 2024).
ATM
In October 2024 and November 2024 through issuance date we issued 22,448,000 shares of common stock for a total of $2.8 million.
Reverse Stock Split
On November 8, 2024, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, $0.0001 par value per share, at a rate of 1-for-100 (the “Reverse Stock Split”), effective as of 9:00 a.m. Eastern Time on November 11, 2024.
The Reverse Stock Split decreased the number of shares of Common Stock issued and outstanding from 41,787,040 shares to 417,870 shares, subject to adjustment for the rounding up of fractional shares. Accordingly, each holder of Common Stock now owns fewer shares of Common Stock as a result of the Reverse Stock Split. However, the Reverse Stock Split affected all holders of Common Stock uniformly and did not affect any stockholder’s percentage ownership interest in the Company, except to the extent that the Reverse Stock Split resulted in an adjustment to a stockholder’s ownership of Common Stock due to the treatment of fractional shares in the Reverse Stock Split. Therefore, voting rights and other rights and preferences of the holders of Common Stock were not affected by the Reverse Stock Split (other than as a result of the treatment of fractional shares). Common stock issued pursuant to the Reverse Stock Split remains fully paid and nonassessable, without any change in the par value per share.
The Common Stock began trading on a Reverse Stock Split-adjusted basis on The Nasdaq Capital Market on November 11, 2024. The trading symbol for the Common Stock remains “TRNR.” The new CUSIP number for the Common Stock following the Reverse Stock Split is 45840Y302.
Series A Preferred Stock Certificate of Designation Amendment
On November 8, 2024, the Company filed a Certificate of Amendment (the “CoD Amendment”) to the Company’s Certificate of Designation of Series A Convertible Preferred Stock (“Series A”) with the Secretary of State of the State of Delaware to reduce the conversion price of Series A from $0.7501 to $0.0702. The Certificate of Amendment became effective with the Secretary of State of the State of Delaware upon filing.
41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included in Part I, Item 1. of this Form 10-Q, and together with our audited condensed consolidated financial statements and the related notes and other information for the year ended December 31, 2023. Historic results are not necessarily indicative of future results.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. Forward-looking statements include, but are not limited to, statements regarding:
42
These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and under Item 1A. Risk Factors, as well as the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law. You should carefully read the “Risk Factors” section to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
Interactive Strength Inc. is the parent company of two leading brands serving the commercial and at-home markets with specialty fitness equipment and virtual training: CLMBR and FORME. CLMBR manufactures vertical climbing equipment and provides a unique digital and on-demand training platform. FORME is a hardware manufacturer and digital fitness service provider that combines award-winning smart gyms with live 1:1 personal training (from real humans) to deliver an immersive experience. The combination of technology with expert training leads to better outcomes for both consumers and trainers alike. CLMBR and FORME offer unique fitness solutions for both the commercial and at-home markets.
Key milestones in our growth history include:
Our revenue is primarily generated from the sale of our connected fitness hardware products and associated recurring membership revenue. As we launched our first connected fitness hardware product in July 2021, we began generating revenue from sales of our products starting in the second half of 2021.
During the three and nine months ended September 30, 2024 and 2023, we generated total revenue of $2.0 million and $0.3 million and $3.0 million and $0.8 million, respectively, and incurred net losses of $(7.1) million and $(10.4) million and $(29.2) million and $(40.0) million, respectively. As we generated recurring net losses and negative operating cash flow during the research and development stage of the FORME Studio and FORME Studio Lift products, we have funded our operations primarily with gross proceeds from the sales of our redeemable convertible preferred stock, the sale of our SAFE notes, the issuance of convertible notes, and the issuance of common stock.
Business Model and Growth Strategy
Acquire complementary businesses that generate attractive synergies
We acquired CLMBR in February 2024 and believe that there are other compelling businesses to be acquired. We expect that we will be able to acquire revenue-generating businesses, which would generate higher earnings and cashflow through synergies with our
43
existing business. Our team has significant experience in M&A and we are one of the few companies in our industry with a public currency, which we believe makes us an attractive acquiror.
Leverage well established equipment distributors to scale in commercial channels
We have high value partnerships with distributors, including Woodway, to sell CLMBR and FORME products into a variety of commercial environments. These relationships allow us to leverage the sales knowledge, relationships and specialization of third parties to accelerate our sales initiatives. Importantly, this construct allows us to make the vast majority of our sales related expenses variable, as we typically pay commissions only when units are sold.
Expand into new geographies
We intend to expand the international reach of our product and service offerings. With more than 180 million people belonging to gyms globally in 2019, according to IHRSA, we believe there is significant opportunity to grow internationally. For example, we are currently evaluating potential international expansion in the United Kingdom and Canada, although we have not yet made any definitive plans regarding such expansion or the potential timing thereof. We plan to continue to pursue disciplined international expansion by targeting countries with high fitness penetration and spend, as well as the presence of boutique fitness, and where we believe both CLMBR and FORME’s value propositions will resonate.
Increase uptake of add-on services through compelling member experience
We intend to increase uptake of our add-on memberships and services by providing a compelling member experience focused on introducing our members to the variety of services available on our platform and specifically, the value-added benefits of our coaching and personal training offering. We believe our ability to provide service offerings at a number of price points will serve as a valuable lever for growth by increasing overall service revenues over time.
Reduce the cost of personal training and expand addressable market without sacrificing quality
We intend to continue to explore ways to leverage our products, technology, and proprietary trainer education platform to bring the cost of coaching down incrementally, while maintaining an unwavering focus on the quality of the coaching experience we deliver to our members. This strategy is key to our medium- to long-term objectives, as we believe we can expand the addressable market for coaching services by reducing the per session cost and increasing accessibility of expert coaching services through our hardware and mobile experiences.
Build out partnership ecosystem
We intend to continue to build our strategic partner ecosystem with a focus on relationships that enable us to extend our platform to new audiences. We are pursuing opportunities in a number of attractive verticals, including sports, physical therapy and rehabilitation, and telemedicine. We are continuously identifying and evaluating opportunities to apply our coaching know-how in new and innovative ways to expand our reach and impact.
Expand corporate wellness
We intend to expand our recently launched corporate wellness initiative. Historically, corporate wellness programs were generally one-size-fits-all solutions for employees, such as corporate gyms. The rise of the hybrid workforce has made robust corporate wellness both an imperative and a challenge for many companies. We believe our comprehensive product portfolio makes us a better fit for modern corporate wellness programs than many existing alternatives. Our solution enables corporations to provide all of their employees with a coaching platform regardless of whether they work from home, in the office, or both. Our multi-pronged service offering also provides a new level of customization that can be adapted to employees at virtually all levels of tenure.
Target Sport Specific Markets
We intend to reach sport specific markets, specifically golf, tennis and pickleball, which have historically been underserved by the fitness market. Golf is one of the fastest growing sports in the United States. According to the National Golf Foundation, golf participation grew 10% year-over-year surpassing 41.1 million in 2022. In 2023, on-course golfers rose for the fifth consecutive year. Similarly for tennis, according to data from the United States Tennis Association, and the Tennis Industry Association Participation and Engagement Study, in 2022 there were 23.6 million players, a 33% increase since the beginning of 2020. Pickleball has solidified its status as America's fastest-growing sport for the third consecutive year. According to the 2023 Sports & Fitness Industry Association's (SFIA) Topline Participation Report, participation in pickleball almost doubled in 2022, showing an 85.7 percent increase year-over-year and a staggering 158.6 percent increase over the past three years. Each of these sports, as well as others, benefit greatly from high quality strength and conditioning as well as the style of training that can be provided by both a cable-based
44
system and vertical climbing. Providing greater access to quality training to support place is a high value service in both commercial and direct to consumer markets.
Factors Affecting Our Performance
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:
We have experienced, and expect to continue to experience, some disruptions to parts of our supply chain, including procuring necessary components or parts in a timely fashion, with suppliers increasing lead times or placing products on allocation and raising prices. In addition, disruptions to commercial transportation infrastructure have increased delivery times for materials and components or parts of our fitness equipment, and has impacted, and could in the future impact, our ability to timely deliver our products to customers. These supply chain disruptions have not materially affected our business outlook and goals or our operating results, including our sales, revenue, or liquidity or capital resources, and we have not implemented any mitigation efforts to date as a result. However, we cannot predict the impact to us of any future or prolonged supply chain disruptions or any mitigation efforts we may take going forward. For example, as a result of these supply chain disruptions, we may be required to increase customer order lead times and place some products on allocation. In addition, we may consider additional or alternative third-party manufacturing and logistics providers or suppliers. Such mitigation efforts may result in cost increases and any attempts to offset such increases with price increases may result in reduced sales, increased customer dissatisfaction, or otherwise harm our reputation. Further, if we were to elect to transition or add manufacturing or logistics providers or suppliers, it may result in temporary or additional delays in product delivery or risks related to consistent product quality or reliability. This in turn may limit our ability to fulfill customer orders and we may be unable to satisfy all of the demand for our products. We may in the future also purchase components further in advance, which in return can result in less capital being allocated to other activities such as marketing and other business needs. We cannot quantify the impact of such disruptions at this time or predict the impact of any mitigation efforts we may take in response to supply chain disruptions on our business, financial condition, and results of operations.
In addition, customer demand for our products may be impacted by weak economic conditions, inflation, weak growth, recession, equity market volatility, or other negative economic factors in the United States or other nations. The United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase, it will likely affect our expenses, including, but not limited to, employee compensation expenses, increased manufacturing and supplier costs, and increasing market prices of certain components, parts, supplies, and commodity raw materials, which are incorporated into our products or used by our suppliers to manufacture our products. These components, parts, supplies, and commodities may from time to time become restricted, or general market factors and conditions may affect pricing of such components, parts, supplies and commodities, such as inflation or supply chain constraints. Given our limited operating history, we cannot predict how ongoing or increasing recessionary or inflationary pressures may impact our business, financial condition, and results of operations in the future.
45
Components of Our Operating Results
We generate revenue from sales of our connected fitness products, membership revenue, and personal training revenue. We identify our reportable segment based on the information used by management to monitor performance and make operating decisions. See Note 2. of the notes to our condensed consolidated financial statements included elsewhere in this report for additional information regarding our reportable segment.
Revenue
Connected Fitness Product
Connected Fitness Product revenue consists of sales of our connected fitness products and related accessories, delivery and installation services, and extended warranty agreements offered through a third-party. Fitness Product revenue is recognized at the time of delivery, except for extended warranty revenue which is recognized over the warranty period. For the third-party extended warranty service sold along with the connected fitness products, we do not obtain control of the warranty before transferring it to the customers. Therefore, we account for revenue related to the fees paid to the third-party extended warranty provider on a net basis, by recognizing only the net commission we retain. Connected fitness product revenue represented 80% and 67% and 64% and 64% of total revenue for the three and nine months ended September 30, 2024 and 2023, respectively.
Membership
Membership revenue consists of revenue generated from our monthly Connected Fitness membership. Membership revenue represented 11% and 12% and 20% and 12% of total revenue for the three and nine months ended September 30, 2024 and 2023, respectively.
Training
Training revenue consists of sales of our personal training services delivered through our connected fitness products and third-party mobile devices. Training revenue is recognized at the time of delivery. Training revenue represented 9% and 20% and 16% and 23% of total revenue for the three and nine months ended September 30, 2024 and 2023, respectively.
Cost of Revenue
Connected Fitness Product
Connected Fitness Product cost of revenue consists of Studio and Studio Lift and accessories product costs, including manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging, warranty replacement costs, fulfillment costs, warehousing costs, and certain allocated costs related to management and facilities expenses associated with supply chain logistics.
Membership
Membership cost of revenue includes costs associated with personnel related expenses, filming and production costs, hosting fees, music royalties, and amortization of capitalized software development costs.
Training
Training cost of revenue includes costs associated with personnel related expenses.
Operating Expenses
Research and Development
Research and development expense primarily consists of personnel and facilities-related expenses, consulting and contractor expenses, tooling and prototype materials, and software platform expenses. We capitalize certain qualified costs incurred in connection with the development of internal-use software and software to be sold or marketed which may also cause research and development expenses to vary from period to period.
46
Sales and Marketing
Sales and marketing expense consists of performance marketing media spend, asset creation, and other brand creative, all showroom expenses and related lease payments, payment processing fees incurred in connection with the sale of our connected fitness products, and sales and marketing personnel-related expenses.
General and Administrative
General and administrative expense includes personnel-related expenses and facilities-related costs primarily for our executive, finance, accounting, legal, human resources, and IT functions. General and administrative expense also includes fees for professional services principally comprised of legal, audit, tax and accounting services, and insurance.
We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses, and professional services. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue, but we expect to leverage these expenses over time as we grow our revenue and member base.
Other (Expense) Income, Net
Other (expense) income, net consists of unrealized currency gains and losses, loss on exchange of warrants for equity, and fair value of issuance of Loss Restoration Agreement derivative.
Interest Expense
Interest expense consists of interest associated with the related party loans, term loans, convertible notes, senior secured notes and waiver consideration granted to December 2023 Notes and Equity Line of Credit.
Loss on issuance of warrants
Loss on issuance of warrants consists of fair value of issuance of warrants issued in connection with Registered Direct Offering and Best Efforts Offering.
Change in Fair Value of Convertible Notes
The change in fair value of convertible notes consists of the change in the fair value of the outstanding convertible notes since the previous reporting period.
Change in Fair Value of Earn Out
The change in fair value of earn out consists of the change in the fair value of the outstanding contingent considerations since the previous reporting period.
Change in Fair Value of Derivatives
The change in fair value of derivatives consists of the change in the fair value of the outstanding derivatives since the previous reporting period.
Change in Fair Value of Warrants
The change in fair value of warrants consists of the change in the fair value of the outstanding warrants notes since the previous reporting period.
Provision for Income Taxes
The provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized.
47
Results of Operations
The following tables set forth our condensed consolidated results of operations in dollars and as a percentage of total revenue for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.
|
| Three Months Ended September 30, |
|
| Change |
|
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
|
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| ||||||||
Revenue: |
| (in thousands) |
|
| (in thousands) |
|
|
|
|
|
| (in thousands) |
|
| (in thousands) |
|
|
|
| ||||||||||||||
Fitness product revenue |
| $ | 1,617 |
|
| $ | 206 |
|
| $ | 1,411 |
|
|
| 685 | % |
|
| $ | 1,927 |
|
| $ | 502 |
|
| $ | 1,425 |
|
|
| 284 | % |
Membership revenue |
|
| 224 |
|
|
| 38 |
|
|
| 186 |
|
|
| 489 | % |
|
|
| 586 |
|
|
| 94 |
|
|
| 492 |
|
|
| 523 | % |
Training revenue |
|
| 173 |
|
|
| 62 |
|
|
| 111 |
|
|
| 179 | % |
|
|
| 484 |
|
|
| 183 |
|
|
| 301 |
|
|
| 164 | % |
Total revenue |
|
| 2,014 |
|
|
| 306 |
|
|
| 1,708 |
|
|
| 558 | % |
|
|
| 2,997 |
|
|
| 779 |
|
|
| 2,218 |
|
|
| 285 | % |
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cost of fitness product revenue (2) |
|
| (1,349 | ) |
|
| (360 | ) |
|
| (989 | ) |
|
| 275 | % |
|
|
| (2,075 | ) |
|
| (1,529 | ) |
|
| (546 | ) |
|
| 36 | % |
Cost of membership (2) |
|
| (768 | ) |
|
| (960 | ) |
|
| 192 |
|
|
| (20 | %) |
|
|
| (2,768 | ) |
|
| (2,861 | ) |
|
| 93 |
|
|
| (3 | %) |
Cost of training |
|
| (185 | ) |
|
| (109 | ) |
|
| (76 | ) |
|
| 70 | % |
|
|
| (522 | ) |
|
| (300 | ) |
|
| (222 | ) |
|
| 74 | % |
Total cost of revenue |
|
| (2,302 | ) |
|
| (1,429 | ) |
|
| (873 | ) |
|
| 61 | % |
|
|
| (5,365 | ) |
|
| (4,690 | ) |
|
| (675 | ) |
|
| 14 | % |
Gross loss |
|
| (288 | ) |
|
| (1,123 | ) |
|
| 835 |
|
|
| (74 | %) |
|
|
| (2,368 | ) |
|
| (3,911 | ) |
|
| 1,543 |
|
|
| (39 | %) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Research and development (1) |
|
| 2,212 |
|
|
| 2,357 |
|
|
| (145 | ) |
|
| (6 | %) |
|
|
| 6,708 |
|
|
| 7,796 |
|
|
| (1,088 | ) |
|
| (14 | %) |
Sales and marketing (1) (2) |
|
| 194 |
|
|
| 282 |
|
|
| (88 | ) |
|
| (31 | %) |
|
|
| 562 |
|
|
| 1,473 |
|
|
| (911 | ) |
|
| (62 | %) |
General and administrative (1) (2) |
|
| 5,060 |
|
|
| 6,313 |
|
|
| (1,253 | ) |
|
| (20 | %) |
|
|
| 15,438 |
|
|
| 30,043 |
|
|
| (14,605 | ) |
|
| (49 | %) |
Total operating expenses |
|
| 7,466 |
|
|
| 8,952 |
|
|
| (1,486 | ) |
|
| (17 | %) |
|
|
| 22,708 |
|
|
| 39,312 |
|
|
| (16,604 | ) |
|
| (42 | %) |
Loss from operations |
|
| (7,754 | ) |
|
| (10,075 | ) |
|
| 2,321 |
|
|
| (23 | %) |
|
|
| (25,076 | ) |
|
| (43,223 | ) |
|
| 18,147 |
|
|
| (42 | %) |
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other (expense) income, net: |
|
| 256 |
|
|
| (179 | ) |
|
| 435 |
|
|
| (243 | %) |
|
|
| (506 | ) |
|
| 25 |
|
|
| (531 | ) |
|
| (2,124 | %) |
Interest expense |
|
| (1,831 | ) |
|
| (154 | ) |
|
| (1,677 | ) |
|
| 1,089 | % |
|
|
| (6,750 | ) |
|
| (1,382 | ) |
|
| (5,368 | ) |
|
| 388 | % |
Gain upon debt forgiveness |
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
|
|
| — |
|
|
| 2,595 |
|
|
| (2,595 | ) |
|
| (100 | %) |
Loss on issuance of warrants |
|
| (4,780 | ) |
|
| — |
|
|
| (4,780 | ) |
|
| (100 | %) |
|
|
| (5,551 | ) |
|
| — |
|
|
| (5,551 | ) |
|
| (100 | %) |
Gain (loss) upon extinguishment of debt and accounts payable |
|
| 110 |
|
|
| — |
|
|
| 110 |
|
|
| 100 | % |
|
|
| (1,622 | ) |
|
| — |
|
|
| (1,622 | ) |
|
| (100 | %) |
Change in fair value of convertible notes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
|
|
| (316 | ) |
|
| (252 | ) |
|
| (64 | ) |
|
| 25 | % |
Change in fair value of earn out |
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
|
|
| 1,300 |
|
|
| — |
|
|
| 1,300 |
|
|
| 100 | % |
Change in fair value of derivatives |
|
| 956 |
|
|
| — |
|
|
| 956 |
|
|
| 100 | % |
|
|
| 201 |
|
|
| — |
|
|
| 201 |
|
|
| 100 | % |
Change in fair value of warrants |
|
| 5,902 |
|
|
| — |
|
|
| 5,902 |
|
|
| 100 | % |
|
|
| 9,148 |
|
|
| 2,266 |
|
|
| 6,882 |
|
|
| 304 | % |
Total other (expense) income, net |
|
| 613 |
|
|
| (333 | ) |
|
| 946 |
|
|
| (284 | %) |
|
|
| (4,096 | ) |
|
| 3,252 |
|
|
| (7,348 | ) |
|
| (226 | %) |
Loss before provision for income taxes |
|
| (7,141 | ) |
|
| (10,408 | ) |
|
| 3,267 |
|
|
| (31 | %) |
|
|
| (29,172 | ) |
|
| (39,971 | ) |
|
| 10,799 |
|
|
| (27 | %) |
Income tax benefit (expense) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
Net loss |
| $ | (7,141 | ) |
| $ | (10,408 | ) |
| $ | 3,267 |
|
|
| (31 | %) |
|
| $ | (29,172 | ) |
| $ | (39,971 | ) |
| $ | 10,799 |
|
|
| (27 | %) |
|
| Three Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||
Research and development |
| $ | 1,206 |
|
| $ | 1,347 |
|
| $ | (141 | ) |
|
| (10 | %) |
| $ | 3,527 |
|
| $ | 4,803 |
|
| $ | (1,276 | ) |
|
| (27 | %) |
Sales and marketing |
|
| 2 |
|
|
| 87 |
|
|
| (85 | ) |
|
| (98 | %) |
|
| (5 | ) |
|
| 407 |
|
|
| (412 | ) |
|
| (101 | %) |
General and administrative |
|
| 1,949 |
|
|
| 3,402 |
|
|
| (1,453 | ) |
|
| (43 | %) |
|
| 5,926 |
|
|
| 18,563 |
|
|
| (12,637 | ) |
|
| (68 | %) |
Total stock-based compensation expense |
| $ | 3,157 |
|
| $ | 4,836 |
|
| $ | (1,679 | ) |
|
| (35 | %) |
| $ | 9,448 |
|
| $ | 23,773 |
|
| $ | (14,325 | ) |
|
| (60 | %) |
For the three and nine months ended September 30, 2024 and 2023, $0.0 million and $0.1 million and $0.2 million and $0.7 million of stock-based compensation was capitalized as software costs, respectively.
In December 2022, the Company enacted a restructuring cost savings initiative which resulted in employee terminations in both December 2022 and January 2023. In association with the January 2023 terminations, the Company accelerated the vesting of a number of individual option awards, resulting in the accelerated vesting of 148 shares on the date of modification. Also in January 2023, the Company repriced 7,538 option awards. Both the accelerated vesting and repricing were accounted for as an equity award modification under ASC Topic 718 which resulted in adjustment of the award value to reflect the fair value at the modification date and acceleration of the recognition schedule in the case of awards which were modified to have accelerated vesting. The adjustment resulted in additional expense of $0.5 million.
48
|
| Three Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||
Cost of membership |
| $ | 769 |
|
| $ | 953 |
|
| $ | (184 | ) |
|
| (19 | %) |
| $ | 2,761 |
|
| $ | 2,700 |
|
| $ | 61 |
|
|
| 2 | % |
Cost of fitness product revenue |
|
| 62 |
|
|
| — |
|
|
| 62 |
|
|
| 100 | % |
|
| 164 |
|
|
| — |
|
|
| 164 |
|
|
| 100 | % |
General and administrative |
|
| 422 |
|
|
| 743 |
|
|
| (321 | ) |
|
| (43 | %) |
|
| 1,811 |
|
|
| 2,231 |
|
|
| (420 | ) |
|
| (19 | %) |
Sales and marketing |
|
| 139 |
|
|
| — |
|
|
| 139 |
|
|
| 100 | % |
|
| 370 |
|
|
| — |
|
|
| 370 |
|
|
| 100 | % |
Total depreciation and amortization expense |
| $ | 1,392 |
|
| $ | 1,696 |
|
| $ | (304 | ) |
|
| (18 | %) |
| $ | 5,106 |
|
| $ | 4,931 |
|
| $ | 175 |
|
|
| 4 | % |
Comparison of the three and nine months ended September 30, 2024 and 2023
Revenue
|
| Three Months Ended September 30, |
|
| Change |
| Nine Months Ended September 30, |
|
|
|
|
|
| |||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| 2024 |
|
| 2023 |
|
| Amount |
|
| % Change | ||||||
Revenue: |
| (in thousands) |
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
| ||||||||||||
Fitness product |
| $ | 1,617 |
|
| $ | 206 |
|
| $ | 1,411 |
|
| 685% |
| $ | 1,927 |
|
| $ | 502 |
|
| $ | 1,425 |
|
| 284% |
Membership |
|
| 224 |
|
|
| 38 |
|
|
| 186 |
|
| 489% |
|
| 586 |
|
|
| 94 |
|
|
| 492 |
|
| 523% |
Training |
|
| 173 |
|
|
| 62 |
|
|
| 111 |
|
| 179% |
|
| 484 |
|
|
| 183 |
|
|
| 301 |
|
| 164% |
Total revenue |
|
| 2,014 |
|
|
| 306 |
|
|
| 1,708 |
|
| 558% |
|
| 2,997 |
|
|
| 779 |
|
|
| 2,218 |
|
| 285% |
Percentage of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fitness product |
|
| 80 | % |
|
| 67 | % |
|
|
|
|
|
|
| 64 | % |
|
| 64 | % |
|
|
|
|
| ||
Membership |
|
| 11 | % |
|
| 12 | % |
|
|
|
|
|
|
| 20 | % |
|
| 12 | % |
|
|
|
|
| ||
Training |
|
| 9 | % |
|
| 21 | % |
|
|
|
|
|
|
| 16 | % |
|
| 24 | % |
|
|
|
|
| ||
Total |
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
Three and nine months ended September 30, 2024 and 2023
Fitness product revenue increased $1.4 million or 685% and $1.4 million or 284% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively. The increase was primarily attributable to the acquisition of CLMBR, Inc.
Membership revenue increased $0.2 million or 489% and $0.5 million or 523% for the three and nine months ended September 30, 2024compared to the three and nine months ended September 30, 2023, respectively. The increase was primarily attributable to the acquisition of CLMBR, Inc.
Training revenue increased $0.1 million or 179% and $0.3 million or 164% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively. The increase was primarily attributable to the acquisition of CLMBR, Inc.
49
Cost of Revenue and Gross Loss
|
| Three Months Ended September 30, |
|
| Change |
| Nine Months Ended September 30, |
|
|
|
|
|
| |||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| 2024 |
|
| 2023 |
|
| Amount |
|
| % Change | ||||||
Cost of Revenue: |
| (in thousands) |
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
| ||||||||||||
Fitness product |
| $ | 1,349 |
|
| $ | 360 |
|
| $ | 989 |
|
| 275% |
| $ | 2,075 |
|
| $ | 1,529 |
|
| $ | 546 |
|
| 36% |
Membership |
|
| 768 |
|
|
| 960 |
|
|
| (192 | ) |
| (20%) |
|
| 2,768 |
|
|
| 2,861 |
|
|
| (93 | ) |
| (3%) |
Training |
|
| 185 |
|
|
| 109 |
|
|
| 76 |
|
| 70% |
|
| 522 |
|
|
| 300 |
|
|
| 222 |
|
| 74% |
Total cost of revenue |
|
| 2,302 |
|
|
| 1,429 |
|
|
| 873 |
|
| 61% |
|
| 5,365 |
|
|
| 4,690 |
|
|
| 675 |
|
| 14% |
Gross Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fitness product |
|
| 268 |
|
|
| (154 | ) |
|
| 422 |
|
| (274%) |
|
| (148 | ) |
|
| (1,027 | ) |
|
| 879 |
|
| (86%) |
Membership |
|
| (544 | ) |
|
| (922 | ) |
|
| 378 |
|
| (41%) |
|
| (2,182 | ) |
|
| (2,767 | ) |
|
| 585 |
|
| (21%) |
Training |
|
| (12 | ) |
|
| (47 | ) |
|
| 35 |
|
| (74%) |
|
| (38 | ) |
|
| (117 | ) |
|
| 79 |
|
| (68%) |
Total gross loss |
|
| (288 | ) |
|
| (1,123 | ) |
|
| 835 |
|
| (74%) |
|
| (2,368 | ) |
|
| (3,911 | ) |
|
| 1,543 |
|
| (39%) |
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fitness product |
|
| 17 | % |
|
| (75 | %) |
|
|
|
|
|
|
| (8 | %) |
|
| (205 | %) |
|
|
|
|
| ||
Membership |
|
| (243 | %) |
|
| (2,426 | %) |
|
|
|
|
|
|
| (372 | %) |
|
| (2,944 | %) |
|
|
|
|
| ||
Training |
|
| (7 | %) |
|
| (76 | %) |
|
|
|
|
|
|
| (8 | %) |
|
| (64 | %) |
|
|
|
|
| ||
Total |
|
| (14 | %) |
|
| (367 | %) |
|
|
|
|
|
|
| (79 | %) |
|
| (502 | %) |
|
|
|
|
|
Three and nine months ended September 30, 2024 and 2023
Fitness product cost of revenue increased $1.0 million or 275% and $0.5 million or 36% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively. The increase is mostly due to the increase in sales related to the acquisition of CLMBR, Inc.
Membership cost of revenue decreased $0.2 million or 20% and $0.1 million or 3% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively. The decrease is primarily related to the decrease in content amortization and headcount offset by increase in amortization of intangible assets from the acquisition of CLMBR, Inc.
Training cost of revenue increased $0.08 million or 70% and $0.2 million or 74% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively. The increase is attributable to increase in training personnel from the acquisition of CLMBR, Inc.
Our gross loss decreased by $0.8 million or 74% and $1.5 million or 39% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively mostly due the increase in fitness product sales from the acquisition of CLMBR, Inc.
Operating Expenses
|
| Three Months Ended September 30, |
|
| Change |
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| ||||||
Operating Expenses: |
| (in thousands) |
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
| ||||||||||||
Research and development |
| $ | 2,212 |
|
| $ | 2,357 |
|
| $ | (145 | ) |
| (6%) |
| $ | 6,708 |
|
| $ | 7,796 |
|
| $ | (1,088 | ) |
| (14%) |
|
Sales and marketing |
|
| 194 |
|
|
| 282 |
|
|
| (88 | ) |
| (31%) |
|
| 562 |
|
|
| 1,473 |
|
|
| (911 | ) |
| (62%) |
|
General and administrative |
|
| 5,060 |
|
|
| 6,313 |
|
|
| (1,253 | ) |
| (20%) |
|
| 15,438 |
|
|
| 30,043 |
|
|
| (14,605 | ) |
| (49%) |
|
Total operating expenses |
|
| 7,466 |
|
|
| 8,952 |
|
| $ | (1,486 | ) |
| (17%) |
| $ | 22,708 |
|
| $ | 39,312 |
|
| $ | (16,604 | ) |
| (42%) |
|
Three and nine months ended September 30, 2024 and 2023
Research and Development
Research and development decreased $0.1 million or 6% and decreased $1.1 million and 14% for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, respectively. The decrease of $0.1 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was due to a decrease in personnel-related costs of $0.2 million and from a reduction in headcount and a decrease in stock-based compensation expense of $0.1 million offset by an increase of $0.2 million in software and subscriptions related to the acquisition of CLMBR, Inc. The decrease of $1.1 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to a decrease in personnel-related expenses from a reduction in headcount of $0.3 million, and a decrease in stock-based
50
compensation expenses of $1.3 million partially offset by an increase of $0.4 million in software and subscriptions related to the acquisition of CLMBR, Inc.
Sales and Marketing
Sales and marketing expense decreased $0.1 million or 31% and $0.9 million or 62% for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, respectively. The decrease was primarily due to a decrease in personnel-related expenses from a reduction in headcount of $0.03 million and $0.2 million, respectively, a decrease of $0.02 million and $0.2 million in advertising and marketing, respectively, a decrease of $0.01 million and $0.4 million in consulting, respectively, a decrease in stock-based compensation of $0.1 million and $0.4 million, respectively, partially offset by an increase in amortization expense of customer related intangibles from the acquisition of CLMBR, Inc. of $0.1 million and $0.4 million, respectively.
General and Administrative
General and administrative expense decreased $1.3 million or 20% and $14.6 million or 49% for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, respectively. The decrease was due primarily to decreases of $1.5 million and $12.6 million, respectively in stock-based compensation expenses, decreases of $0.3 million and $2.7 million in consulting, accounting and tax expenses, respectively, and decreases of $0.3 million and $0.4 million in depreciation and amortization, respectively, offset by increase of $0.1 million and $0.5 million in insurance, respectively, with the remaining difference due to change in other miscellaneous expenses.
Other (Expense) Income, net
|
| Three Months Ended September 30, |
|
| Change |
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| ||||||
Other (expense) income, net |
| (in thousands) |
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
| ||||||||||||
Other (expense) income, net: |
| $ | 256 |
|
| $ | (179 | ) |
| $ | 435 |
|
| (243%) |
| $ | (506 | ) |
| $ | 25 |
|
| $ | (531 | ) |
| (2124%) |
|
Interest expense |
|
| (1,831 | ) |
|
| (154 | ) |
|
| (1,677 | ) |
| 1089% |
|
| (6,750 | ) |
|
| (1,382 | ) |
|
| (5,368 | ) |
| 388% |
|
Gain upon debt forgiveness |
|
| — |
|
|
| — |
|
|
| — |
|
| 0% |
|
| — |
|
|
| 2,595 |
|
|
| (2,595 | ) |
| (100%) |
|
Loss on issuance of warrants |
|
| (4,780 | ) |
|
| — |
|
|
| (4,780 | ) |
| (100%) |
|
| (5,551 | ) |
|
| — |
|
|
| (5,551 | ) |
| (100%) |
|
Gain (loss) upon extinguishment of debt and accounts payable |
|
| 110 |
|
|
| — |
|
|
| 110 |
|
| 100% |
|
| (1,622 | ) |
|
| — |
|
|
| (1,622 | ) |
| (100%) |
|
Change in fair value of convertible notes |
|
| — |
|
|
| — |
|
|
| — |
|
| 0% |
|
| (316 | ) |
|
| (252 | ) |
|
| (64 | ) |
| 25% |
|
Change in fair value of earn out |
|
| — |
|
|
| — |
|
|
| — |
|
| 0% |
|
| 1,300 |
|
|
| — |
|
|
| 1,300 |
|
| 100% |
|
Change in fair value of derivatives |
|
| 956 |
|
|
| — |
|
|
| 956 |
|
| 100% |
|
| 201 |
|
|
| — |
|
|
| 201 |
|
| 100% |
|
Change in fair value of warrants |
|
| 5,902 |
|
|
| — |
|
|
| 5,902 |
|
| 100% |
|
| 9,148 |
|
|
| 2,266 |
|
|
| 6,882 |
|
| 304% |
|
Total other (expense) income, net |
| $ | 613 |
|
| $ | (333 | ) |
| $ | 946 |
|
| (284%) |
| $ | (4,096 | ) |
| $ | 3,252 |
|
| $ | (7,348 | ) |
| (226%) |
|
Three and nine months ended September 30, 2024 and 2023
Other (Expense) Income, net
Other (expense) income, net consists of unrealized currency gains and losses, loss on exchange of warrants for equity, and fair value of issuance of Loss Restoration Agreement derivative.
Interest Expense
Interest expense increased $1.7 million and $5.4 million for the three and nine months ended September 30, 2024, respectively as compared to the three and nine months ended September 30, 2023 as a result of the December 2023 Note, February 2024 Convertible Notes and Vertical Loan and amortization of the debt discounts.
51
Loss on issuance of warrants
Loss on issuance of warrants consists of fair value of issuance of warrants issued in connection with Registered Direct Offering and Best Efforts Offering.
Gain on debt forgiveness
Gain on debt extinguishment was a result of forgiveness of debt of $2.6 million related to the third-party content provider for the nine months ended September 30, 2023.
Gain (loss) on extinguishment of debt and accounts payable
Gain (loss) on extinguishment of debt and accounts payable was a result of conversion of promissory loans and senior secured debt into convertible notes resulting in a gain of $0.1 million and loss of $1.6 million for the three and nine months ended September 30, 2024.
Change in Fair Value of Convertible Notes, Change in the Fair Value of Earn out, Change in Fair Value of Derivatives, Change in Fair Value of Warrants
Change in fair value of convertible notes, earn out, derivatives and warrants for the three and nine months ended September 30, 2024 and 2023 were due to change in fair value of these financial instruments. The change in fair value of convertible notes was driven by the conversion of bridge loans to Series A Preferred Stock, change in the fair value of earn out was due to the Company's remote chance of obtaining the 2024 unit sales targets, change in fair value of derivatives was due to the Loss Restoration agreement, and the change in fair value of warrants was attributable to the change in fair value of warrants issued with December 2023 Note, February 2024 Convertible Note and Registered Direct Offering in May 2024 and Best Efforts Offering in July 2024.
Liquidity and Capital Resources
In accordance with Accounting Standards Update ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), or ASU 205-40, management evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying condensed consolidated financial statements were issued.
As an emerging growth company, the Company is subject to certain inherent risks and uncertainties associated with the development of an enterprise. In this regard, since the Company’s inception, substantially all of management’s efforts have been devoted to making investments in research and development including the development of revenue generating products and services and the development of a commercial organization, all at the expense of short-term profitability.
As of the date the accompanying condensed consolidated financial statements were issued (the “issuance date”), management evaluated the following adverse conditions and events present at the Company in accordance with ASU 205-40:
52
The Company believes that it will stay compliant with the Rule through the end of the fiscal year and beyond because, since September 30, 2024, the Company has issued more shares of common stock pursuant to the At The Market offering and the extinguishment of debt.
53
These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
Cash Flows
Comparison of the nine months ended September 30, 2024 and 2023
(in thousands) |
| 2024 |
|
| 2023 |
| ||
Net cash used in operating activities |
| $ | (8,909 | ) |
| $ | (13,561 | ) |
Net cash used in investing activities |
|
| (1,407 | ) |
|
| (1,146 | ) |
Net cash provided by financing activities |
|
| 12,947 |
|
|
| 14,656 |
|
Effect of exchange rate on cash |
|
| (362 | ) |
|
| (145 | ) |
Net Change In Cash and Cash Equivalents |
| $ | 2,269 |
|
| $ | (196 | ) |
Operating Activities
Net cash used in operating activities of $8.9 million for the nine months ended September 30, 2024, was primarily due to a net loss of $29.2 million offset by depreciation and amortization of $5.1 million, stock-based compensation of $9.4 million, amortization of debt discount and interest of $6.8 million, change in fair value of convertible notes of $0.3 million, loss on extinguishment of debt and accounts payable of $1.6 million, common stock issued to lender in connection with equity line of credit and Best Efforts Offering of $0.7 million, warrants issued to service providers $5.9 million, non cash lease expense of $0.2 million, loss on exchange of warrants for equity of $0.4 million and increase in operating assets and liabilities of $0.2 million, partially offset by change in fair value of derivatives of $0.2 million, change in the fair value of warrants of $9.1 million, change in fair value of earn out of $1.3 million.
Net cash used in operating activities of $13.6 million for the nine months ended September 30, 2023, was primarily due to a net loss of $40.0 million offset by depreciation and amortization expense of $4.9 million, stock-based compensation of $23.8 million, amortization of debt discount $1.3 million, warrants issued to service providers $0.5 million, change in fair value of convertible notes of $0.3 million, and increase in operating assets and liabilities of $0.1 million, partially offset by gain on debt forgiveness of $2.6 million and change in the fair value of warrants of $2.3 million. The remaining difference of $0.5 million was related to foreign currency, inventory valuation loss and interest expense.
Investing Activities
Net cash used in investing activities of $1.4 million for the nine months ended September 30, 2024 related to the acquisition of CLMBR, Inc. net of cash acquired.
Net cash used in investing activities of $1.1 million for the nine months ended September 30, 2023 related to the acquisition of software and content and internal use software.
Financing Activities
Net cash provided by financing activities of $12.9 million for the nine months ended September 30, 2024 was primarily from the issuance of convertible notes of $4.8 million, proceeds from loans and related party loans of $1.9 million, proceeds from issuance of common stock from equity line of credit $0.4 million, proceeds from common stock offering net of issuance and offering costs of $4.4
54
million, At the Market Offering proceeds of $4.0 million offset by the payment of loans and related party loans and interest of $2.5 million.
Net cash provided by financing activities of $14.7 million for the nine months ended September 30, 2023 was primarily related to $4.3 million of proceeds from the issuance of common stock in connection with the rights offering completed in February 2023 and $10.8 million net proceeds from issuance of common stock upon IPO, net proceeds from senior secured notes of $1.0 million and net payments of loans of $0.02 million, partially offset by payments of offering costs of $1.5 million.
Contractual Obligations and Other Commitments
Commitments
In May 2021, we entered into two agreements with a third-party content provider (“Content Provider”), a service agreement and a collaboration agreement. Per the service agreement, Forme is to provide content creation services for the Content Provider in which we are to produce workout content using the Content Provider’s trainers and studios. Under the collaboration agreement, both we and the Content Provider agree to jointly market their partnership; in addition, the collaboration agreement provides us with a license to use the Content Provider’s content and marks on our Studio fitness ecosystem (i.e., the “License”). The license issued to us allows us to reproduce, modify, prepare derivative works based upon, distribute, publicly display, publicly perform the content and the modified content, to market, advertise or promote Forme, perform specified activities, and provide our customers access to and use of the Content Provider’s content, throughout the world on our Studio products and in any media, so long as such other media is associated or related to the use of our Studio products.
A liability for total minimum commitment (the license fee) on a quarterly basis was recognized as a liability of $2.3 million as of December 31, 2022. In March 2023, both agreements with the Content Provider were terminated by mutual agreement and no payments remain due or payable thereunder and the liability was recognized as a gain on settlement for the nine months ended September 30, 2023.
Off-Balance Sheet Arrangements
In accordance with ASC 718, when a nonrecourse note is used to fund the exercise of a stock option, the stock option is not considered “exercised” for accounting purposes until the employee repays the loan. Prior to repayment of a nonrecourse loan, the outstanding shares received in exchange for the loan are excluded from the denominator of basic earnings per share. Additionally, the nonrecourse loan itself is not recorded on the Company’s condensed consolidated balance sheet since the arrangement is, in substance, a stock option.
In 2022 and 2021, the sale of the shares of common stock to several employees was completed in the form of issuances of Secured Partial Recourse Promissory Notes (the “Note(s)”) by the respective employee to the Company.
The Notes were in the aggregate amount of $154,875 and 94,908 shares as of September 30, 2024 and December 31, 2023. The Notes are secured by a pledge of collateral, representing the shares of stock sold. Interest is charged at the mid-term Applicable Federal Rate as of the date of the Note and compounded annually. Per the terms of the Notes, 51% of the initial amounts of the outstanding principal balances plus any accrued and unpaid interest, represent a full recourse note, and 49% of the initial amounts represent a nonrecourse note. The Company analyzed the terms of the Notes and concluded that the recourse portion of the notes are nonrecourse in nature as the Company does not have intention to seek repayment beyond the shares issued despite the recourse legal terms, and thus will be treated the same as the nonrecourse portion of the Notes. All Notes are outstanding as of September 30, 2024, and are not recorded on the condensed consolidated balance sheet.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the condensed consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity/deficit, 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.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Form 10-K and in Note 2. to our consolidated financial statements included in our Form 10-K. As disclosed in Note 2. to our consolidated financial statements included in our Form 10-K, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ
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significantly from those estimates. During the period covered by this Quarterly Report, there were no material changes to our critical accounting policies from those discussed in our Form 10-K other than those disclosed in Note 2. of this Quarterly Report.
Goodwill and Intangible Assets
Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. The Company follows the provisions of ASC Topic 350, “Intangibles —Goodwill and Other”, which requires an annual impairment test for goodwill and intangible assets. The Company may first choose to perform a qualitative evaluation of the likelihood of goodwill and intangible assets impairment. For the goodwill that was the result of current year acquisitions, the Company chose to perform a qualitative evaluation. If the Company determined a quantitative evaluation was necessary, the goodwill at the reporting unit was subject to a two-step impairment test. The first step compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, the Company completes the second step in order to determine the amount of goodwill impairment loss that should be recorded. In the second step, the Company determines an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill. As of September 30, 2024 there was no goodwill impairment. For additional information refer to Note 6.—Goodwill and Intangible Assets.
The Company estimates the fair value of intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates for this category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. For the periods presented, the Company did not recognize any impairment of intangible assets as the estimated fair value of its intangible assets exceeded the book value of these reporting units.
Business Combinations
The Company accounts for business combinations under the provisions of ASC 805, Business Combinations, which requires that the acquisition method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. ASC 805 also specifies criteria that intangible assets acquired in a business combination must be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date with changes in the fair value recorded through earnings.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, of the notes to our condensed consolidated financial statements included elsewhere in this report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this report.
Emerging Growth Company and Smaller Reporting Company Status
Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have elected this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Where allowable we have early adopted certain standards as described in Note 2. of our condensed financial statements included elsewhere in this report. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will continue to remain an “emerging growth company” until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.235 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual
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Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Risk
To date, all of our inventory purchases have been denominated in U.S. dollars. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also subject to fluctuations due to changes in foreign currency exchange rates. In addition, our suppliers incur many costs, including labor and supply costs, in other currencies. While we are not currently contractually obligated to pay increased costs due to changes in exchange rates, to the extent that exchange rates move unfavorably for our suppliers, they may seek to pass these additional costs on to us, which could have a material impact on our gross margins. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure to foreign currency fluctuation from operating expenses is relatively small at this time as the related costs do not constitute a significant portion of our total expenses. To date, we have not entered into derivatives or hedging transactions, as our exposure to foreign currency exchange rates has historically been partially hedged as our foreign currency denominated inflows have covered our foreign currency denominated expenses. However, we may enter into derivative or hedging transactions in the future if our exposure to foreign currency should become more significant.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and operating results.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, that are designed to ensure information required to be disclosed in our reports that we file or furnish pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate to allow for timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, has 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 (“Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, a material weaknesses is identified related to (1) the lack of a sufficient number of trained professionals with the expertise to design, implement, and execute a formal risk assessment process and formal accounting policies, procedures, and controls over accounting and financial reporting to ensure the timely and accurate recording of financial transactions while maintaining a segregation of duties; and (2) the lack of a sufficient number of trained professionals with the appropriate U.S. GAAP technical expertise to identify, evaluate, and account for complex transactions and review valuation reports prepared by external specialists.
Changes in Internal Control over Financial Reporting
As of September 30, 2024, management, with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that, as of September 30, 2024, our disclosure controls and procedures were not effective at a reasonable assurance level due to the material weakness described below.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
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In preparing our financial statements as of September 30, 2024 and December 31, 2023, management identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified related to (1) the lack of a sufficient number of trained professionals with the expertise to design, implement, and execute a formal risk assessment process and formal accounting policies, procedures, and controls over accounting and financial reporting to ensure the timely and accurate recording of financial transactions while maintaining a segregation of duties; (2) certain system limitations in our accounting software and the overall control environment (3) the lack of a sufficient number of trained professionals with the appropriate U.S. GAAP technical expertise to identify, evaluate, and account for complex transactions and review valuation reports prepared by external specialists and (4) the lack of sufficient processes and precise review and procedures to ensure the proper accounting for stock based compensation expenses, and the recording of those expenses completely and accurately in the appropriate period.
We are planning on implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including formalizing our processes and internal control documentation and strengthening supervisory reviews by our financial management; hiring additional qualified accounting and finance personnel and engaging financial consultants to enable the implementation of internal control over financial reporting and segregating duties amongst accounting and finance personnel. In addition, we are planning on implementing an accounting software system with the design and functionality to segregate incompatible accounting duties, which we currently expect will be fully implemented in our 2024 fiscal year.
While we are implementing these measures, we cannot assure you that these efforts will remediate our material weaknesses and significant deficiencies in a timely manner, or at all, or prevent restatements of our financial statements in the future. In particular, our material weakness related to our accounting software was not fully remediated as of September 30, 2024, as we expect to implement new software in 2025. If we are unable to successfully remediate our material weaknesses, or identify any future significant deficiencies or material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, and the market price of our common stock may decline as a result.
In accordance with the provisions of the JOBS Act, we and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal control over financial reporting as of September 30, 2024, nor any period subsequent in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act after the completion of our initial public offering.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Part II - Other Information
Item 1. Legal Proceedings.
For information regarding legal proceedings please refer to Note 14. - Commitments and Contingencies in Part I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q. From time to time, we are involved in legal proceedings and subject to claims arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we believe that the resolution of current matters will not have a material adverse effect on our business, financial condition, or results of operations. Even if any particular litigation or claim is not resolved in a manner that is adverse to our interests, such litigation can have a negative impact on us because of defense and settlement costs, diversion of management resources from our business, and other factors.
Item 1A. Risk Factors.
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our most recent Annual Report on Form 10-K and in our other filings with the SEC, the occurrence of any one of which could have a material adverse effect on our actual results. There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K and our other filings with the SEC.
Item 5. Other Information
Our directors and officers (as defined in Rule 16a-1 under the Exchange Act) may from time to time enter into plans or other arrangements for the purchase or sale of our shares that are intended to satisfy the affirmative defense conditions of Rule 10b5–1(c) or may represent a non-Rule 10b5-1 trading arrangement under the Exchange Act. During the quarter ended September 30, 2024, no such plans or arrangements were adopted or terminated, including by modification.
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Item 6. Exhibit
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101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |
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* In accordance with Item 601(b)(32)(ii) of Regulation S K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERACTIVE STRENGTH INC. | |||
Date: November 14, 2024 | By: | /s/ Trent A. Ward | |
Trent A. Ward | |||
Chief Executive Officer | |||
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| (Principal Executive Officer and Duly Authorized Officer) |
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Date: November 14, 2024 | By: | /s/ Michael J. Madigan | |
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| Michael J. Madigan |
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| Chief Financial Officer |
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| (Principal Financial Officer and Principal Accounting Officer) |
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