TRX: From Black & Yellow to Black & Bruised

As early employees of TRX who had the opportunity to be part of a rapidly growing brand that was truly innovating the fitness industry, we felt a combination of sadness and disappointment in its Chapter 11 bankruptcy filing.?

TRX went from a novelty to a must-have fitness tool and transformed the fitness industry. Nothing we say here attempts in any way to take away from that and is as much a personal reflection as it is a recognition that building a company is hard and most companies, no matter how good they look on the outside, are dealing with difficult challenges of their own.?

We deeply believe in TRX Suspension Training as one of the most innovative training companies in all of fitness, and its following are true brand aficionados. It is a great brand that has had a lot of smart and hard working people behind a founder with a strong vision and personality.?

We begin by looking at the basics of the filing, then a historical review that includes some of the internal challenges, details of the filing and finally what is possibly next for the brand.

TRX Chapter 11 Bankruptcy

This may seem like a bit of a Gordian knot, but bear with us for a moment. The Chapter 11 filing is for two of the five entities that hold assets related to the TRX brand.

The five different entities are:

1. TRX Holdco, LLC?
2. Fitness Anywhere, LLC (main TRX entity)?
3. Fitness Anywhere International, LLC?
4. Fitness Anywhere Europe?
5. TRXperience, LLC (this is an entity holding digital assets)

Only TRX Holdco and Fitness Anywhere are part of the bankruptcy filing.

TRX Holdco holds a preferential and controlling interest in Fitness Anywhere, a subsidiary of TRX Holdco. It is these two entities that are part of the bankruptcy filing.

Fitness Anywhere International is wholly owned by Fitness Anywhere. Fitness Anywhere Europe is 99% owned by Fitness Anywhere and 1% owned by Fitness Anywhere International. TRXperience is wholly owned by TRX Holdco. These entities are not part of the bankruptcy filing.

What is a successful outcome of bankruptcy?

Per the filing, a successful outcome is to find a buyer for at least $25M.

Keep that $25M in mind as you read through the historical forecasted and actual revenues.

Some History

2010 - TRX was generating over $30M in revenue and internal projections were forecasting sales to reach $200M per year by 2013 based on market size and the historical trend of doubling revenue every year.

2011 - ~$50M revenue on a forecasted revenue of $65M

• Castanea private equity invests roughly $20 million for a minority stake in TRX (as a general guideline, private equity will typically sell in 2-7 years at a 2-2.5x return)
• TRX moved into a new 40,000-square-foot office at 755 Sansome St., spending what was rumored to be $1M on making the roof structural and functional to support outdoor classes. Few paid classes were ever given on the rooftop.? Instead, they were conducted at the original location at 1660 Pacific Avenue that was turned into a TRX training facility open to the public.
• 140 employees and growing, exercise room and a rooftop terrace.

TRX was stuck hovering in the $50M annual revenue stream and the cash from Castanea was intended to support a number of key growth initiatives. The new office and hiring plan were based on where the company was going rather than what it could currently support on a long-term basis. What had been accomplished to this point was truly revolutionary for the fitness industry. TRX completely changed the landscape of continuing education while creating the Suspension Training category.?

Up to this point in the company there was not a big emphasis on targeting the consumer market. The focus had been primarily on the fitness professionals and it worked great to get them to attend a course, purchase and then use the gear with their clients who would then purchase their own gear.

To break through the $50M revenue mark a number of opportunities were pursued, including a product designed specifically for the home consumer and a digital toolbox for trainers to help them succeed in their business, TRX Core. TRX wanted to develop a recurring revenue stream with TRX Core

2012 - forecasted revenue $125M

Launch of TRX Home, a lower cost version of the Suspension Trainer that included a digital download of workouts and training programs.

Around the same, upgrades were made to the original Suspension Trainer and it was re-packaged as the TRX Pro.

2013 - forecasted revenue $250M

• Launch of TRX Core, a digital subscription platform for professionals
• TRX Core conversion significantly below target.
• Military sales are challenged by the federal budget delays
• Education course sales are challenged by increased competition as fitness brands realize the monetary and brand equity potential of education.?
• The reckoning begins with a round of layoffs reducing headcount by around 20%

There had been a number of digital initiatives leading up to the launch of TRX Core that were ahead of the adoption curve. TRX had already launched a mobile app, digital downloads and was hiring internal software developers to complement external agencies. While these don’t seem like challenges today with no-code software for website and app development, at the time these were still mostly bespoke builds that required more time and money than expected.

The year leading up to this was challenging as everyone knew TRX was not meeting expectations. This tends to lead to greater siloing as people try to protect their domains, which leads to more inefficiencies, which leads to greater siloing…..no easy answer and rather than be critical of anyone in particular we can certainly reflect and see things that we could have done differently.?

2017 - $51.5M revenue and $4.5 million of earnings before interest, taxes, depreciation and amortization

2018

• Castanea Partners-backed Fitness Anywhere LLC engaged investment bank Raymond James & Associates Inc. to sell the company

2018

• Brent Leffel / Equity38, LLC acquired TRX, financed by:
• Woodforest National Bank
• Equity Investment
• Rollover Investment from previous partners

?2018

• Equity38 recapitalization?
• Stated that TRX was still recovering from a lengthy patent defense that had required an outsized amount of the management team’s focus.

2019 - $51M Revenue

• Operation Improvement Initiatives implemented to restructure business
• Additional capital from Bank to pursue digital initiatives
• TRX acquires XD

?2020 - $85M Revenue (47% YOY Growth)

• Holdco formed
• Additional equity capital from existing and new investors
• Portion of investment to Fitness Anywhere, LLC to repay senior debt and provide working capital
• Remaining cash in Holdco to fund growth initiatives, including digital
• Holdco now owned preferential stake in Fitness Anywhere, LLC and became guarantor to Bank
• TRXperience, LLC formed to house digital services (education and consumer fitness)
• Various entities developed to segregate equity investments and limit dilution to legacy shareholders

2021 - $62M revenue

• Company determined it needed additional capital to fund operations and debt
• Bank owed >$19M secured with a guarantee from Holdco, Fitness Anywhere and TRXperience
• Other unsecured debt of $17M (*see list of unsecured creditors)
• Tried unsuccessfully to raise capital to pay down debt or engage in strategic merger/acquisition

?2022

Bankruptcy filing?

• Bank is requested to provide credit for ongoing operations that will be secured through a preference on post-sale assets.?
• Company states that without a company sale or additional financing that they will be unable to purchase new inventory and could lead to a shutdown / liquidation.
• Bank essentially “owns: Holdco and its portion of Fitness Anywhere, LLC.?
• Bank will either get money back through company liquidation or assets from a company sale.

The top list of people owed money by TRX includes:

CASE SUMMARY: TRX Files to Sell Assets, Adapt to Post-Pandemic Environment After Record-Breaking 2020 Due to 'COVID-19 Home Fitness Boom'

Of the $17M in unsecured debt the top 10 list is for a total of around $14M. The remaining $3M could be a lot of small accounts and / or some rollover debt they acquired from Castanea.

Current Assets

• $5.1M Accounts receivable
• $17.8M inventory (cost-basis)
• IP / Goodwill
• Domestic and international customer base

Since the company's debt ($36M) is greater than its tangible assets ($23M) it is very difficult to raise any additional debt to fund its operations and the bankruptcy filing is really the only way out.

The bank has secured debt so they will get their money back first and the courts will work out a deal with the creditors who will get a certain percentage of what they are owed.?

The bankruptcy filing will also allow the company to obtain debtor-in-process financing from the bank. DIP financing is senior to all other debt, so it’s secured, and is used to keep the business operating until it can be sold.?

?So Why did this happen?

The company states that revenue and cash flow cannot support ongoing operations due to a combination of the following:

• Macroeconomic conditions
• Competition
• Excess inventory purchase
• Higher than expected costs for development of digital platform and marketing / paid advertising

Macroeconomics is definitely an issue. Nobody could have predicted Covid-19 and its economic impact on the past few years. Two of the largest debt holders, FlexPort and UPS, most likely helped TRX get product from the factory to the market via airfreight which is incredibly expensive when compared to slower ocean freight, both of which increased by more than 5x during COVID . In 2022, with rising interest rates/inflation the cost to service the debt will increase much more and this will also make it more difficult to find a buyer, at least one who will pay what they want.

Competition has been there for years. The company has spent a lot of time and money defending patents and there are plenty of lower cost or comparable products for people to buy. In the past, we would argue the strength of the brand and community created a great halo effect. This is tough to maintain and as the company correctly scaled growth into the fit consumer market it was harder to keep the community of trainers as engaged.? As the world grapples with inflation and a possible recession, lower priced alternatives to the premium Suspension Trainer will likely erode TRX’s market share. The entire product line risks becoming more commoditized as consumers become more price sensitive. The brand is still aspirational, but how much will that continue to matter?

Inventory:? The excess inventory purchase means they miscalculated the longevity of the home fitness rush and / or purchased a lot based on concerns over future supply chain issues. Amazon, who attempted to meet demand during COVID is struggling to figure out how to monetize the no longer needed 800,000+ workers they hired and millions of warehouse space they built during COVID.? No one got this right.

Digital:? It’s difficult and expensive to build your own ecosystem and many are seeing an unwillingness in consumers to pay for content. Digital platforms are like building a house, it always costs more and takes longer. TRX should have learned this lesson with previous projects. There was also an explosion in fitness brands with deep pockets and thousands of trainers who started marketing their programs, going after the same consumer, which would increase customer acquisition costs across all channels.?

Equity38 knew it was buying a company that was already broken and thought they could fix it. Like many over the past few years they made a big swing for the fences with their digital investments and were probably hoping for a windfall in subscriptions to drive recurring revenue. We estimate they spend $6-7M on the digital asset strategy. Equally, they over-purchased inventory probably through a combination of thinking the rush to home workouts would continue to drive sales and would build up stock due to the uncertainty around supply chain challenges.

Equity38 likely had very little room for error in their strategy and unfortunately it didn’t work.? The bank will get most of their money back and as is typical, the employees, suppliers and distributors will lose.

What happens next?

TRX as a brand will stick around as someone will buy it in what we believe as two most likely options:

1. A company who already has good distribution into retail and commercial fitness.
2. Conversely, it could also be a good roll-up into an existing digital-first brand or any of the many equipment providers where TRX can provide access to a distribution channel.?

We learned a lot at TRX and it served as a great career launching pad for many of its employees and cadre of Suspension Training Instructors. To this day, there is still the TRX halo effect of the brand when we speak with potential clients. One of the benefits working at a rapidly growing company is the broad experiences you receive that are unmatched in stable, larger companies. Start-ups are messy, change course quickly and it’s easy to be critical of decisions that have been made without the foresight or insight into their rationale.??

Like Icarus, TRX has flown too close to the sun, or as one of our prior colleagues stated, “TRX is a category-creating brand that endeavored into a blue ocean and created a wake so big that it capsized the ship”.

What began as a curiosity about the filing led to this broader reflection on the history of TRX, what got them to this point and where they may go next. One of the struggles in writing this has been to balance the information with the context at the time and not just “hang out the dirty laundry”. We are grateful for the opportunity to have been a part of TRX and will wait to see what’s next.