NAUTILUS, INC.
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PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-looking statements. The forward-looking statements in this report include, without limitation: our prospects, resourcesability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs; an inability to pass along or capabilities; current otherwise mitigate the impact of raw material price increases and other cost pressures, including unfavorable currency exchange rates; experiencing delays and/or future financial trends;greater than anticipated future operating results; future plans for introductioncosts in connection with launch of new products; anticipated demand for ourproducts, entry into new and existing products; maintenance of appropriate inventory levels; growth in revenues and profits; leverage of operating expenses; future revenues from licenses of our intellectual property; results of increased media investment in the Direct segment; continued improvement in operating margins; expectations for increased research and development expenses; anticipated capital expenditures; fluctuations in net sales due to seasonality; andmarkets, or strategic initiatives; our ability to continuehire and retain key management personnel; changes in consumer fitness trends; changes in the media consumption habits of our target consumers or the effectiveness of our media advertising; a decline in consumer spending due to fund our operatingunfavorable economic conditions; and capital needs forsoftness in the following twelve-month period. Forward-looking statements also include any statements related to our expectations regarding future business and financial performance or conditions, anticipated sales growth across markets, distribution channels and product categories, expenses and gross margins, profits or losses, losses from discontinued operations, settlements of warranty obligations, the anticipated outcome of litigation to which we are a party, new product introductions, financing and working capital requirements and resources. These forward-looking statements, and others we make from time-to-time, are subject to a number ofretail marketplace. Additional assumptions, risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risksuncertainties are described in Part I, Item 1A of this reportdetail in our registration statements, reports and in other reports we filefilings with the Securities and Exchange Commission.Commission, including the “Risk Factors” set forth in our Annual Report on Form 10-K, as supplemented by our quarterly reports on Form 10-Q. Such filings are available on our website or at www.sec.gov. You are cautioned that such statements are not guarantees of future performance and that our actual results may differ materially from those set forth in the forward-looking statements. We do not undertake any duty to publicly update or revise forward-looking statements after the date they are madeto reflect subsequent developments, events or conform them to actual results or to changes in circumstances or expectations.circumstances.
Item 1. Business
OVERVIEW
Founded in 1986, Nautilus, Inc. and subsidiaries (collectively, "Nautilus" or the "Company") is a consumerglobal leader in innovative home fitness products companysolutions, headquartered in Vancouver, Washington and incorporated in the State of Washington in January 1993. We became a publicly traded company in May 1999 and are committedlisted on the New York Stock Exchange and traded under ticker symbol: NLS.
Our diverse brand portfolio includes Bowflex®,Schwinn®, JRNY® and Nautilus®, pursuant to providing innovative, quality solutions to help people achieve their fitness goals throughwhich we sell a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-qualitybroad selection of exercise bikes, other cardio andequipment, strength fitnesstraining products, and related accessories for consumer and commercial use, primarily in the U.S. and Canada, but also in international markets outside North America. Our products are sold under some of the most-recognized brand names in theour JRNY® digital fitness industry: Nautilus®, Bowflex®, Octane Fitness®, Schwinn® and Universal®.platform.
Nautilus empowers healthier living through individualized connected fitness experiences. We marketsell our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our
We also derive a portion of our revenue from the licensing of our brands and intellectual property.
BUSINESS STRATEGY
Nautilus empowers healthier living through individualized, connected-fitness experiences. We are focused on developingdevelop and marketing consumermarket home fitness equipment and related products to help people enjoy healthier lives. Our products are targeted to meet the needs of a broad range of consumers, including fitness enthusiasts and individuals who are seeking the benefits of regular exercise.consumers. We have diversified our business by expanding our portfolio of high quality fitness equipment into multiple product lines utilizing our well-recognized brand names. We are focused on consumer markets and specialty and commercial distribution channels, and view the continual innovation of our product offerings as a key aspect of our business strategy. We regularly refresh our existing product lines with new technologies and finishes, and focus significant effort and resources on the development or acquisition of innovative new fitness products and technologies for introduction to the marketplace at periodic intervals.
Our strategies incorporatelong-term strategy involves:
•Enhancing our product lines by designing personalized connected-fitness equipment that meets or exceeds the high expectations of our existing and new customers;
•Continuing our investment in innovation, with a particular focus on expanding the reach of our digital platform, JRNY®;
•Creatively marketing our equipment, both directly to consumers and through our Retail customers, while leveraging our well-known brand names;
•Increasing our international Retail sales and distribution.
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Our long-term strategy incorporates the individual characteristicsgoals of our Direct and Retail businesses. Our Direct business focuses on: (i) the development of, or acquisition of rights to, unique, branded products;products and technologies; (ii) the application of creative, cost-effective ways to communicate the benefits of their use;using our products; and (iii) making various payment options available to our customers. We are particularly attentive to Direct business metrics that provide feedback regarding the effectiveness and efficiency of our media marketing programs and attractiveness of third-party consumer financing programs.
In our Retail business, we strive to develop long-term relationships with key retailers of sports or fitness equipment. The primary objectives of our Retail business are to: (i) to offer a selection of innovative, unique products at key price-points to capture market share; and (ii) to utilize the strength of our brands and long-standing customer relationships to secure more floor space withexposure in the stores or websites of our Retail customers for our products, as well as support efforts to gain share in multi-user environments.customers.
PRODUCTS
We market quality cardiovascular and strength fitness products that cover a broad range of price points and features. Our products are designed for home use and multi-user environments by individuals with varying exercise needs. From the person who works out occasionally to the serious athlete, we have products that will help them achieve their fitness objectives.
•Our Schwinn®brand is known for sale primarily throughits popular line of exercise bikes, including the connected-fitness IC4®.
•Our JRNY® digital fitness platform helps Members to achieve their fitness goals by offering curated workout and entertainment options that stream while coaching. The JRNY® platform uses machine learning to create a virtually infinite number of personalized workouts that include motivation and praise and is based on an initial fitness assessment that learns and adapts as the member progresses.
•Our Nautilus® brand is our Direct sales channel.corporate umbrella brand and is also used to differentiate certain specialized cardio equipment.
BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
We conduct our business in two segments, Direct and Retail. Our Direct business offers products directly to consumers primarily through our websites. Our Retail business offers our products through a network of independent companies to reach consumers in the home use markets in the U.S. and internationally.
For further information regarding our segments and geographic information, see Note 20,22, Segment and Enterprise-Wide Information, to our consolidated financial statements in Part II, Item 8 of this report.
SALES AND MARKETING
Direct
In our Direct business, we market and sell our products principally Bowflex® cardio and strength products, directly to consumers. While we are,consumers via our websites bowflex.com, bowflex.ca, schwinnfitness.com and plan to continue to be, a large direct marketer of strength products in the U.S., our advertising emphasis has shifted toward cardio products, especially the Max Trainer® and HVT®, as cardio products represent the largest component of the fitness equipment market and a majority of our business. Sales of cardio products represented 90% of our Direct channel revenues in 2017, compared to 93% in each of the two years 2016 and 2015, respectively.nautilus.com.
Our marketing efforts are based on an integrated combination of media and direct consumer contact. In addition to television advertising, which ranges in length from 30 seconds toour marketing mix includes a combination of digital, search, shopping and social media, as longwell as three minutes, we utilize Internet advertising, product websites, inquiry-response mailings, catalogsemail and inbound/outbound call centers.direct mail campaigns. Marketing and media effectiveness is measured continuously based on sales inquiries generated, cost-per-lead,web traffic, conversion rates, return on investment and other performance
metrics and we strive to optimize the efficiency of our marketing and media expenditures based on this data. Almost all of our Direct customer orders are received either on our Internet websites or through company-owned and third-party call centers.
Retail
In our Retail business, we market and sell a comprehensive line of consumer fitness equipment under the NautilusBowflex®, Octane Fitness®, Schwinn®, Universal® and BowflexNautilus® brands. Our products are marketed through a network of retail companies, consisting ofvia brick and mortar locations and those retailers' websites. Retail partners include online-only retailers, sporting goods stores, Internet retailers,electronics stores, furniture stores, large-format and warehouse stores, smaller specialty retailers and independent bike dealers, and to specialty commercial customers purchasing our products for multi-user environments.dealers.
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We offer programs that provide price discounts to our Retail customers for ordering container-sized shipments or placing orders early enough in theour manufacturing season to allow for more efficient manufacturing by our Asian suppliers. These programs are designed to reduce our shipping and handling costs, with much of the savings being passed on to our customers. In addition, we often offer other types of sales incentives to our Retail customers, including volume discounts and various forms of rebates or allowances, which generally are intended to increase product exposure and availability for consumers, reduce transportation costs, and encourage marketing and promotion of our brands or specific products.
PRODUCT DESIGN AND INNOVATION
Innovation is a vital part of our business, and we continue to expand and diversify our product offerings by leveraging our research and development capabilities. We constantly search for new technologies and innovations that will help us grow our business, either through higher sales or increased production efficiencies. To accomplish this objective, we seek out ideas and concepts both within our company and from outside inventors. Recently, our investments have been focused on personalized connected-fitness, including voice coaching, simulated outdoor exploration and diverse music playlist options with copyright clearance. Our JRNY® digital platform uses artificial intelligence and data from an initial assessment and every following workout to create, and continually evolve, personalized daily workouts based on the user's fitness goals and capabilities. Our data shows the JRNY® system is coaching people to work out longer and getting them to stay with their fitness journey longer.
We rely on financial and engineering models to assist us in assessing the potential operational and economic impacts of adopting new technologies and innovations. If we determine that a third-party technology or innovation concept meets certain technical and financial criteria, we may enter into a licensing arrangement to utilize the technology or, in certain circumstances, purchase the technology for our own use. Our product design and engineering teams also invest considerable effort to improve product design and quality. As a consumer-driven company, we invest from time-to-time in qualitative and quantitative consumer research to help us assess new product concepts, optimal features and anticipated consumer adoption.
Our research and development expenses were $15.4$22.8 million, $13.9$3.8 million, $15.8 million and $9.9$14.3 million for the year ended March 31, 2022, the three-month transition period ended March 31, 2021, and years ended December 31, 2020 and 2019, respectively. The increase in 2017, 2016our research and 2015, respectively, as wedevelopment expenses in fiscal year 2022 compared to fiscal year 2021 was due to increased expenses related to personnel to develop and update our connected-fitness technology. The increase in our research and development expenses in 2020 compared to 2019 was due to increased capitalized investment in new product development resources and capabilities.for our connected-fitness technology. We expect our research and development expenses to increase in 2018fiscal 2023 as we continue to supplement our investment in new product development, technology initiatives, and engineering capabilities.
JRNY® Digital Platform
JRNY® Member
JRNY® Members are offered Connected Fitness Subscriptions on a month-to-month or annual basis, that allow for multiple household users, and provide unlimited access to on-demand classes and fitness experiences. Our JRNY® digital platform allows Members and Subscribers to access digital content through JRNY® and track performance metrics and goals. Our Members gain access to our content through our digital app JRNY®, which is available through iOS and Android mobile devices and most tablets and computers.
We define JRNY® Members as all individuals who have a JRNY® account and/or Subscription, which includes Subscribers, their respective associated users and users who consume free content. We had approximately 325,000 JRNY® Members as of March 31, 2022.
Subscriptions
We define Subscriptions as a person or household who paid for a Subscription (via a successful credit card billing or with prepaid subscription credits or waivers), or are in a trial, or have requested a "pause"' to their subscriptions for up to three months. As of March 31, 2022, we had approximately 111,000 Subscriptions.
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SEASONALITY
We expect our revenue from fitness equipment products to vary seasonally. Sales are typically strongest in the firstour fiscal third quarter ending December and fourth quarters, followed by the third quarter ending March and are generally weakest in theour fiscal first quarter ending June and second quarter.quarter ending September. We believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization.
MERCHANDISE SOURCING
All of our products are produced by third-party manufacturers, and in 2017, our manufacturing partners wereare primarily located in Asia. Although multiple factories bid on and are able to produce most of our products, we typically select one factory to be the primary supplier of any given product. Lead times for inventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit time represents three-to-fourthree to four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demand for our products. We attempt to compensate for our long replenishment lead times by maintaining adequate levels of inventory at our warehousing facilities.
We monitor our suppliers' ability to meet our product needs and we participate in quality assurance activities to reinforce adherence to our quality standards. Our third-party manufacturing contracts are generally of annual or shorter duration orand our manufactured products are sourced on the basis of individual purchase orders. Our manufacturing relationships are non-exclusive, and we are permitted to procure our products from other sources at our discretion. None of our manufacturing contracts include production volume or purchase commitments on the part of either party. Our third-party manufacturers are responsible for the sourcing of raw materials and producing parts and finished products to our specifications.
LOGISTICS
Our company-operated warehousing and distribution facilities are located in Oregon, Ohio and Ohio.California. In addition to Company-operatedcompany-operated distribution centers, we utilize third-party warehouses and logistics providers to fulfill orders.
In our Direct business, we strive to maintain inventory levels that will allow us to ship our products shortly after receiving a customer's order. We use common carriers for substantially all of our merchandise shipments to Direct customers.
In our Retail business, we manage our inventory levels to accommodate anticipated seasonal changes in demand. Generally, we maintain higher inventory levels at the end of the thirdfiscal second and fourththird quarters to satisfy relatively higher consumer demand in the fourthfiscal third and firstfourth quarters of each year. Many of our Retail customers place orders well in advance of peak periods of consumer demand to ensure an adequate supply for the anticipated selling season.
In 2017,fiscal 2022, approximately 58%60% of our Retail customers' orders were shipped by our contract manufacturers in Asia directly to our Retail customerscustomers' locations, typically in container loads. The use of such direct shipments allows us to maintain lower levels of inventory in our warehouses, resulting in lower storage, handling, freight, insurance and other costs, with much of the savings being passed on to our customers. We use various commercial truck lines for our merchandise shipments to Retail customers.
COMPETITION
The markets for all of our products are highly competitive. We believe the principal competitive factors affecting our business are quality, brand recognition, innovation and pricing. We believe we are well positioned to compete in markets in which we can take advantage of our strong brand names and that our focus on innovative product design, quality, and performanceour integrated fitness experiences distinguishes our products from theour competition.
Our products compete directly with those offered by a large number of companies that market consumer fitness equipmentexperiences and fitness programs. As the use of Internet websites for product sales by traditionalmore retailers has increased,utilize eCommerce, our competitors have become increasingly similar across our Direct and Retail sales channels.segments.
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Our principal competitors include: ICONPeloton, iFit Health & Fitness Inc. ("iFit"), Johnson Health Tech, Peloton, Beach Body, American Telecast, Life Fitness,Technogym, Echelon, Mirror, Hydrow, Tonal, JaxJox and Precor.Tempo. We also compete with marketers of mobile device applications focused on fitness training and coaching on both iOS® and Android™ platforms, such as Workout: Gym exercise plannerfor example Peloton, Zwift, Strava, Mirror, BeachBody, and NIKE® Training Club.Apple Fitness+. Additional marketers of competitive products include the following: activity trackersin-studio fitness classes, fitness clubs, at-home fitness equipment and content-driven physical activity products, such as Garmin vivofit® content, and Fitbit®; computer-based recreation products, such as the Microsoft Xbox®; weight management companies, such as Weight Watchers; group fitness, such as cross-fit classes;health and gym memberships, each of which offers alternative solutions for a fit and healthy lifestyle.wellness apps.
EMPLOYEES
At Nautilus, we promote an overall alignment of our Mission, Vision, and Values. This includes a strategy to create a company culture that attracts talent and provides retention, promotes employee engagement and wellness while ensuring equal opportunities, diversity and inclusion. There is a focus on workforce compensation and equity for our employees. In our efforts to build a healthier world, one person at a time, we strive to make a positive impact on the global fitness industry, our community, and our planet with a commitment to operate with transparent, socially conscious, and sustainable business practices.
As of February 28, 2018,June 1, 2022, we had approximately 491521 employees, substantially all4 of whom were full-time.part-time. None of our employees are subject to collective bargaining agreements. We have not experienced a material interruption of our operations due to labor disputes.
Company culture
Nautilus's culture is as unique as its employees and can be seen and felt throughout the Company. It is an inclusive environment, which helps individuals become their best selves, unlocking the greatest potential of each person to go 'above and beyond' for success. We value partnerships with businesses, academic institutions, and non-profit organizations to service our community. Our charitable contributions focus on supporting these partnerships and serving the community. We are engaged citizens in the communities in which we operate and our commitment to diversity, equity and inclusion extends to the way we support these communities.
Employee engagement and wellness
At Nautilus, we are committed to developing and maintaining a positive company culture that attracts and retains talent, engages with employees, and promotes wellness, while ensuring diversity, equity, and inclusion for all employees. Every member of Team Nautilus brings a unique background and skills to our company. We celebrate our differences but we are united in our Mission, Vision, and Values. We are a dynamic team driving the future of consumer fitness experiences through our well-known brands and a passionate company culture.
We conduct surveys on a monthly basis and analyze the results, provide feedback to employees of those results, and, where appropriate, develop initiatives around issues raised by employees. Nautilus also supports learning and development opportunities, implementation of health and safety measures and other employee wellness programs.
Nautilus pivoted overnight from the onset of COVID-19 into a fully remote environment. As the pandemic continued, numerous efforts and careful decisions were made by the Executive Team, considering employee input, to maintain the highest level of health and safety of employees and their families. Remote work continued until safety precautions were lifted, and employees could safely return to an office environment. The flexibility and ability to adjust to change continues, as we settle into a hybrid schedule, allowing collaboration and interaction while showing the continued commitment and flexibility to this ever-changing environment. Managers are being provided training to develop skills for success in this hybrid transition.
Talent acquisition and retention
We believe that the retention of our talented people is a key element to our ability to execute our strategy. Our ability to retain our talent has become increasingly challenging in a competitive labor market as reflected in what has been coined “The Great Resignation”. In addition to our competitive compensation program, we have instituted a number of initiatives for open communication between leaders and employees to ensure that management is able to respond continuously and strategically to employee needs and concerns. We believe that open and continuous dialogue fosters a dynamic culture of ownership and accountability at all levels.
We have a comprehensive and holistic approach to ensuring that we have the best people with exceptional and diverse skills and perspectives who are engaged and can grow to execute our strategy in a continuously changing environment. Our talent philosophy includes hiring from a diverse pool of candidates, developing our internal talent with formal and informal training opportunities, engaging our people with our company culture, and retaining our talent with competitive rewards and promoting our well-qualified and diverse pipeline of leaders.
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We focus on employee development to support business needs and goals. We design programs that provide career and leadership development opportunities for employees at all levels. Talent development is key to leadership readiness, employee engagement and retention.
INTELLECTUAL PROPERTY
Trademarks, patents and other forms of intellectual property are vital to the success of our business and are an essential factor in maintaining our competitive position in the health and fitness industry. We regularly monitor commercial activity in our industry to identify potential infringement of our intellectual property. We protect our proprietary rights and attempt to take prompt, reasonable actions to prevent counterfeit products and other infringement on our intellectual property.
Trademarks
We own many trademarks, including Nautilus®, Bowflex®, Max Trainer®, TreadClimber®, HVT®, Power Rod®, Bowflex Revolution®, SelectTech®, Octane Fitness®, LateralX®, xRide®, Zero Runner®, Airdyne®, Max Total®, Explore the World®, VeloCore® and UniversalJRNY®. Nautilus is the exclusive licensee under the Schwinn®mark for indoor fitness products. We believe that having distinctive trademarks that are readily identifiable by consumers is an important factor in creating a market for our products, maintaining a strong company identity and developing brand loyalty among our customers. In addition, we have granted licenses to a third party to use the Nautilus®, Schwinn® and TreadClimber® trademarks on commercial fitness products, for which we receive royalty income and expanded consumer awareness of our brands.
Each federally registered trademark is renewable indefinitely if the trademark is still in use at the time of renewal.
Patents and Designs
Building our intellectual property portfolio is an important factor in maintaining our competitive position in the health and fitness equipment industry. We have followed a policy of filing applications for U.S. and non-U.S. patents on utility and design inventions that we deem valuable to our business.
We own or license patents and design registrations covering a variety of technologies, some of which are utilized in our selectorized dumbbells, kettlebells, barbells, treadmills, exercise bikes, and elliptical machines. Patent and design protection for these technologies, which are utilized in products sold in both the Direct and Retail segments, extends as far as 2034.
We maintain a portfolio of patents and patent applications related to our MaxTrainerMax Trainer® specialized cardio machines, which are sold primarily in our Direct segment.and Retail segments. The portfolio includes issued patents with expiration dates ranging from 2024 to 2034,2037, and additional pending patent applications.
We maintain a portfolio of patents and patent applications related to our JRNY® digital fitness platform. The portfolio includes issued patents with expiration dates ranging from 2032 to 2038, and additional pending patent applications.
Nautilus is also the licensee of patentsa patent related to the Bowflex Revolution® home gyms. Thesegyms and patents related to the VeloCore® bike. The home gym patent expires in 2025, and the bike patents have expiration dates ranging from 2018 to 2025. Through its Octane Fitness subsidiary, Nautilus owns and licenses certain patents related to Octane's LateralX®, xRide® and Zero Runner® products. These patents have expiration dates ranging from 2018 to 2034.in 2027.
BACKLOG
We define our customer order backlog to include firm orders for future shipment to our Retail customers, as well as unfulfilled consumer orders within the Direct segment.
Backlog as of a given date fluctuates basedbased on specific timing of product shipment within the typical shipment timeframes for each of our segments. Retail orders comprise the larger portionWe had $32.9 million in backlog as of our order backlog, while Direct orders comprise a smaller portion of our backlog due to shorter fulfillment timeframes.
March 31, 2022. Our customer order backlog as of DecemberMarch 31, 2017 and 20162021 was approximately $6.0$205.1 million due to global supply and $4.9 million, respectively.logistics disruptions during the COVID pandemic.
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SIGNIFICANT CUSTOMERS
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Amazon.com | 16.8% | 10.6% | 17.1% | 15.2% | |||||||||||||||||||
| Dick's Sporting Goods | * | * | 10.2% | 11.7% | |||||||||||||||||||
| Best Buy | 13.6% | * | * | * | |||||||||||||||||||
*Less than 10% of total net sales.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
We will continue to build our environmental initiatives, ensuring that we have the authorityinformation, systems, people, and processes in place across the organization to promulgate regulationsdevelop targets and roadmaps for priority focus areas. We will integrate and accelerate to make tangible progress and further embed sustainability across our full value chain. Some areas of focus include a lower carbon footprint, less landfill waste, chemical safety and regulatory compliance.
We do not expect that may impact our operations. In particular, we are subject to legislation placing restrictions on our generation, emission, treatment, storage and disposal of materials, substances and wastes. Such legislation includes: the Toxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water Act; and the Comprehensive Environmental Response and the Compensation and Liability Act (also known as Superfund). We are also subject to the requirements of the Consumer Product Safety Commission and the Federal Trade Commission, in addition to regulations concerning employee health and safety matters.
Our digital platforms may receive, process, transmit and store personal health and fitness information relating to identifiable individuals. Consumer demand for personalized fitness experiences, through mobile applications or wearable fitness trackers and our focus on digital fitness solutions for our products may increase the volume of identifiable individual information we receive on our platforms and through our products. We also receive, process, transmit and store information relating to identifiable individuals in our capacity as an employer. As a result, we may be subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect both individually identifiable information as well as personal health information, including the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) and the European Union’s General Data Protection Regulation (“GDPR”), each of which governs, among other things, the privacy, security and electronic transmission of individually identifiable health information. The GDPR includes, and a growing number of legislative and regulatory bodies elsewhere in the future.world have adopted, consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. These breach notification laws continue to evolve and include jurisdiction-specific obligations.
We believe that we comply with such laws and regulations in all material respects and our controls in place are adequate for our continued compliance.
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AVAILABLE INFORMATION
Our common stock is listed on the New York Stock Exchange and trades under the symbol “NLS.” Our principal executive offices are located at 17750 SE 6th Way, Vancouver, Washington 98683, and our telephone number is (360) 859-2900. The Internet address of ourOur corporate website is located at http://www.nautilusinc.com. We maintain anwww.nautilusinc.com and we use the investor relations page on our corporate website accessible at http://www.nautilusinc.com/investors.(www.nautilusinc.com/investors) to make information available to investors and the market.
We file annual reports, quarterly reports, current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended. You can inspect and obtain a copy of our reports, proxy statements and other information filed with the SEC at the offices of the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549, on official business days during the hours of 10 a.m. to 3 p.m. EST. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Interneta website at http://www.sec.gov where you can access copies of most of our SEC filings.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, and other information as filed or furnished with the SEC, available free of charge on the investor relations page of our corporate website. In addition to our SEC filings, we also webcast our earnings calls and certain events we participate in with members of the investment community on our investor relations page. Further, we use our investor relations page to make presentations and other materials regarding our business and financial performance available, along with our Code of Business Conduct and Ethics, corporate governance policies, and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
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Item 1A. Risk Factors
Nautilus operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in this Annual Report on Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business, operations.operations and financial results. If any of the risks described in this Annual Report on Form 10-K actually occur, our business, operating results and financial position could be adversely affected.
Strategic and Operational Risks
Our revenuesbusiness is typically affected by seasonality which results in fluctuations in our operating results.
We typically experience fluctuations in aggregate sales volume during the year. In most prior years, sales were typically strongest in the fiscal third ending December and profitability can fluctuate from period to periodfourth quarter ending March and are often difficultgenerally weakest in the fiscal first quarter ending June and second quarter ending September. During the COVID-19 pandemic the seasonality we had typically experienced was largely nullified. The mix of product sales may vary considerably from time to predict due to factors beyondtime as a result of changes in seasonal and geographic demand for particular types of fitness equipment. In addition, our control.
The loss of one or more of our large Retail customers could negatively impact our revenue and operating results.
We derive a significant portion of our revenue from a small number of Retail customers. A Retail customer or any of our retail partners may in the future experience difficulties in their businesses that could prompt store closures or reorganizations. A loss of business from one or more of these large customers, if not replaced with new business, could negatively affect our operating results and cash flows.
Our inventory purchases are subject to long lead times, which could negatively impact our revenue, cash flows and liquidity.
All of our products are produced by third-party manufacturers, substantially all of which are located in salesAsia, primarily China. Lead times for inventory purchases from our Asian suppliers, from order placement to receipt of Max Trainergoods, generally range from approximately two to three months, of which transit time represents three to four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demand for our products. Due to the length of our lead times, our revenue and cash flows may be negatively impacted if we do not have sufficient inventory on hand to meet customer demand for such items. In addition, our liquidity and cash flows may be negatively affected, and inventory obsolescence may increase, if the quantity of products we order exceeds customer demand for such items.
If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose revenues, and our reputation and market share may be harmed
Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control:
•® Unexpected increases in manufacturing and repair costs;
•Interruptions in shipments if our contract manufacturer is unable to complete production;
•Inability to completely control the quality of finished products;
•Inability to completely control delivery schedules;
•Changes in our contract manufacturer's business models or operations;
•Potential increases in our negotiated product costs as a result of fluctuations in currency exchange rates;
•Impact of the global market and economic conditions on the financial stability of our contract manufacturers and their ability to operate without requesting earlier payment terms or letters of credit;
•Potential lack of adequate capacity to manufacture all or a part of the products withoutwe require; and
•Potential unauthorized reproduction or counterfeiting of our products.
Substantially all of our contract manufacturers are located in Asia, primarily China, and may be subject to disruption by natural disasters, public health crises, such as pandemics and epidemics, as well as political, social or economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could
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cause a corresponding increasesignificant disruption in salesour product supply chain and operations and delays in product shipments. For example, the recent spread of otherthe COVID-19 and related quarantines and work and travel restrictions in China has disrupted, and may continue to disrupt, production for certain of our products, would negativelyand the extent to which these events will affect our future revenuesresults of operations and operating results.
Our third-party manufacturing contracts are generally of annual or shorter duration and some manufactured products are sourced on the basis of individual purchase orders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements with other third-party manufacturers on commercially reasonable terms. Further, while we maintain an active quality control, factory inspection and qualification program, we cannot ensure that their manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertent sale of substandard products. While we believe that products manufactured by our current third-party manufacturers could generally be procured from alternative sources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain and operations.
Our operating results could be adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory.
To ensure adequate inventory supply, we must forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers and contract manufacturers, based on our estimates of future demand for particular products and services. Failure to accurately forecast our needs may result in manufacturing delays or increased costs. Our ability to accurately forecast demand could be affected by many factors, including changes in consumer demand for our products and services, changes in demand for the products and services of our competitors, unanticipated changes in general market conditions, and the weakening of economic conditions or consumer confidence in future economic conditions, such as those caused by the recent COVID-19 outbreak. This risk will be exacerbated by the fact that we may not carry a significant amount of inventory and may not be able to satisfy short-term demand increases. If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of products available for sale.
Inventory levels in excess of consumer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margins to suffer and could impair the strength and premium nature of our brand. Further, lower than forecasted demand could also result in excess manufacturing capacity or reduced manufacturing efficiencies, which could result in lower margins. Conversely, if we underestimate consumer demand, our suppliers and manufacturers may not be able to deliver products to meet our requirements or we may be subject to higher costs in order to secure the necessary production capacity. An inability to meet consumer demand and delays in the delivery of our products to our customers could result in reputational harm and damaged customer relationships and have an adverse effect on our business, financial positioncondition, and operating results.
We are subject to warranty claims for our products, which could result in unexpected expense.
Many of our products carry warranties for defects in quality and workmanship. We may experience significant expense as the result of product quality issues, product recalls or product liability claims, which may have a material adverse effect on our business. We maintain a warranty reserve for estimated future warranty claims. However, the actual costs of servicing future warranty claims may exceed the reserve and have a material adverse effect on our results of operations, financial condition and cash flows.
Portions of our operating expenses and costs of goods sold are relatively fixed, and we may have limited ability to reduce expenses sufficiently in response to any revenue shortfalls.
Many of our operating expenses are relatively fixed. We may not be able to adjust our operating expenses or other costs sufficiently to adequately respond to any revenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any declines in revenue, it would negatively impact our operating results, financial condition and cash flows.
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If we are unable to anticipate consumer preferences or to effectively develop, market and sell future products, our future revenues and operating results could be adversely affected.
Our future success depends on our ability to effectively develop, market and sell new products that respond to new and evolving consumer preferences. Accordingly, our revenues and operating results may be adversely affected if we are unable to develop or acquire rights to new products that satisfy consumer preferences. In addition, any new products that we market may not generate sufficient revenues to recoup their acquisition, development, production, marketing, selling and other costs.
We may be unable to adapt to significant changes in media consumption habits and media coverage of current events may compete for consumer attention, which could diminish the effectiveness or efficiency of our advertising.
New technologies and services, such as streaming services and social media have changed traditional patterns of media coverage and consumption. Additionally, consumer attention is increasingly fragmented across a variety of traditional and digital media the balance of which may shift at any time in response to media coverage of current events and the advancement of new technologies. We believe that consumer attention to media coverage of major events, such as the Olympics and the U.S. presidential election, have, in the past, impacted the effectiveness of our media advertising. Future events that draw significant media coverage may similarly impact our ability to engage consumers with our media advertising. If we are unable to successfully adapt our media strategies to new television viewing and media consumption habits, or if consumer attention is focused on other events, the effectiveness and efficiency of our media placements could be adversely affected, and our operating results may be negatively impacted.
Health epidemics, including the recent COVID-19 pandemic, have had, and could in the future have, an adverse impact on our operations, supply chains and distribution systems
Our business and operations have been and may continue to be affected by health epidemics, including the recent COVID-19 pandemic, impacting the markets and communities in which we and our partners, advertisers, and customers operate. The global spread of COVID-19 has created significant worldwide operational and economic volatility, uncertainty and disruption, and the extent towhich COVID-19 will adversely impact our business is highly uncertain, rapidly changing, and cannot be accurately predicted. The COVID-19 pandemic may adversely affect our operations, supply chains and distribution systems. We have experienced, and may continue to experience, unpredictable supply and demand for certain of our products and services.
As a result of COVID-19, we have experienced delays in receiving our products due to difficulties in sourcing logistics from Asia during the pandemic and the resulting higher costs associated with securing shipping slots from Asia. In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital, which could negatively affect our liquidity in the future. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.
There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as general economic uncertainty and macroeconomic conditions, and, as a result, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time.
Our business is subject to the risk of earthquakes, fire, power outages, floods, public health crises, including the recent COVID-19 pandemic, and other catastrophic events, and to interruption by man-made problems such as terrorism.
Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, public health crises, including the recent COVID-19 pandemic, and similar events. The third-party systems and operations and contract manufacturers we rely on are subject to similar risks. Our insurance policies may not cover losses from these events or may provide insufficient compensation that does not cover our total losses. For example, a significant natural disaster, such as an earthquake, fire, or flood, could have an adverse effect on our business, financial condition and operating results, and our insurance coverage may be insufficient to compensate us for losses that
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may occur. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could also cause disruptions in our or our suppliers’ and contract manufacturers’ businesses or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting locations that store significant inventory of our products, that house our servers, or from which we generate content. As we rely heavily on our computer and communications systems, and the internet to conduct our business and provide high-quality customer service, these disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt suppliers’ and our contract manufacturers’ businesses, which could have an adverse effect on our business, financial condition, and operating results.
Disruption to our information and communication systems could result in interruptions to our business and potential implementation of new systems for critical business functions may heighten the risk of disruption.
Our business is reliant on information and communication technology, and a substantial portion of our revenues are generated with the support of information and communication systems. The success of our Direct business is heavily dependent on our ability to respond to customer sales inquiries and process sales transactions using our call center communication systems, websites and similar data monitoring and communication systems provided and supported by third-parties. If such systems were to fail, or experience significant or lengthy interruptions in availability or service, our revenues could be materially affected. We also rely on information systems in all stages of our product cycle, from design to distribution, and we use such systems as a method of communication between employees, suppliers and customers. In addition, we use information systems to maintain our accounting records, assist in trade receivables collection and customer service efforts, and forecast operating results and cash flows.
System failures or service interruptions may occur as the result of a number of factors, including: computer viruses; hacking or other unlawful activities by third parties; disasters; equipment, hardware or software failures; ineffective design or implementation of new systems or systems upgrades; cable outages, extended power failures, or our inability or failure to properly protect, repair or maintain our communication and information systems. To mitigate the risk of business interruption, we have in place a disaster recovery program that targets our most critical operational systems. If our disaster recovery system is ineffective, in whole or in part, or efforts conducted by us or third-parties to prevent or respond to system interruptions in a timely manner are ineffective, our ability to conduct operations would be significantly affected. If we do not consider the potential impact of critical decisions related to systems or process design and implementation, this could lead to operational challenges and increased costs. Any of the aforementioned factors could have a material adverse effect on our operating results, financial position and cash flows.
System security risks, data protection breaches and cyber-attacks could disrupt our operations.
We manage and store various proprietary information and sensitive or confidential data relating to our business, including sensitive and personally identifiable information. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our revenue, manufacturing, distribution or other critical functions.
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Our products and services may be affected from time to time by design and manufacturing defects that could adversely affect our business and result in harm to our reputation.
We offer complex hardware and software products and services that can be affected by design and manufacturing defects. Sophisticated operating system software and applications, such as those offered by us, often have issues that can unexpectedly interfere with the intended operation of hardware or software products. Defects may also exist in components and products that we source from third parties. Any such defects could make our products and services unsafe, create a risk of environmental or property damage and personal injury, and subject us to the hazards and uncertainties of product liability claims and related litigation. In addition, from time to time we may experience outages, service slowdowns, or errors that affect our fitness and wellness programming. As a result, our services may not perform as anticipated and may not meet customer expectations. There can be no assurance that we will be able to detect and fix all issues and defects in the hardware, software, and services we offer. Failure to do so could result in widespread technical and performance issues affecting our products and services and could lead to claims against us. We maintain general liability insurance; however, design and manufacturing defects, and claims related thereto, may subject us to judgments or settlements that result in damages materially in excess of the limits of our insurance coverage. In addition, we may be exposed to recalls, product replacements or modifications, write-offs of inventory, property and equipment, or intangible assets, and significant warranty and other expenses such as litigation costs and regulatory fines. If we cannot successfully defend any large claim, maintain our general liability insurance on acceptable terms, or maintain adequate coverage against potential claims, our financial results could be adversely impacted. Further, quality problems could adversely affect the experience for users of our products and services, and result in harm to our reputation, loss of competitive advantage, poor market acceptance, reduced demand for our products and services, delay in new product and service introductions, and lost revenue.
Our results of operations and ability to grow could be materially negatively affected if it cannot successfully keep pace with technological changes impacting the development and implementation of its products, services and business needs.
Our success depends on the ability to keep pace with rapid technological changes affecting both the development and implementation of products, services and business needs. Technological advances such as artificial intelligence, machine learning, and automation are impacting industries and business operations. In addition, we rely on a variety of technologies, including those that support order management, billing, and consumer analytics. If we do not sufficiently invest in new technology and industry developments, appropriately implement new technologies, or evolve its business at sufficient speed and scale in response to such developments, or if it does not make the right strategic investments to respond to these developments, our services, results of operations, and ability to develop and maintain its business could be negatively affected.
Future impairments of goodwill and intangible assets could negatively impact our operating results.
As of March 31, 2022, we had goodwill of $24.5 million and other intangible assets of $9.3 million. Any future impairment charges, if significant, could materially and adversely affect our operating results. An unexpected decline in revenue, changes in market conditions, changes in competitive products or technologies or a change in management's intentions regarding utilization of intangible assets could lead to future impairment charges.
We may be unable to attract and retain Members, which could have an adverse effect on our business and rate of growth.
We have experienced Member growth over the past several years. Our continued business and revenue growth is dependent on our ability to continuously attract and retain Members, and we cannot be sure that we will be successful in these efforts, or that Members retention levels will not materially decline. There are a number of factors that could lead to a decline in Member levels or that could prevent us from increasing our Member levels, including:
•our failure to introduce new features, products, or services that Members find engaging or our introduction of new products or services, or changes to existing products and services that are not favorably received;
• pricing and perceived value of our offerings;
• harm to our brand and reputation;
• our inability to deliver quality products, content, and services;
• actual or perceived safety concerns regarding our products;
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• unsatisfactory experiences with the delivery, installation, or servicing of our connected-fitness products, including due to prolonged delivery timelines and limitations on, or the suspension of, the in-home installation, return, and warranty servicing processes as a result of the current COVID-19 pandemic;
• our Members engaging with competitive products and services;
• technical or other problems preventing Members from accessing our content and services in a rapid and reliable manner or otherwise affecting the Member's experience;
• a decline in the public’s interest in indoor cycling or running, or other fitness disciplines that we invest most heavily in;
• deteriorating general economic conditions or a change in consumer spending preferences or buying trends, whether as a result of the COVID-19 pandemic or otherwise; and
• interruptions in our ability to sell or deliver our connected fitness products or to create content and services for our Members as a result of the COVID-19 pandemic.
We may be adversely impacted by environmental, social and governance matters, including if we are unable to meet goals and commitments that we establish in relation to such matters.
In recent years, there has been an increased focus from investors, governmental and nongovernmental entities, and the public on environmental, social and governance ("ESG") matters, including greenhouse gas emissions, renewable energy, packaging and waste, practices related to sustainable supply chain, energy and water use, diversity, equity and inclusion, human rights and social commitment. A variety of organizations evaluate, and measure the performance of, companies on such ESG matters, and the results of these assessments are widely publicized. Given our commitment to ESG, we have established initiatives and are developing targets which we may refine or even expand further in the future. Execution of our ESG strategies to achieve these goals, commitments, and targets are subject to risks and uncertainties, many of which may be outside of our control and prove to be more costly than we anticipate. These risks and uncertainties include, but are not limited to, our ability to achieve our goals, commitments, and targets within the currently projected costs and the expected timeframes; unforeseen operational and technological difficulties; the outcome of research efforts and future technology developments; and the success of our collaborations with third parties. Any failure, or perceived failure, to achieve our ESG goals, commitments, and targets could damage our reputation and customer, investor and other stakeholder relationships, and may even result in regulatory enforcement action. Such conditions could have an adverse effect on our business, results of operations and financial condition.
Economic and External Market Risks
We operate in a highly competitive market and we may be unable to compete successfully against existing and future competitors.
The markets for our products and services are characterized by intense competition, new industry standards, evolving distribution models, limited barriers to entry, disruptive technology developments, short product life cycles, customer price sensitivity and frequent product introduction. Our products and services face significant competition in every aspect of our business, including at-home fitness equipment and digital platforms, fitness clubs, in-studio fitness classes, and health and wellness apps. Further, we expect the competition in our market to intensify in the future as new and existing competitors introduce new or enhanced products and services that compete with ours.
Our competitors may develop, or have already developed, products, features, content, services, or technologies that are similar to ours or that achieve greater acceptance, may undertake more successful product development efforts, create more compelling employment opportunities, or marketing campaigns, or may adopt more aggressive pricing policies. Our competitors may develop or acquire, or have already developed or acquired, intellectual property rights that significantly limit or prevent our ability to compete effectively in the public marketplace. In addition, some competitors may have greater resources, or lack a short-term profitability motive, allowing them to identify and capitalize more efficiently upon opportunities in new markets and consumer preferences and trends, quickly transition and adapt their products and services, devote greater resources to marketing and advertising, or be better positioned to withstand substantial price competition. If we are not able to compete effectively against our competitors, they may acquire and engage customers or generate revenue at the expense of our efforts, which could have an adverse effect on our business, financial condition, and operating results.
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Decline in consumer spending would likely negatively affect our product revenues and earnings.
Success of each of our products depends substantially on the amount of discretionary funds available to our customers. Global credit and financial markets have experienced extreme disruptions in the recent past, including severely diminished liquidity and credit availability, inflationary pricing constraints, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur in the future. Deterioration in general economic conditions may depress consumer spending, especially spending for discretionary consumer products such as ours. Poor economic conditions could, in turn, lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial position and cash flows.
Our revenues could decline due to changes in credit markets and decisions made by credit providers.
Historically, a significant portion of our Direct sales have been financed for our customers under various programs offered by third-party consumer credit financing sources. Reductions in consumer lending and the availability of consumer credit could limit the number of customers with the financial means to purchase our products. Higher interest rates could increase monthly payments for consumer products financed through one of our financing partners or through other sources of consumer financing. In the past, we have partnered with financial service companies to assist our customers in obtaining financing to purchase our products. Our present agreements with our third-party consumer credit financing providers enable certain customers to obtain financing if they qualify for the provider's private label revolving credit card. We cannot be assured that our third-party financing providers will continue to provide consumers with access to credit or that credit limits under such arrangements will not be reduced. Such restrictions or reductions in the availability of consumer credit could have a material adverse impact on our results of operations, financial position and cash flows. Higher interest rates could result in declines in consumer spending on consumer durable goods and other shifts in their spending habits which may result in decreased sales and reduced margins.
Currency exchange rate fluctuations could result in higher costs, reduced margins or decreased international sales.
Substantially all of our products are manufactured outside of the U.S. and, therefore, currency exchange rate fluctuations could result in higher costs for our products, or could disrupt the business of independent manufacturers that produce our products, by making their purchases of raw materials more expensive and more difficult to finance. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which we, our customers or our suppliers conduct business. Past fluctuations in currency exchange rates versus the U.S. dollar have caused our costs for certain products to increase, reducing our margins and cash flows. Similar fluctuations and cost increases may occur in the future. If we are unable to increase our selling prices to offset such cost increases, or if such increases have a negative impact on sales of our products, our revenues and margins would be reduced and our operating results and cash flows would be negatively impacted. In addition, a portion of our revenue is derived from sales outside the U.S., primarily in Canada and Europe. Currency rate fluctuations could make our products more expensive for foreign consumers and reduce our revenue, which would negatively affect our operating results and cash flows.
In addition, inflation is often accompanied by higher interest rates. The impact of COVID-19 may increase uncertainty in revenue, changes in marketthe global financial markets, as well as the possibility of high inflation and extended economic
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downturn, which could reduce our ability to incur debt or access capital and impact our results of operations and financial condition even after these conditions changes in competitive products or technologies or a change in management's intentions regarding utilization of intangible assets could lead to future impairment charges.improve.
Legal and Regulatory Risks
We are subject to warranty claimslaws of the United States and foreign jurisdictions relating to individually identifiable information and personal health information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and could materially adversely affect our business, financial condition and results of operations.
Our digital platforms may receive, process, transmit and store personal health and fitness information relating to identifiable individuals. Consumer demand for personalized fitness experiences, through mobile applications or wearable fitness trackers, and our strategy to focus on digital fitness solutions for our products may increase the volume of identifiable individual information we receive on our platforms and through our products. We also receive, process, transmit and store information relating to identifiable individuals in our capacity as an employer. As a result, we may be subject to United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect both individually identifiable information and personal health information, including HIPAA and its regulations, and the GDPR. The GDPR includes, and a growing number of legislative and regulatory bodies elsewhere in the world have adopted, consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. These breach notification laws continue to evolve and include jurisdiction-specific obligations. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises personal data.
These and other related laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. Changes to existing laws, introduction of new laws in this area or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and consumers that we have not performed our contractual obligations, any of which could materially adversely affect our business, financial condition and results of operations.
We may face competition from providers of comparable products in categories where our patent protection is limited or reduced due to patent expiration. Increased competition in those product categories could negatively affect our future revenues and operating results.
Sales of cardio products represent a substantial portion of our Direct segment revenues. Introduction by competitors of comparable products, a maturing product lifecycle or other factors could result in unexpected expense.
Trademark infringement, patent infringement or other intellectual property claims relating to our products could increase our costs.
Our businessindustry is affected by seasonality which resultssusceptible to litigation regarding trademark and patent infringement and other intellectual property rights. We could become a plaintiff or defendant in fluctuations inlitigation involving trademark or patent infringement claims or claims for breach of a license agreement. The prosecution or defense of intellectual property litigation is both costly and disruptive of the time and resources of our operating results.management, regardless of the claim's merit. We could also be required to pay substantial damages or settlement costs to resolve intellectual property litigation or related matters.
We experience fluctuations in aggregate sales volume during the year. Sales are typically strongest in the first and fourth quarters, followed by the third quarter, and are generally weakest in the second quarter. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of fitness equipment. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to successfully acquire intellectual property rights, protect existing rights, or potentially prevent others from claiming that we have violated their proprietary rights. We could incur substantial costs in defending against such claims even if they are without basis, and we could become subject to judgments or settlements requiring us to pay substantial damages, royalties or other charges.
We are subject to periodic litigation, product liability risk and other regulatory proceedings, which could result in unexpected expense of time and resources.
From time to time, we may be a defendant in lawsuits and regulatory actions relating to our business or the former operations of our discontinued Commercial business segment. Due to the inherent uncertainties of litigation and
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regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse effect on our quarterly sales. Accordingly,business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management's attention from our operations and may result in substantial legal costs.
Our business is exposed to potential false advertising and other related claims, which could adversely affect our financial condition and performance.
The global nature of our business involves a risk of exposure under U.S. (both federal and state) and foreign laws and regulations related to false advertising. A false advertising claim or related judgment against us could result in substantial and unexpected expenditures, affect consumer or customer confidence in our products and services, and divert management’s time and attention from other responsibilities. Although we maintain product and general liability insurance, there can be no assurance that the type or level of coverage we have is adequate (or will apply to the claim at hand) or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A false advertising or other judgment against us and related negative publicity could have a material adverse effect on our reputation, results of operations and financial condition.
We may in the future be subject to claims and lawsuits alleging that our products fail to provide accurate measurements and data to our users.
Some components of our digital platform are likelyused to fluctuate significantly from periodtrack and display various information about users’ activities, such as calories burned, distance traveled and floors climbed. We anticipate new features and functionality in the future, as well.We believe that we have done, and will continue to period.do, everything we can to ensure accuracy of measurements in our digital system, but as with all such systems, there is always the risk that there may be an unintentional software design issue that results in measurements being inaccurately reported. We may receive reports made against us alleging that our products do not provide accurate measurements and data to users, including claims asserting that certain features of our products do not operate as advertised. Such reports and claims may result in negative publicity, and may require us to expend time and resources to defend litigation. If our products fail to provide accurate measurements and data to users, or if there are reports or claims of inaccurate measurements, claims of false advertisement, or claims of inaccuracy regarding the overall health benefits of our products and services in the future, we may become the subject of negative publicity, litigation, including class action litigation, regulatory proceedings, and warranty claims, and our brand, operating results, and business could be harmed.
Government regulatory actions could disrupt our marketing efforts and product sales.
Various international and U.S. federal, state and local governmental authorities, including the Federal Trade Commission, the Consumer Product Safety Commission, and the Consumer Financial Protection Bureau, regulate our product and marketing efforts. Our revenue and profitability could be significantly harmed if any of these authorities commence a regulatory enforcement action that interrupts our marketing efforts, results in a product recall or negative publicity, or requires changes in product design or marketing materials.
Changes in international trade policy could adversely affect our business and results of operations.
All of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily in China and Taiwan.China. Additionally, we make significant sales to customers worldwide, and in particular to customers in Canada. Most of our imported products are subject to duties or tariffs that affect the cost and quantity of various types of goods imported into the U.S. or our other markets. The currentprior U.S. presidential administration has indicated that it may seeksought changes to, or withdrawthe withdrawal of the United States from various international treaties and trade arrangements. Our operating results have been negatively impacted by tariffs imposed by the prior U.S. presidential administration. Uncertainty regarding future policies affecting global trade may make it difficult for our management to accurately forecast our business, and increases in the duties, tariffs and other charges imposed on our products by the United States or other countries in which on our products are manufactured or sold, or other restraints on international trade, could negatively affect our business and the results of our operations.
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Table of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily China and Taiwan. Lead times for inventory purchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit time represents three to four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demand for our products. Due to the length of our lead times, our revenue and cash flows may be negatively impacted if we do not have sufficient inventory on hand to meet customer demand for such items. In addition, our liquidity and cash flows may be negatively affected, and inventory obsolescence may increase, if the quantity of products we order exceeds customer demand for such items.Contents
A delay in getting non-U.S.-sourced products through port operations and customs in a timely manner could result in reduced sales, canceled sales orders and unanticipated inventory accumulation.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the free flow of goods through open and operational ports worldwide. Labor disputes or other disruptions at ports create significant risks for our business, particularly if work slowdowns, lockouts, strikes or other disruptions occur during our peak importing seasons. Any of these factors could result in reduced sales, canceled sales orders and unanticipated inventory accumulation and have a material adverse effect on our operating results, financial position and cash flows.
Unpredictable events and circumstances relating to our international operations, including our use of non-U.S. manufacturers, could have a material adverse effect on our business.
Substantially all of our products are manufactured outside of the U.S. and a portion of our revenue is derived from sales outside the U.S., primarily in Canada, but also in markets outside North America. Accordingly, our future results could be materially adversely affected by a variety of factors pertaining to international trade, including: changes in a specific country's or region's political or economic conditions; trade restrictions; import and export licensing requirements; changes in regulatory requirements; additional efforts to comply with a variety of foreign laws and regulations; and longer payment cycles in certain countries, thus requiring us to finance customer purchases over a longer period than those made in the U.S. In addition, we rely on the performance of our employees located in foreign countries. Our ability to control the actions of these employees may be limited by the laws and regulations in effect in each country. Changes in any of the above factors could have a material adverse effect on our operating results, financial position and cash flows.
We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires us to conduct due diligence on and disclose whether or not our products contain conflict minerals. These requirements could adversely affect the sourcing, availability, and pricing of the materials used in the manufacture of components used in our products. In addition, we incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes, or sources of supply as a consequence of such due diligence activities. It is also possible that we may face competition from providers of comparable products in categories where our patent protection is limited or reduced due to patent expiration. Increased competition in those product categories could negatively affect our future revenues and operating results.
Failure or inability to protect our intellectual property could significantly harm our competitive position.
Protecting our intellectual property is an essential factor in maintaining our competitive position in the health and fitness industry. Failure to maximize or to successfully assert our intellectual property rights could impact our competitiveness. We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. Many factors bear upon the exclusive ownership and right to exploit intellectual properties, including, without limitation, prior rights of third parties and nonuse and/or nonenforcement by us and/or related entities. While we make efforts to develop and protect our intellectual property, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated. We cannot be sure that our intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights or, where appropriate, license intellectual property rights necessary to compete successfully within the marketplace for our products. We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future. If we do not, or are unable to, adequately protect our intellectual property, then we may face difficulty in differentiating our products from those of our competitors and our business, operating results and financial condition may be adversely affected.
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General Risk Factors
Our revenues and profitability can fluctuate from period to period and are often difficult to predict due to factors beyond our control.
Our results of operations in any particular period may not be indicative of results to be expected in future periods, and have historically been, and are expected to continue to be, subject to periodic fluctuations arising from a number of factors, including:
•Introduction and market acceptance of new products and sales trends affecting specific existing products;
•Variations in product selling prices and costs and the mix of products sold;
•Size and timing of Retail customer orders, which, in turn, often depend upon the success of our customers' businesses or specific products;
•Changes in the market conditions for consumer fitness equipment;
•Changes in macroeconomic factors;
•Availability of consumer credit;
•Consumer confidence or income levels caused by changes in market conditions, including changes in the credit market, expected inflation, employment levels, and energy or other intellectual property claims relatingcommodity prices;
•Timing and availability of products coming from our offshore contract manufacturing suppliers;
•Seasonality of markets, which vary from quarter-to-quarter and are influenced by outside factors such as overall consumer confidence and the availability and cost of television advertising time;
•Effectiveness of our media and advertising programs;
•Customer consolidation in our Retail segment, or the bankruptcy of any of our larger Retail customers;
•Restructuring charges;
•Goodwill and other intangible asset impairment charges; and
•Legal and contract settlement charges.
These trends and factors could adversely affect our business, operating results, financial position and cash flows in any particular period.
Our business and operations are dependent on the expertise of our key contributors, our successful implementation of succession plans, and our ability to attract and retain management employees and skilled labor.
Our future success depends on, among other factors, our ability to attract and retain qualified personnel, including executives and skilled labor. Availability of skilled workers is critical to our operations. We may experience difficulty maintaining desired staffing levels with unemployment rates at low levels in many of the geographic areas in which we manufacture or distribute goods. COVID-19 has added new challenges in attracting people for relocation. The loss of qualified personnel, our inability to attract new qualified employees or adequately train employees or a delay in hiring key personnel, could materially adversely affect our business, financial condition and results of operations.
Our ability to continue to execute our growth strategy could potentially be adversely affected by the effectiveness of organizational changes. Any disruption or uncertainty resulting from such changes could have a material adverse impact on our business, results of operations, and financial condition.
We are subject to a number of debt covenants.
In January 2020, we entered into a new credit facility with Wells Fargo National Association which was later amended in May and then October of 2021 to a period of five years ending October 2026. The proceeds from this new credit facility was used to refinance our existing indebtedness. Our new credit facility contains certain debt covenants and other customary events of default. Our ability to comply with these debt covenants may be affected by the other factors described in this “Risk Factors” section and other factors outside of our control. Failure to comply with one or more of these debt covenants may result in an event of default. Upon an event of default, if not waived by our lender, our lender may declare all amounts outstanding as due and payable. If our lender accelerates the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lender on a timely basis. In addition, these debt covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions and taking advantage of attractive business opportunities. If we need additional capital and cannot raise it on acceptable terms, our business, financial condition and operating results could be materially and adversely affected.
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The issuance of additional shares of our common stock could cause the market price of our common stock to decline and may result in dilution to our existing shareholders.
The Company filed a shelf registration statement on Form S-3 on November 9, 2020 with the SEC, that allows us to issue up to $100 million in securities including common stock, debt securities, warrants and units. The shelf registration statement is intended to provide the Company with increased financial flexibility and more efficient access to the capital markets. We cannot predict the effect, if any, that market sales of these securities or the availability of the securities will have on the prevailing market price of our common stock from time to time. Substantial sales of shares of our common stock or other securities in the public market, or the perception that those sales could occur, may cause the market price of our common stock to decline. Such a decrease in our share price could in turn impair our ability to raise capital through the sale of additional equity securities. Future issuances of our common stock, or other securities convertible into our common stock, may result in significant dilution to our existing shareholders. Significant dilution would reduce the proportionate ownership and voting power held by our existing shareholders.
We have incurred operating losses in the past, may incur operating losses in the future, and may not achieve or maintain profitability in the future.
We incurred operating losses for the year-ended March 31, 2022, $25.3 million, and may incur operating losses in the future. We expect our operating expenses to increase in the future as we continue our sales and marketing efforts, continue to invest in research and development, expand our operating and retail infrastructure, add content and software features to our platform, expand into new geographies, develop new connected-fitness products couldand services, and in connection with legal, accounting, and other expenses related to operating as a public company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our costs.
revenue to offset our operating expenses. Our industry is susceptible to litigation regarding trademarkrevenue growth may slow or our revenue may decline for a number of other reasons, including reduced demand for our products and patent infringement and other intellectual property rights. We could becomeservices, increased competition, a plaintiffdecrease in the growth or defendantreduction in litigation involving trademark or patent infringement claims or claims for breach of a license agreement. The prosecution or defense of intellectual property litigation is both costly and disruptive of the time and resourcessize of our overall market, the impacts to our business from the COVID-19 pandemic, or if we cannot capitalize on growth opportunities. If our revenue does not grow at a greater rate than our operating expenses, we will not be able to achieve and maintain profitability.
We track certain operational and business metrics with internal methods that are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We track certain operational and business metrics, including our connected fitness products, with internal methods, which are not independently verified by any third party and are often reliant upon an interface with mobile operating systems, networks and standards that we do not control. Our internal methods have limitations and our process for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we report. If the internal methods we use under-count or over-count metrics related to our connected fitness products metrics as a result of algorithm or other technical errors, the operational and business metrics that we report may not be accurate. In addition, limitations or errors with respect to how we measure certain operational and business metrics may affect our understanding of certain details of our business, which could affect our longer term strategies. If our operational and business metrics are not accurate representations of our business, market penetration, retention or engagement; if we discover material inaccuracies in our metrics; or if the metrics we rely on to track our performance do not provide an accurate measurement of our business, our reputation may be harmed, and our operating and financial results could be adversely affected.
We may engage in merger and acquisition activities, which could require significant management regardlessattention, disrupt our business, dilute stockholder value, and adversely affect our operating results.
As part of our business strategy, we have made or may in the claim's merit. We could also be required to pay substantial damagesfuture make investments in other companies, products, or settlement costs to resolve intellectual property litigation or related matters.
technologies. We may not be able to successfully acquire intellectual property rights, protect existing rights, or potentially prevent others from claiming that we have violated their proprietary rights. We could incur substantial costs in defending against such claims even if they are without basis,find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all, in the future. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could become subject to judgmentsbe viewed negatively by Members or settlements requiringinvestors. Moreover, an acquisition, investment, or business relationship may result in unforeseen operating difficulties and expenditures, including disrupting our ongoing operations, diverting management from their primary responsibilities, subjecting us to additional liabilities, increasing our expenses, and adversely impacting our business, financial condition, and operating results. Moreover, we may be exposed to unknown liabilities and the anticipated benefits of any acquisition, investment, or business relationship may not be
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realized, if, for example, we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, into our company.
To pay substantial damages, royaltiesfor any such acquisitions, we would have to use cash, incur debt, or other charges.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Following is a summary of each of our properties as of DecemberMarch 31, 2017:
2022:
| Company | Location | Primary Function(s) | Owned or Leased | |||||||||||||||||
| Nautilus | Washington | Corporate headquarters, customer call center, and R&D facility | Leased | |||||||||||||||||
| Nautilus | California | Warehouse and distribution facility | Leased | |||||||||||||||||
| Nautilus | Minnesota | Software engineering offices | Leased | |||||||||||||||||
| Nautilus | Ohio | Warehouse and distribution facility | Leased | |||||||||||||||||
| Nautilus | Oregon | Warehouse and distribution facility | Leased | |||||||||||||||||
| Nautilus | China | Quality assurance and software engineering offices | Leased | |||||||||||||||||
| Nautilus | Switzerland | Software engineering offices | Leased | |||||||||||||||||
Item 3. Legal Proceedings
From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur.
As of the date of filing of this Annual Report on Form 10-K, we were not involvedhave recorded a $4.7 million loss contingency related to a legal settlement involving a class action lawsuit related to advertisement of our treadmills. The settlement includes damages, a one-year free membership to JRNY, and administrative fees and was included as a component of General and administrative on our Consolidated Statements of Operations for the fiscal year ended March 31, 2022. As of March 31, 2022, $4.3 million remained accrued and was reflected in any material legal proceedings.Accrued liabilities on our Consolidated Balance Sheets.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock is listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “NLS.” As of February 28, 2018,June 1, 2022, there were 4541 holders of record of our common stock and approximately 11,8004,900 beneficial shareholders. The following table sets forth the high and low sales prices of our common stock for each period presented:
| High | Low | ||||||
| 2017 | |||||||
| Quarter 1 | $ | 19.55 | $ | 14.80 | |||
| Quarter 2 | $ | 19.55 | $ | 16.80 | |||
| Quarter 3 | $ | 19.05 | $ | 16.05 | |||
| Quarter 4 | $ | 17.25 | $ | 12.40 | |||
| 2016 | |||||||
| Quarter 1 | $ | 21.04 | $ | 16.80 | |||
| Quarter 2 | $ | 21.10 | $ | 16.80 | |||
| Quarter 3 | $ | 24.99 | $ | 17.68 | |||
| Quarter 4 | $ | 22.59 | $ | 15.65 | |||
We did not pay any dividends on our common stock in 2017fiscal years 2022 or 2016.2021. Payment of any future dividends, in accordance with our borrowing arrangements, is at the discretion of our Board of Directors, which considers various factors such as our financial condition, operating results, current and anticipated cash needs and future expansion plans.
Equity Compensation Plans
See Part III, Item 12 for equity compensation plan information.
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| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1),(2) | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1),(2) |
| October 1 - October 31 | 45,983 | $13.22 | 45,983 | $17,586,541 |
| November 1 - November 30 | 437,062 | 12.81 | 437,062 | 11,987,135 |
| December 1 - December 31 | — | — | — | 11,987,135 |
| Total | 483,045 | $12.85 | 483,045 | $11,987,135 |
(1) On May 4, 2016, our Board of Directors authorized the repurchase up to $10.0 million of our outstanding common stock from time to time through May 4, 2018. As of November 2017, the stock repurchases under this program were completed in full and the program expired. | ||||
(2) On April 25, 2017, our Board of Directors authorized a $15.0 million repurchase of our outstanding common stock from time to time through April 25, 2019. | ||||
Stock Performance Graph
The graph below compares the cumulative total stockholdershareholder return of our common stock with the cumulative total return of the NYSE Composite Index and the S&P SmallCap 600Russell 2000 index for the period commencing December 31, 20122016 and ending on DecemberMarch 31, 2017.2022. The S&P SmallCap 600Russell 2000 was chosen because we do not believe we can reasonably identify an industry index or specific peer issuer that would offer a meaningful comparison. The S&P SmallCap 600Russell 2000 represents a broad-based index of companies with similar market capitalization.
The graph assumes $100 was invested, on December 31, 2012,2016, in our common stock and each index presented.presented in the graph. The comparisons in the table below are not intended to forecast or be indicative of future performance of our common stock.
Item 6. Selected Financial Data[Reserved]
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| For the Year Ended December 31, | ||||||||||||||||||||
| (In thousands, except per share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Consolidated Statements of Operations Data | ||||||||||||||||||||
| Net sales | $ | 406,184 | $ | 406,039 | $ | 335,764 | $ | 274,447 | $ | 218,803 | ||||||||||
| Cost of sales | 202,302 | 194,514 | 162,530 | 133,872 | 112,326 | |||||||||||||||
| Gross profit | 203,882 | 211,525 | 173,234 | 140,575 | 106,477 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Selling and marketing | 116,222 | 115,437 | 101,618 | 81,059 | 66,486 | |||||||||||||||
| General and administrative | 27,111 | 28,775 | 21,441 | 22,131 | 18,705 | |||||||||||||||
| Research and development | 15,446 | 13,919 | 9,904 | 7,231 | 5,562 | |||||||||||||||
Asset impairment charge(1) | 8,800 | — | — | — | — | |||||||||||||||
| Total operating expenses | 167,579 | 158,131 | 132,963 | 110,421 | 90,753 | |||||||||||||||
| Operating income | 36,303 | 53,394 | 40,271 | 30,154 | 15,724 | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest income | 653 | 234 | 218 | 63 | 14 | |||||||||||||||
| Interest expense | (1,552 | ) | (1,928 | ) | (22 | ) | (25 | ) | (36 | ) | ||||||||||
| Other, net | 301 | (119 | ) | (445 | ) | 32 | 337 | |||||||||||||
| Total other income (expense) | (598 | ) | (1,813 | ) | (249 | ) | 70 | 315 | ||||||||||||
| Income from continuing operations before income taxes | 35,705 | 51,581 | 40,022 | 30,224 | 16,039 | |||||||||||||||
Income tax expense (benefit)(2),(3) | 8,080 | 16,480 | 13,219 | 9,841 | (32,085 | ) | ||||||||||||||
| Income from continuing operations | 27,625 | 35,101 | 26,803 | 20,383 | 48,124 | |||||||||||||||
| Loss from discontinued operations | (1,358 | ) | (923 | ) | (201 | ) | (1,588 | ) | (170 | ) | ||||||||||
| Net income | $ | 26,267 | $ | 34,178 | $ | 26,602 | $ | 18,795 | $ | 47,954 | ||||||||||
| Basic income per share from continuing operations | $ | 0.90 | $ | 1.13 | $ | 0.86 | $ | 0.65 | $ | 1.55 | ||||||||||
| Basic loss per share from discontinued operations | (0.04 | ) | (0.03 | ) | (0.01 | ) | (0.05 | ) | (0.01 | ) | ||||||||||
| Basic net income per share | $ | 0.86 | $ | 1.10 | $ | 0.85 | $ | 0.60 | $ | 1.54 | ||||||||||
| Diluted income per share from continuing operations | $ | 0.89 | $ | 1.12 | $ | 0.85 | $ | 0.64 | $ | 1.53 | ||||||||||
| Diluted loss per share from discontinued operations | (0.04 | ) | (0.03 | ) | (0.01 | ) | (0.05 | ) | (0.01 | ) | ||||||||||
| Diluted net income per share | $ | 0.85 | $ | 1.09 | $ | 0.84 | $ | 0.59 | $ | 1.52 | ||||||||||
| Shares used in per share calculations: | ||||||||||||||||||||
| Basic | 30,671 | 31,032 | 31,288 | 31,253 | 31,072 | |||||||||||||||
| Diluted | 31,010 | 31,301 | 31,589 | 31,688 | 31,457 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
| Consolidated Balance Sheets Data | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Cash and investments(4) | $ | 85,196 | $ | 79,617 | $ | 60,776 | $ | 72,190 | $ | 40,979 | ||||||||||
Working capital(4) | 91,118 | 84,951 | 69,373 | 83,080 | 45,662 | |||||||||||||||
| Total assets | 324,776 | 333,066 | 315,912 | 175,654 | 143,567 | |||||||||||||||
Long-term note payable, net of current portion(5) | 31,986 | 47,979 | 63,971 | — | — | |||||||||||||||
| Other long-term liabilities | 16,227 | 25,825 | 29,432 | 4,911 | 4,077 | |||||||||||||||
| Total shareholders' equity | 179,189 | 160,857 | 126,991 | 111,072 | 91,565 | |||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.
OVERVIEW
We empower healthier living through individualized connected fitness experiences and are committed to building a healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and a digital platform for consumer use, primarily in the U.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Bowflex®, Schwinn®, JRNY® andNautilus®.
We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers primarily through websites. Our Retail business offers our products through a network of independent retail companies to reach consumers in the home use markets in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
Our results for the fiscal year ended March 31, 2022 ("fiscal 2022") were driven by the actions outlined in our North Star strategy. The five strategic pillars of our North Star strategy are: (1) adopt a consumer first mindset; (2) scale a differentiated digital offering; (3) focus investments on core businesses; (4) evolve supply chain to be a strategic advantage; and (5) build organizational capabilities to win by unleashing the power of our team. We intend to leverage our many strengths to transform into a company that empowers healthier living through individualized connected fitness experiences. Our transformation will build on our leading brands, products, innovation, distribution and digital assets to create a healthier world, one person at a time.
At the center of health and well-being is fitness. The market size more than doubled over the past two years, is normalizing from its peak during the COVID-19 pandemic with more normal seasonality, and will settle at a “new normal” significantly above pre-pandemic levels based on a profound evolution in consumers’ workouts and workplace habits. As a result of these changed habits and sentiments, we continue to believe much of the industry growth opportunity will remain at elevated levels relative to those experienced pre-pandemic. This results in stronger opportunities for the fitness industry and Nautilus.
Comparison for the Twelve-Months Ended March 31, 2022 to the Twelve-Months Ended March 31, 2021
•Net sales were $589.5 million for 2022, reflecting an 11.3% decrease as compared to net sales of $664.9 million for 2021.
•Net sales of our Direct segment decreased by $73.6 million, or 24.9%, in 2022, compared to 2021.
•Net sales of our Retail segment decreased by $1.8 million, or 0.5%, in 2022, compared to 2021, but increased 5% when excluding sales related to the Octane brand.
•Backlog was $32.9 million atMarch 31, 2022, compared to $205.1 million at March 31, 2021 as retailers are now ordering closer to inventory needs.
•Royalty income for 2022 increased by $0.01 million compared to 2021.
•Gross profit for 2022 was $148.5 million, or 25.2% of net sales, a decrease of $123.8 million, or 45.5%, as compared to gross profit of $272.3 million, or 41.0% of net sales, for 2021.
•Operating expenses for 2022 were $173.8 million, an increase of $19.6 million, or 12.7%, as compared to operating expenses of $154.2 million for 2021.
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•Operating loss for 2022 was $25.3 million, a decrease of $143.4 million, or 121.4%, as compared to an operating income of $118.1 million for 2021.
•Loss from continuing operations was $22.2 million for 2022, or $0.72 per diluted share, compared to income from continuing operations of $88.8 million, or $2.81 per diluted share, for 2021. The effective tax rates for 2022 and 2021 were 21.3% and 20.7%, respectively.
•Net loss for 2022 was $22.4 million, compared to a net income of $88.1 million for 2021. Net loss per diluted share was $0.72 for 2022, compared to net income of $2.78 per diluted share, for 2021.
Comparison for the Twelve-Months Ended March 31, 2022 to the Twelve-Months Ended March 31, 2020
We measured our sales results versus the same period two years ago because we believe such a comparison is useful to investors as we return to a new normal level of demand post-COVID-19 pandemic.
•Net sales were $589.5 million, an increase of 85.0% versus the twelve-months ended March 31, 2020. When excluding sales related to the Octane brand, net sales increased by 112%, which equates to a 46% CAGR for the twelve-month period ended March 31, 2022 when compared to the same period in 2020.
•Gross profit for 2022 was $148.5 million, or 25.2% of net sales, an increase of $38.1 million, or 34.5%, as compared to gross profit of $110.3 million, or 34.6% of net sales, for 2020.
Comparison of the Twelve-Months Ended March 31, 2022 to the Twelve-Months Ended December 31, 2020 ("fiscal 2020")
We measured our sales results versus twelve-months ended December 31, 2020 because we believe such a comparison is useful to investors as we return to a new normal level of demand post-COVID-19 pandemic.
Net sales were $589.5 million for the fiscal year ended March 31, 2022, reflecting a 6.7% increase as compared to net sales of $552.6 million for the year ended December 31, 2020.
•Net sales of our Direct segment decreased by $19.2 million, or 8.0%, in fiscal 2022, compared to fiscal 2020.
•Net sales of our Retail segment increased by $56.0 million, or 18.2%, in fiscal 2022, compared to fiscal 2020, but increased 30% when excluding sales related to the Octane brand.
•Royalty income for fiscal 2022 increased by $0.1 million compared to fiscal 2020.
•Gross profit for fiscal 2022 was $148.5 million, or 25.2% of net sales, a decrease of $80.3 million, or 35.1%, as compared to gross profit of $228.8 million, or 41.4% of net sales, for fiscal 2020.
•Operating expenses for fiscal 2022 were $173.8 million, an increase of $22.8 million, or 15.1%, as compared to operating expenses of $151.0 million for fiscal 2020.
•Operating loss for 2022 was $25.3 million, a decrease of $103.1 million, or 132.5%, as compared to an operating income of $77.8 million for 2020.
•Loss from continuing operations was $22.2 million for fiscal 2022, or $0.72 per diluted share, compared to income from continuing operations of $60.5 million, or $1.88 per diluted share, for fiscal 2020. The effective tax rates for fiscal 2022 and fiscal 2020 were 21.3% and 16.8%, respectively.
•Net loss for fiscal 2022 was $22.4 million, compared to a net income of $59.8 million for 2020. Net loss per diluted share was $0.72 for fiscal 2022, compared to net income of $1.86 per diluted share, for fiscal 2020.
Comparison of the Three-Months Ended March 31, 2021 to the Three-Months ended March 31, 2020
A comparison of the three-months ended March 31, 2021 to the three-months ended March 31, 2020 may be found in Part I, Item 2, of the Company's Quarterly Report on Form10-QTfor the three-months ended March 31, 2021.
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JRNY® Update
•Nautilus, Inc. continues to enhance the JRNY® platform, creating a differentiated connected-fitness experiences for its Members, which numbered 325,000 at March 31, 2022. Of these members, 111,000 were Subscribers.
•JRNY® Members now have access to over 1,400 on-demand instructor led videos as well as being able to enjoy over 220 locations with the immersive Explore the World feature.
•The benefits of the JRNY® platform are now even more prominently featured on the Bowflex.com and Schwinnfitness.com websites to help customers understand the full value of purchasing the company’s connected-fitness cardio and strength products.
•The Company has made great strides over the last two years to expand the installed base of “connectable to JRNY®” products. In FY2020, the Company sold only one connectable to JRNY® product, the Max Total. Since then, the Company has launched new bikes, treadmills, and Max Trainers that are connectable to JRNY® via an embedded screen or via the user’s own device. With the launch of the Bowflex® SelectTech® Workouts on the JRNY® Platform in November 2021, the Company can now include the best-selling SelectTech® 552 and 1090 dumbbells to the connectable to JRNY® installed base, which has grown to over 2.7 million units at the end of fiscal 2022 from about 0.1 million units at the end of fiscal 2020.
•In fiscal 2022, approximately 80% of total units sold were connectable to JRNY®, compared to only 22% in fiscal 2020.
Factors Affecting Our Performance
Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the U.S. and Canada. The COVID-19 pandemic had created a heightened need for home-fitness products at an unprecedented rate and then as the pandemic lessened there was a return to a more normal seasonality. We cannot predict with certainty the longer-term impacts of the COVID-19 pandemic and the change to consumer habits and sentiments and therefore, the impact on our results of operations is uncertain. Our profitgross margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affectedare being impacted by fluctuations in the costs or availability of materials used to manufacture our products, tariffs, expedited shipping and transportation costs. Gross margins may also be affected by fluctuations in cost associated with the acquisition or license of products and technologies, product warranty costs, the cost ofclaims, fuel, foreign currency exchange rates, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, the Internetwebsites and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.
As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you any future growth or profitability. For more information, see our discussion of Risk Factors located at Part I, Item 1A of this Form 10-K.
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DISCONTINUED OPERATIONS
Results from discontinued operations relate to the disposal of our former Nautilus® Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation at December 31, 2012. Although there was no revenue related to the Commercial business in 2017, 2016 or 2015,2022, 2021 and 2020, we continue to incur product liability expenses associated with product previously sold into the Commercial channel.channel, and accrued interest associated with an uncertain tax position on discontinued international operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and (b)(ii) the impact of the estimate on financial condition or operating performance is material. Our critical accounting estimates areestimate is discussed below.
Goodwill and Other Long-Term Assets Valuation
We evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their carrying value may be impaired. Definite-lived intangible assets, including acquired trade names, customer relationships, patents and patent rights, and other long-lived assets, primarily property, plant and equipment, are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. In 2017,During the year ended December 31, 2019 ("fiscal 2019"), we recognized a non-cash
goodwill and intangible asset impairment charge of $8.8$72.0 million primarily related to the goodwill and indefinite-lived Octane Fitness brand name. Noname which was sold October 14, 2020. During fiscal 2022 and fiscal 2021, we recognized no goodwill or other long-term assetimpairment.
During the fourth quarter of fiscal 2022, we performed a sensitivity analysis for goodwill impairment charges were recognizedwith respect to each of our respective reporting units and determined that a hypothetical 10% decline in 2016 or 2015.the fair value of either of the reporting units would not result in an impairment of goodwill for any reporting unit.
Our impairment evaluations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate future cash flows and asset fair values. Our judgments regarding potential impairment are based on a number of factors including: the timing and amount of anticipated cash flows; market conditions; relative levels of risk; the cost of capital; terminal values; royalty rates; and the allocation of revenues, expenses and assets and liabilities to reporting units. Each of these factors can significantly affect the value of our goodwill or other long-term assets and, thereby, could have a material adverse effect on our financial position and results of operations.
The fair value of acquired technology, which was determined at the acquisition date, primarily uses the cost of replacement parts, cost of shipping the parts toapproach. Other third party costs were also provided and considered in our customers and, in certain instances, service labor costs. At the time of sale, we record a liability for the estimated costs of fulfilling future warranty claims. The estimated warranty costs are recorded as a component of cost of sales, based on historical warranty claim experience and available product quality data. If necessary, we adjust our liability for specific warranty matters when they become known and are reasonably estimable. Our estimates of warranty expenses are based on significant judgment, and the frequency and cost of warranty claims are subject to variation. Warranty expenses are affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is deliveredanalysis, where appropriate. In addition to the customer, product failure ratescosts to reproduce each application, a developer's profit, an opportunity cost and variancesan obsolescence factor were considered. The developer's profit represents the profit margin on a market participate developer's investment in expected repair costs.the material, labor and overhead costs necessary to develop the intangible asset.
28
Table of realizing the tax benefit of an uncertain tax position, significant judgment would be applied in determining the effect of the change. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination, including resolutions of any related appeals or litigation.Contents
RESULTS OF OPERATIONS
The discussion that follows regarding our financial condition and results of operations for fiscal 2022 compared to the twelve months ended March 31, 2021 ("fiscal 2021") should be read in conjunction with our consolidated financial statements and the related notes in this report. Results for fiscal 2021 and the twelve months ended March 31, 2020 were derived from our quarterly condensed consolidated statements of operations as previously reported. All comparisons to prior year results are in reference to continuing operations only in each period, unless otherwise indicated. A discussion regarding our financial condition and results of operations for fiscal 2020 compared to the fiscal year ended December 31, 2019 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investors website at http://www.nautilusinc.com/investors/sec-filings/.
Results of operations information was as follows (in thousands):
| Year Ended March 31, | Twelve-Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| Net sales | $ | 589,534 | $ | 664,913 | $ | (75,379) | (11.3) | % | |||||||||||||||
| Cost of sales | 441,077 | 392,617 | 48,460 | 12.3 | % | ||||||||||||||||||
| Gross profit | 148,457 | 272,296 | (123,839) | (45.5) | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling and marketing | 99,204 | 77,131 | 22,073 | 28.6 | % | ||||||||||||||||||
| General and administrative | 51,783 | 40,580 | 11,203 | 27.6 | % | ||||||||||||||||||
| Research and development | 22,786 | 15,840 | 6,946 | 43.9 | % | ||||||||||||||||||
| Loss on disposal group | — | 20,668 | (20,668) | (100.0) | % | ||||||||||||||||||
| Total operating expenses | 173,773 | 154,219 | 19,554 | 12.7 | % | ||||||||||||||||||
| Operating (loss) income | (25,316) | 118,077 | (143,393) | (121.4) | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 35 | 54 | (19) | ||||||||||||||||||||
| Interest expense | (1,580) | (1,085) | (495) | ||||||||||||||||||||
| Other, net | (1,369) | (4,991) | 3,622 | ||||||||||||||||||||
| Total other expense, net | (2,914) | (6,022) | 3,108 | ||||||||||||||||||||
| (Loss) income from continuing operations before income taxes | (28,230) | 112,055 | (140,285) | ||||||||||||||||||||
| Income tax (benefit) expense | (6,026) | 23,239 | (29,265) | ||||||||||||||||||||
| (Loss) income from continuing operations | (22,204) | 88,816 | (111,020) | ||||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (227) | (748) | 521 | ||||||||||||||||||||
| Net (loss) income | $ | (22,431) | $ | 88,068 | $ | (110,499) | |||||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2017 | 2016 | Change | % Change | |||||||||||
| Net sales | $ | 406,184 | $ | 406,039 | $ | 145 | — | % | ||||||
| Cost of sales | 202,302 | 194,514 | 7,788 | 4.0 | % | |||||||||
| Gross profit | 203,882 | 211,525 | (7,643 | ) | (3.6 | )% | ||||||||
| Operating expenses: | ||||||||||||||
| Selling and marketing | 116,222 | 115,437 | 785 | 0.7 | % | |||||||||
| General and administrative | 27,111 | 28,775 | (1,664 | ) | (5.8 | )% | ||||||||
| Research and development | 15,446 | 13,919 | 1,527 | 11.0 | % | |||||||||
| Asset impairment charge | 8,800 | — | 8,800 | — | % | |||||||||
| Total operating expenses | 167,579 | 158,131 | 9,448 | 6.0 | % | |||||||||
| Operating income | 36,303 | 53,394 | (17,091 | ) | (32.0 | )% | ||||||||
| Other income (expense): | ||||||||||||||
| Interest income | 653 | 234 | 419 | |||||||||||
| Interest expense | (1,552 | ) | (1,928 | ) | 376 | |||||||||
| Other, net | 301 | (119 | ) | 420 | ||||||||||
| Total other expense, net | (598 | ) | (1,813 | ) | 1,215 | |||||||||
| Income before income taxes | 35,705 | 51,581 | (15,876 | ) | ||||||||||
| Income tax expense | 8,080 | 16,480 | (8,400 | ) | ||||||||||
| Income from continuing operations | 27,625 | 35,101 | (7,476 | ) | ||||||||||
| Loss from discontinued operations, net of income taxes | (1,358 | ) | (923 | ) | (435 | ) | ||||||||
| Net income | $ | 26,267 | $ | 34,178 | $ | (7,911 | ) | |||||||
29
| Year Ended December 31, | ||||||||||||||
| 2016 | 2015 | Change | % Change | |||||||||||
| Net sales | $ | 406,039 | $ | 335,764 | $ | 70,275 | 20.9 | % | ||||||
| Cost of sales | 194,514 | 162,530 | 31,984 | 19.7 | % | |||||||||
| Gross profit | 211,525 | 173,234 | 38,291 | 22.1 | % | |||||||||
| Operating expenses: | ||||||||||||||
| Selling and marketing | 115,437 | 101,618 | 13,819 | 13.6 | % | |||||||||
| General and administrative | 28,775 | 21,441 | 7,334 | 34.2 | % | |||||||||
| Research and development | 13,919 | 9,904 | 4,015 | 40.5 | % | |||||||||
| Total operating expenses | 158,131 | 132,963 | 25,168 | 18.9 | % | |||||||||
| Operating income | 53,394 | 40,271 | 13,123 | 32.6 | % | |||||||||
| Other income (expense): | ||||||||||||||
| Interest income | 234 | 218 | 16 | |||||||||||
| Interest expense | (1,928 | ) | (22 | ) | (1,906 | ) | ||||||||
| Other, net | (119 | ) | (445 | ) | 326 | |||||||||
| Total other expense, net | (1,813 | ) | (249 | ) | (1,564 | ) | ||||||||
| Income before income taxes | 51,581 | 40,022 | 11,559 | |||||||||||
| Income tax expense | 16,480 | 13,219 | 3,261 | |||||||||||
| Income from continuing operations | 35,101 | 26,803 | 8,298 | |||||||||||
| Loss from discontinued operations, net of income taxes | (923 | ) | (201 | ) | (722 | ) | ||||||||
| Net income | $ | 34,178 | $ | 26,602 | $ | 7,576 | ||||||||
Results of operations information by segment and major product lines was as follows (in thousands):
| Year Ended March 31, | Twelve- Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Direct net sales: | |||||||||||||||||||||||
Cardio products(1) | $ | 128,550 | $ | 212,887 | $ | (84,337) | (39.6) | % | |||||||||||||||
Strength products(2) | 93,176 | 82,435 | 10,741 | 13.0 | % | ||||||||||||||||||
| Direct | 221,726 | 295,322 | (73,596) | (24.9) | % | ||||||||||||||||||
| Retail net sales: | |||||||||||||||||||||||
Cardio products(1) | $ | 208,991 | $ | 270,097 | $ | (61,106) | (22.6) | % | |||||||||||||||
Strength products(2) | 155,078 | 95,761 | 59,317 | 61.9 | % | ||||||||||||||||||
| Retail | 364,069 | 365,858 | (1,789) | (0.5) | % | ||||||||||||||||||
| Royalty income | 3,739 | 3,733 | 6 | 0.2 | % | ||||||||||||||||||
| $ | 589,534 | $ | 664,913 | $ | (75,379) | (11.3) | % | ||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Direct | $ | 153,609 | $ | 137,760 | $ | 15,849 | 11.5 | % | |||||||||||||||
| Retail | 287,468 | 254,857 | 32,611 | 12.8 | % | ||||||||||||||||||
| $ | 441,077 | $ | 392,617 | $ | 48,460 | 12.3 | % | ||||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Direct | $ | 68,117 | $ | 157,562 | $ | (89,445) | (56.8) | % | |||||||||||||||
| Retail | 76,601 | 111,001 | (34,400) | (31) | % | ||||||||||||||||||
| Royalty | 3,739 | 3,733 | 6 | 0.2 | % | ||||||||||||||||||
| $ | 148,457 | $ | 272,296 | $ | (123,839) | (45.5) | % | ||||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| Direct | 30.7 | % | 53.4 | % | (2,270) | basis points | |||||||||||||||||
| Retail | 21.0 | % | 30.3 | % | (930) | basis points | |||||||||||||||||
| Contribution: | |||||||||||||||||||||||
| Direct | $ | (15,711) | $ | 86,013 | $ | (101,724) | (118.3) | % | |||||||||||||||
| Retail | 44,831 | 80,741 | (35,910) | (44.5) | % | ||||||||||||||||||
| Contribution rate: | |||||||||||||||||||||||
| Direct | (7.1) | % | 29.1 | % | (3,620) | basis points | |||||||||||||||||
| Retail | 12.3 | % | 22.1 | % | (980) | basis points | |||||||||||||||||
(1) Cardio products include: connected-fitness bikes like the Bowflex® C6, VeloCore® and Schwinn® IC4, Max Trainer®, Zero Runner®, treadmills, other exercise bikes, ellipticals and subscription services. | |||||||||||||||||||||||
(2) Strength products include: home gyms and Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories | |||||||||||||||||||||||
30
| Year Ended December 31, | ||||||||||||||
| 2017 | 2016 | Change | % Change | |||||||||||
| Net sales: | ||||||||||||||
| Direct | $ | 219,440 | $ | 225,057 | $ | (5,617 | ) | (2.5 | )% | |||||
| Retail | 183,875 | 177,920 | 5,955 | 3.3 | % | |||||||||
| Royalty | 2,869 | 3,062 | (193 | ) | (6.3 | )% | ||||||||
| $ | 406,184 | $ | 406,039 | $ | 145 | — | % | |||||||
| Cost of sales: | ||||||||||||||
| Direct | $ | 78,716 | $ | 75,390 | $ | 3,326 | 4.4 | % | ||||||
| Retail | 123,569 | 119,080 | 4,489 | 3.8 | % | |||||||||
| Royalty | 17 | 44 | (27 | ) | (61.4 | )% | ||||||||
| $ | 202,302 | $ | 194,514 | $ | 7,788 | 4.0 | % | |||||||
| Gross profit: | ||||||||||||||
| Direct | $ | 140,724 | $ | 149,667 | $ | (8,943 | ) | (6.0 | )% | |||||
| Retail | 60,306 | 58,840 | 1,466 | 2.5 | % | |||||||||
| Royalty | 2,852 | 3,018 | (166 | ) | (5.5 | )% | ||||||||
| $ | 203,882 | $ | 211,525 | $ | (7,643 | ) | (3.6 | )% | ||||||
| Gross margin: | ||||||||||||||
| Direct | 64.1 | % | 66.5 | % | (240 | ) | basis points | |||||||
| Retail | 32.8 | % | 33.1 | % | (30 | ) | basis points | |||||||
| Year Ended March 31, | Twelve-Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2020 | Change | % Change | ||||||||||||||||||||
| Net sales | $ | 589,534 | $ | 318,607 | $ | 270,927 | 85.0 | % | |||||||||||||||
| Cost of sales | 441,077 | 208,269 | 232,808 | 111.8 | % | ||||||||||||||||||
| Gross profit | 148,457 | 110,338 | 38,119 | 34.5 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling and marketing | 99,204 | 85,238 | 13,966 | 16.4 | % | ||||||||||||||||||
| General and administrative | 51,783 | 30,243 | 21,540 | 71.2 | % | ||||||||||||||||||
| Research and development | 22,786 | 13,786 | 9,000 | 65.3 | % | ||||||||||||||||||
| Goodwill impairment | — | 72,008 | (72,008) | (100.0) | % | ||||||||||||||||||
| Total operating expenses | 173,773 | 201,275 | (27,502) | (13.7) | % | ||||||||||||||||||
| Operating loss | (25,316) | (90,937) | 65,621 | (72.2) | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 35 | (1) | 36 | ||||||||||||||||||||
| Interest expense | (1,580) | (1,402) | (178) | ||||||||||||||||||||
| Other, net | (1,369) | (36) | (1,333) | ||||||||||||||||||||
| Total other expense, net | (2,914) | (1,439) | (1,475) | ||||||||||||||||||||
| Loss from continuing operations before income taxes | (28,230) | (92,376) | 64,146 | ||||||||||||||||||||
| Income tax benefit | (6,026) | (10,867) | 4,841 | ||||||||||||||||||||
| Loss from continuing operations | (22,204) | (81,509) | 59,305 | ||||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (227) | (532) | 305 | ||||||||||||||||||||
| Net loss | $ | (22,431) | $ | (82,041) | $ | 59,610 | |||||||||||||||||
31
| Year Ended December 31, | ||||||||||||||
| 2016 | 2015 | Change | % Change | |||||||||||
| Net sales: | ||||||||||||||
| Direct | $ | 225,057 | $ | 225,595 | $ | (538 | ) | (0.2 | )% | |||||
| Retail | 177,920 | 106,195 | 71,725 | 67.5 | % | |||||||||
| Royalty | 3,062 | 3,974 | (912 | ) | (22.9 | )% | ||||||||
| $ | 406,039 | $ | 335,764 | $ | 70,275 | 20.9 | % | |||||||
| Cost of sales: | ||||||||||||||
| Direct | $ | 75,390 | $ | 83,238 | $ | (7,848 | ) | (9.4 | )% | |||||
| Retail | 119,080 | 79,292 | 39,788 | 50.2 | % | |||||||||
| Royalty | 44 | — | 44 | — | % | |||||||||
| $ | 194,514 | $ | 162,530 | $ | 31,984 | 19.7 | % | |||||||
| Gross profit: | ||||||||||||||
| Direct | $ | 149,667 | $ | 142,357 | $ | 7,310 | 5.1 | % | ||||||
| Retail | 58,840 | 26,903 | 31,937 | 118.7 | % | |||||||||
| Royalty | 3,018 | 3,974 | (956 | ) | (24.1 | )% | ||||||||
| $ | 211,525 | $ | 173,234 | $ | 38,291 | 22.1 | % | |||||||
| Gross margin: | ||||||||||||||
| Direct | 66.5 | % | 63.1 | % | 340 | basis points | ||||||||
| Retail | 33.1 | % | 25.3 | % | 780 | basis points | ||||||||
| Year Ended March 31, | Twelve-Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2020 | Change | % Change | ||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Direct net sales: | |||||||||||||||||||||||
Cardio products(1) | $ | 128,550 | $ | 94,093 | $ | 34,457 | 36.6 | % | |||||||||||||||
Strength products(2) | 93,176 | 25,985 | 67,191 | 258.6 | % | ||||||||||||||||||
| Direct | 221,726 | 120,078 | 101,648 | 84.7 | % | ||||||||||||||||||
| Retail net sales: | |||||||||||||||||||||||
Cardio products(1) | $ | 208,991 | $ | 146,778 | $ | 62,213 | 42.4 | % | |||||||||||||||
Strength products(2) | 155,078 | 48,598 | 106,480 | 219.1 | % | ||||||||||||||||||
| Retail | 364,069 | 195,376 | 168,693 | 86.3 | % | ||||||||||||||||||
| Royalty income | 3,739 | 3,153 | 586 | 18.6 | % | ||||||||||||||||||
| $ | 589,534 | $ | 318,607 | $ | 270,927 | 85.0 | % | ||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Direct | $ | 153,609 | $ | 62,625 | $ | 90,984 | 145.3 | % | |||||||||||||||
| Retail | 287,468 | 145,644 | 141,824 | 97.4 | % | ||||||||||||||||||
| $ | 441,077 | $ | 208,269 | $ | 232,808 | 111.8 | % | ||||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Direct | $ | 68,117 | $ | 57,453 | $ | 10,664 | 18.6 | % | |||||||||||||||
| Retail | 76,601 | 49,732 | 26,869 | 54.0 | % | ||||||||||||||||||
| Royalty | 3,739 | 3,153 | 586 | 18.6 | % | ||||||||||||||||||
| $ | 148,457 | $ | 110,338 | $ | 38,119 | 34.5 | % | ||||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| Direct | 30.7 | % | 47.8 | % | (1,710) | basis points | |||||||||||||||||
| Retail | 21.0 | % | 25.5 | % | (450) | basis points | |||||||||||||||||
| Contribution: | |||||||||||||||||||||||
| Direct | $ | (15,711) | $ | 9,270 | $ | (24,981) | (269.5) | % | |||||||||||||||
| Retail | 44,831 | 8,768 | 36,063 | 411.3 | % | ||||||||||||||||||
| Contribution rate: | |||||||||||||||||||||||
| Direct | (7.1) | % | 7.7 | % | (1,480) | basis points | |||||||||||||||||
| Retail | 12.3 | % | 4.5 | % | 780 | basis points | |||||||||||||||||
(1) Cardio products include: connected-fitness bikes like the Bowflex® C6, VeloCore® and Schwinn® IC4, Max Trainer®, Zero Runner®, treadmills, other exercise bikes, ellipticals and subscription services. | |||||||||||||||||||||||
(2) Strength products include: home gyms and Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories | |||||||||||||||||||||||
32
| Year Ended December 31, | ||||||||||||||
| 2017 | 2016 | Change | % Change | |||||||||||
| Direct net sales: | ||||||||||||||
Cardio products(1) | $ | 197,683 | $ | 209,569 | $ | (11,886 | ) | (5.7 | )% | |||||
Strength products(2) | 21,757 | 15,488 | 6,269 | 40.5 | % | |||||||||
| 219,440 | 225,057 | (5,617 | ) | (2.5 | )% | |||||||||
| Retail net sales: | ||||||||||||||
Cardio products(1) | 143,020 | 135,562 | 7,458 | 5.5 | % | |||||||||
Strength products(2) | 40,855 | 42,358 | (1,503 | ) | (3.5 | )% | ||||||||
| 183,875 | 177,920 | 5,955 | 3.3 | % | ||||||||||
| Royalty income | 2,869 | 3,062 | (193 | ) | (6.3 | )% | ||||||||
| $ | 406,184 | $ | 406,039 | $ | 145 | — | % | |||||||
Direct Segment
| Year Ended December 31, | ||||||||||||||
| 2016 | 2015 | Change | % Change | |||||||||||
| Direct net sales: | ||||||||||||||
Cardio products(1) | $ | 209,569 | $ | 210,578 | $ | (1,009 | ) | (0.5 | )% | |||||
Strength products(2) | 15,488 | 15,017 | 471 | 3.1 | % | |||||||||
| 225,057 | 225,595 | (538 | ) | (0.2 | )% | |||||||||
| Retail net sales: | ||||||||||||||
Cardio products(1) | 135,562 | 63,762 | 71,800 | 112.6 | % | |||||||||
Strength products(2) | 42,358 | 42,433 | (75 | ) | (0.2 | )% | ||||||||
| 177,920 | 106,195 | 71,725 | 67.5 | % | ||||||||||
| Royalty income | 3,062 | 3,974 | (912 | ) | (22.9 | )% | ||||||||
| $ | 406,039 | $ | 335,764 | $ | 70,275 | 20.9 | % | |||||||
(1) Cardio products include: MaxTrainer®, TreadClimber®, HVT®, Zero Runner®, treadmills, exercise bikes and ellipticals. | ||||||||||||||
(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories. | ||||||||||||||
Net Salessales were $221.7 million for 2022, compared to $295.3 million, a decline of 24.9%, versus the same period in 2021. The net sales decrease was primarily driven by lower cardio sales.
Cardio sales declined 39.6% versus the same period in 2021. Lower cardio sales were primarily driven by lower bike sales. Strength product sales grew 13.0% versus the same period in 2021. Higher strength sales were primarily driven by increased sales of SelectTech® weights and Costbenches.
The Direct segment ended the year with $0.8 million of Sales
Gross profit margin was 30.7% for 2022 versus 53.4% for the same period in 2021. The 2.5%22.7 ppt decrease in year-over-year Direct net salesgross margin was primarily driven by: increased product costs, logistics and discounting (-19 ppts) and increased investments in JRNY® (-4 ppts). Gross profit was $68.1 million, a decrease of 56.8% versus the same period in 2021.
Segment contribution loss was $15.7 million for 20172022, compared to 2016segment contribution income of $86.0 million for 2021. The decline was primarily due to decreased consumer demand for our TreadClimberdriven by lower gross profit and increased investments in media and JRNY®cardio products, partially offset by a 40.5% increase. Advertising expenses were $42.1 million in strength products. The 0.2% decrease in year-over-year Direct net sales for 20162022 compared to 2015 was primarily due to decreased consumer demand$30.9 million for our TreadClimber® cardio products, partially offset by growththe same period in the Max Trainer® cardio product line and a 3.1% increase in strength products. The business also benefited from higher U.S. consumer credit approval rates in both years.2021.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers were 54.4%56.7% in 20172022 compared to 50.6%52.5% in 2016 and 48.1% in 2015.2021. The increase in approvals reflects higher credit quality applications.
Comparison of the fiscal year-ended March 31, 2022 to the twelve-months ended March 31, 2021
Net sales in 2017were $364.1 million for 2022, compared to 2016 was due to increased product costs$365.9 million, a decline of 0.5%, versus the same period in 2021. Excluding sales related to unfavorable currency trendsOctane, net sales increased 5% compared to the same period in 2021. Retail segment sales outside the United States and unfavorable product mix, partially offset by theCanada decreased 13%, or a decrease in net sales.of 9% excluding Octane.
The decrease in Direct cost of sales in 2016 compared to 2015 was related to improvements in product mix and supply chain efficiencies. In addition, unusual items that occurred in 2015, including an arbitration settlement of $2.5 million and write-off of nutrition inventory of $1.4 million, contributed to the decrease in the year-over-year cost of sales for 2016 compared to 2015.
Gross profit margin was 21.0%, down from 30.3% for the same period in 2021. The 9.3 ppt decrease in gross profit margin was primarily driven by increased product costs, logistics and discounting. Gross profit was $76.6 million, a varietydecrease of product offerings31.0% versus the same period in both the traditional retail2021.
Segment contribution income for 2022 was $44.8 million, compared to $80.7 million for 2021. The $35.9 million decrease was primarily driven by lower gross profit.
Royalty
Royalty income increased by $0.01 million, or 0.2%, to $3.7 million for 2022, compared to 2021, primarily due to royalty settlements.
Operating Expenses
Operating expenses for 2022 were $173.8 million, an increase of $19.6 million, or 12.7%, as compared to operating expenses of $154.2 million for 2021. The increase in operating expenses primarily related to brand advertising and e-commerce channels,media spend and increased research and development and general and administrative expenses partially offset by weaknessloss on disposal group of $20.7 million in sales to specialty and commercial customers.2021.
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Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, sales incentives related to our JRNY® platform and other programs.
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2017 | 2016 | $ | % | ||||
| Selling and marketing | $116,222 | $115,437 | $785 | 0.7% | |||
| As % of net sales | 28.6% | 28.4% | |||||
Selling and marketing information was as follows (dollars in thousands):
| Year Ended March 31, | Twelve-Months Ended March 31, | Change | ||||||||||||||||||||||||||||
| Dollars in thousands | Year Ended December 31, | Change | ||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||
| Selling and marketing | $115,437 | $101,618 | $13,819 | 13.6% | Selling and marketing | $ | 99,204 | $ | 77,131 | $ | 22,073 | 28.6% | ||||||||||||||||||
| As % of net sales | 28.4% | 30.3% | As % of net sales | 16.8% | 11.6% | |||||||||||||||||||||||||
The increase in selling and marketing in 2017 compared to 2016 was primarily due to a $5.5 million increase in media advertising, coupled with a $1.0 million increase in creative production costs related to HVT, partially offset by reductions in variable sales expenses of $5.8 million, mainly reduced financing fees.
Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:follows (dollars in thousands):
| Year Ended March 31, | Twelve-Months Ended March 31, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Media advertising - Direct | $ | 42,096 | $ | 10,139 | $ | 31,957 | 315.2% | ||||||||||||||||
| Media advertising - Brand | 16,239 | 1,399 | 14,840 | 1,060.8% | |||||||||||||||||||
| Total advertising | $ | 58,335 | $ | 11,538 | $ | 46,797 | 405.6% | ||||||||||||||||
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2017 | 2016 | $ | % | ||||
| Media advertising | $65,130 | $59,638 | $5,492 | 9.2% | |||
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2016 | 2015 | $ | % | ||||
| Media advertising | $59,638 | $54,756 | $4,882 | 8.9% | |||
The return metrics we achieved on media performance declined in 2017 and 2016, requiring an increase in investment relativemedia advertising in 2022 compared to the sales generated. We continue2021 was primarily due to closely monitor ourincreased media investments in orderspending as we return to optimize the investmentmore historically normalized levels of advertising support to drive demand and sales.preserve market share.
General and Administrative
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2017 | 2016 | $ | % | ||||
| General and administrative | $27,111 | $28,775 | $(1,664) | (5.8)% | |||
| As % of net sales | 6.7% | 7.1% | |||||
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2016 | 2015 | $ | % | ||||
| General and administrative | $28,775 | $21,441 | $7,334 | 34.2% | |||
| As % of net sales | 7.1% | 6.4% | |||||
General and administrative costs related to Octane, and a $1.3 million reductionexpenses was as follows (dollars in incentive and stock compensation expense, offset by increased litigation costs of $1.3 million.thousands):
| Year Ended March 31, | Twelve-Months Ended March 31, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| General and administrative | $ | 51,783 | $ | 40,580 | $ | 11,203 | 27.6% | ||||||||||||||||
| As % of net sales | 8.8% | 6.1% | |||||||||||||||||||||
The increase in general and administrative expenses in 20162022 compared to 20152021 was attributableprimarily due to the inclusion of the Octane business in the amount of $3.8increased personnel costs, a $4.7 million loss contingency related to a legal settlement for a class action lawsuit, and amortization of Octane acquired assets of $3.1 million.VAY acquisition costs.
The decreaseincrease in general and administrative expenses as a percentage of net sales in 20172022 compared to 2016 was primarily due to achieving cost synergies related to the Octane Fitness acquisition.
Research and Development
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.
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| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2017 | 2016 | $ | % | ||||
| Research and development | $15,446 | $13,919 | $1,527 | 11.0% | |||
| As % of net sales | 3.8% | 3.4% | |||||
| Year Ended March 31, | Twelve-Months Ended March 31, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Research and development | $ | 22,786 | $ | 15,840 | $ | 6,946 | 43.9% | ||||||||||||||||
| As % of net sales | 3.9% | 2.4% | |||||||||||||||||||||
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2016 | 2015 | $ | % | ||||
| Research and development | $13,919 | $9,904 | $4,015 | 40.5% | |||
| As % of net sales | 3.4% | 2.9% | |||||
The increasesincrease in research and development expenses in 20172022 compared to 2016, and2021 was driven primarily by increased investments in 2016JRNY®, our digital platform.
Loss on Disposal Group
The loss on disposal group for 2021 related to the disposal of our Octane business, which was sold on October 14, 2020.
Operating (Loss) Income
Operating loss for 2022 was $25.3 million, a decrease of $143.4 million, as compared to 2015, werean operating income of $118.1 million for 2021. The decrease was primarily due to our investment in additional engineeringlower gross profit and product development headcount as we continue to supplement our new product development resources required to innovate and broaden our product portfolio, coupled with the addition, in 2016, of the research and development expenses related to Octane.
Interest Expense
Interest expense of $1.6 million and $1.9$1.1 million in 20172022 and 2016,2021, respectively, was primarily related to the outstanding balance on our term loan that was used to finance the Octane acquisition.and line of credit.
Other, Net
Other, net primarily relates toincludes the effect of currency exchange rate fluctuations betweenwith the U.S. and the currencies of our foreign subsidiaries and equity investment impairments.
Other, net for 2022 was $1.4 million, a decrease of $3.6 million, as compared to $5.0 million in 2021. The decrease in other, net was primarily Canada, China and Europe. In addition, 2017 included a gaindue to an equity investment impairment for the fair value deterioration from adverse changes in the general market condition of $0.2the equity investees' industry of $2.5 million in 2021.
(Loss) Income from Continuing Operations
Loss from continuing operations was $28.2 million for an insurance reimbursement related2022, or $(0.72) per diluted share, compared to inventory loss,income from continuing operations of $112.1 million, or $2.81 per diluted share, for 2021. The decrease in income from continuing operations was primarily due to lower gross profit and 2015 included losses on asset dispositions of $0.3 million.higher operating expenses as discussed in more detail above.
Income Tax (Benefit) Expense
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2017 | 2016 | $ | % | ||||
| Income tax expense | $8,080 | $16,480 | $(8,400) | (51.0)% | |||
| Effective tax rate | 22.6% | 31.9% | |||||
| Dollars in thousands | Year Ended December 31, | Change | |||||
| 2016 | 2015 | $ | % | ||||
| Income tax expense | $16,480 | $13,219 | $3,261 | 24.7% | |||
| Effective tax rate | 31.9% | 33.0% | |||||
Income tax (benefit) expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.
Income tax (benefit) expense was as follows (dollars in 2017 was primarily attributable to the income generated domestically and internationally, partially offset by a $5.6 millionthousands):
| Year Ended March 31, | Twelve-Months Ended March 31, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Income tax (benefit) expense | $ | (6,026) | $ | 23,239 | $ | (29,265) | (125.9)% | ||||||||||||||||
| Effective tax rate | 21.3% | 20.7% | |||||||||||||||||||||
The income tax benefit relatedfrom continuing operations for 2022 was primarily due to the change in U.S. tax law that resultednet loss incurred in the revaluation of certain deferred tax assets and liabilities. IncomeU.S. The income tax expense from continuing operations for 2016 included2021 was primarily as a release of previously unrecognized tax benefits of $2.7 million associated with certain non-U.S. filing positions which resulted from completing the deregistration of a certain foreign entity. Income tax expense for 2015 included a $2.4 million release of our domestic valuation allowance.
Refer to Note 14,17, Income Taxes, to our consolidated financial statements included in Part II, Item 8 of this report for additional information.
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Net (Loss) Income
Net loss was $22.4 million for 2022, compared to net income of $88.1 million for 2021. Net loss per diluted share was $(0.72) for 2022, compared to net income per diluted share of $2.78 for 2021.
LIQUIDITY AND CAPITAL RESOURCES
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
As of DecemberMarch 31, 2017,2022, we had $85.2$14.2 million of cash and investments, compared to $79.6 million as of December 31, 2016. Cash provided by operating activities was $35.0 million for 2017, compared to cash provided by operating activities of $45.9 million for 2016. We expect our cash, cash equivalents and available-for-salerestricted cash, compared to cash and cash equivalents, restricted cash, and available for sale securities at Decemberof $113.2 million as of March 31, 2017, along with2021.
Cash used in operating activities was $66.6 million for fiscal 2022, compared to cash expected to be generated from operations, to be sufficient to fund ourused in operating and capital requirementsactivities of $71.7 million for at least twelve months from Decemberthe comparable period ended March 31, 2017.
2021. The decrease in cash flows from operating activities for 2017,fiscal 2022 compared to 2016,fiscal 2021 was primarily due to decreased operating performanceour net loss for fiscal 2022 and the changes in our operating assets and liabilities as discussed below.
Trade receivables decreased $2.8by $27.2 million to $42.7$61.5 million as of DecemberMarch 31, 2017,2022, compared to $45.5$88.7 million as of DecemberMarch 31, 2016,2021, primarily due to the decreasetiming of Retail sales in the fourth quarter of 2017 compared to the fourth quarter of 2016.customer payments.
Prepaids and other current assets decreased $0.8by $11.3 million to $7.2$14.5 million as of DecemberMarch 31, 2017,2022, compared to $8.0$25.8 million as of DecemberMarch 31, 2016,2021, primarily due to release of advertising and creative content costs.decreases in other short-term deposits for inventory.
Trade payables increased $0.9decreased by $45.7 million to $66.9$53.2 million as of DecemberMarch 31, 2017,2022, compared to $66.0$98.9 million as of DecemberMarch 31, 2016, primarily due to increased spending on media in the fourth quarter of 2017.
Accrued liabilities increased by $9.8 million to $29.4 million as of March 31, 2022, compared to $19.6 million as of March 31, 2021, primarily due to deferred tax assetssubscription revenue, an accrued loss contingency related to a class action lawsuit legal settlement, payroll related liabilities and liabilities as a result of the recent change in the U.S. tax law.customer deposits.
Cash used inprovided by investing activities of $29.3$34.4 million for 2017in fiscal 2022 was primarily related to the net purchases of $25.5 millionproceeds of marketable securities. In addition, $3.8securities of $73.4 million, was$13.1 million used for capital expenditures during 2017,fiscal 2022, primarily for product tooling, implementation of new software,information technology assets, our digital platform JRNY® and information system hardware upgrades. We anticipate spending $8.5 million to $10.5 million in 2018 for systems integration, productproduction tooling and facilities-related upgrades. equipment, offset by business acquisition costs of $26.0 million.
Cash used inprovided by financing activities of $26.7$12.7 million for 2017in fiscal 2022 was primarily related to principal repaymentsproceeds from long-term debt of $65.2 million and proceeds from stock purchases and stock option exercises of $1.0 million, offset by payments on our term loan and line of $16.0credit of $49.9 million, tax payments related to stock award issuances of $2.9 million and share repurchase program spendingdebt issuance costs of $11.1$0.6 million.
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Financing Arrangements
Wells Fargo Bank Credit Agreement
On December 31, 2015October 29, 2021, we entered into an amendment (the “Amendment”) toamended our existing Credit Agreement dated December 5, 2014,January 31, 2020, with JPMorgan ChaseWells Fargo Bank, N.A.National Association (“Chase Bank”Wells Fargo”) that provided forand the lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders agreed, among other things, to make available to us an $80.0 millionasset-based revolving loan facility, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility (the “Term Loan”Loan Facility” and together with the ABL Revolving Facility, the “Credit Facility”), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The amendment increased the aggregate principal amount available under the ABL Revolving Facility from $55.0 million to finance$100.0 million (the “Revolver”), subject to a borrowing base. The maturity date of the acquisition of Octane.Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million, as of the effective date of the amendment, and will amortize on a new 60-month straight line basis to coincide with the extended maturity date. In connection with the credit amendment we recorded $0.6 million in unamortized debt issuance costs as Other assets on our existing $20.0 million revolving lineConsolidated Balance Sheets. The repayment of credit with Chase Bank areobligations under the Credit Agreement is secured by substantially all of our assets. The Term Loan matures on December 31, 2020. Under the terms of the Amendment, the maturity date of our existing revolving line of credit was extendedPrincipal and interest amounts are required to December 31, 2020.be paid as scheduled.
As of DecemberMarch 31, 2017, we had2022, outstanding borrowings of $48.0totaled $29.4 million, onwith $10.1 million and $19.3 million under our term loanTerm Loan Facility and no letters of credit issued under the Credit Agreement.Revolver, respectively. As of DecemberMarch 31, 2017,2022, we were in compliance with the financial covenants of the Credit Agreement and $20.0$65.8 million was available for borrowing under the lineABL Revolving Facility.
Interest on the Revolver will accrue at the Secured Overnight Financing Rate (“SOFR”) plus a margin of credit.1.86% to 2.36% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at SOFR plus 4.61%. As of March 31, 2022, our interest rate was 2.16% for the Revolver and 4.91% for the Term Loan Facility.
Shelf Registration Statement
On November 3, 2014, our Board of Directors authorized9, 2020, we filed a stock repurchase program that authorized us to repurchase up to $15.0 million of our outstanding common stockshelf registration statement on Form S-3 (“Shelf Registration”) with the SEC under which we may, from time to time, during the ensuing period of 24 months. As of November 2016, the stock repurchases under this program were completedsell securities in full and the program expired.
Commitments and Contingencies
For a description of our commitments and contingencies, refer to Note 21,23, Commitments and Contingencies, to our consolidated financial statements in Part II, Item 8 of this report.
Non-Cancellable Contractual Obligations
Our operating cash flows include the effect of certain non-cancellable contractual obligations. A summary of such obligations as of DecemberMarch 31, 20172022 is as follows (in thousands):
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| Payments due by period | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Payments due by period | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt obligations, including interest | $ | 49,791 | $ | 16,984 | $ | 32,807 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 26,111 | 5,016 | 10,018 | 6,724 | 4,353 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt obligations, including interest | Debt obligations, including interest | $ | 30,714 | $ | 2,737 | $ | 7,549 | $ | 20,428 | $ | — | ||||||||||||||||||||||||||||||||||||||||
Purchase obligations(1) | 19,048 | 19,048 | — | — | — | Purchase obligations(1) | 39,845 | 39,845 | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Minimum royalty obligations | 1,038 | 1,038 | — | — | — | Minimum royalty obligations | 625 | 625 | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Capital lease obligations | 438 | 132 | 259 | 47 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 96,426 | $ | 42,218 | $ | 43,084 | $ | 6,771 | $ | 4,353 | Total | $ | 71,184 | $ | 43,207 | $ | 7,549 | $ | 20,428 | $ | — | ||||||||||||||||||||||||||||||
(1) Our purchase obligations are comprised primarily of inventory purchase commitments to our third-party manufacturers. Because substantially all of our inventory is sourced from Asia, we have long lead times and therefore need to secure factory capacity from our vendors in advance. Our third-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced by individual purchase orders. |
Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at DecemberMarch 31, 2017,2022, we are unable to make reasonablyreasonable reliable estimates of the timing of any cash settlements with the respective taxing authorities. Therefore, approximately $3.2$4.1 million of liabilities relatedrelated to unrecognized tax benefits, including interest and penalties on uncertain tax positions, have been excluded from the contractual table above. For further information, refer to Note 14,17, Income Taxes, to our consolidated financial statements in Part II, Item 8 of this report.Taxes.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications. Because we are unable to estimate our potential obligation, and because management does not expect these obligations to have a material adverse effect on our consolidated financial position, results of operations or cash flows, no liabilities are recorded at DecemberMarch 31, 2017.2022.
INFLATION
We are subject to the effects of inflation through elevated supply chain costs, including logistics costs. Additionally, because we purchase component parts from our suppliers, we may be adversely impacted by their inability to adequately mitigate inflationary, industry, or economic pressures. Although we do not believe that inflation has had a material effectimpact on our business, financial condition or results of operations, our business could be more affected by inflation in 2017, 2016 or 2015. Inflation pressures do exist in countries wherethe future which could have an adverse effect on our contract manufacturersability to maintain current levels of gross margin and operating expenses as a percentage of net sales if we are based; however, we have largely mitigated these increasesunable to fully offset such higher costs through cost improvement measures.price increases.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, Significant Accounting PolicesPolicies, to our consolidated financial statements in Part II, Item 8 of this report.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Exchange Risk
Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents, marketable debt securities, derivative assets, and variable-rate debt obligations. As of December 31, 2017, we had cash equivalents of $12.9 million held in a combination of money market funds and commercial paper, and marketable securities of $57.3 million, held in a combination of certificates of deposit, corporate bonds, and U.S. government bonds. Our cash equivalents mature within three months or less from the date of purchase. Marketable securities with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. We have classified our marketable securities as available-for-sale and, therefore, we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instruments in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affect the market price or liquidity of certain securities within the portfolio.
Our negotiated credit facilities generally charge interest based on a benchmark rate such as LIBOR.SOFR. Fluctuations in short-term interest rates may cause interest payments on term loan principal and drawn amounts on the revolving line to increase or decrease. As of DecemberMarch 31, 2017,2022, the outstanding balances on our credit facilities totaled $48.0$29.4 million.
We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. Total notional amounts outstanding at DecemberMarch 31, 20172022 were $22.1$33.5 million. A hypothetical 10% increase in interest rates, or a 10% movement in the currencies underlying our foreign currency derivative positions, would not have material impacts on our results of operations, financial position or cash flows.
We do not enter into derivative instruments for any purpose other than to manage our interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Nautilus, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Nautilus, Inc. (a Washington corporation) and subsidiaries (the “Company”) as of March 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for the year ended March 31, 2022, and the quarter ended March 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for the year ended March 31, 2022, and the quarter ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Company as of December 31, 2020 and for each of the two years in the period then ended were audited by other auditors. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 26, 2021.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated June 3, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment
As described further in Note 12 to the financial statements, management evaluates goodwill on an annual basis as of March 31, or more frequently if impairment indicators exist, at the reporting unit level. Management estimates the fair values of its reporting units using a combination of the income and market approaches. The determination of the fair value of the reporting units requires management to make estimates and assumptions related to inputs, such as forecasted revenues and certain operating expenses and discount rates. We identified the goodwill impairment assessment as a critical audit matter.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when estimating the fair value of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Our audit procedures related to the critical audit matter included the following, among others:
•We evaluated the reasonableness of management’s significant assumptions, which included forecasted revenue and certain operating expenses. We evaluated whether these forecasted assumptions were reasonable by performing sensitivity tests on significant management assumptions, which included consideration of historical performance and publicly available industry data.
•We evaluated the valuation model with the assistance of valuation specialists, including the reasonableness of the utilized discount rate.
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/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Bellevue, Washington
June 3, 2022
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Nautilus, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Nautilus, Inc. (and subsidiaries) (the “Company”) as of March 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended March 31, 2022, and our report dated June 3, 2022 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Bellevue, Washington
June 3, 2022
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Nautilus, Inc.:
We have audited the accompanying consolidated balance sheetsheets of Nautilus, Inc. and subsidiaries (the “Company”)Company) as of December 31, 2017,2020, and the related consolidated statements of operations, comprehensive income shareholders'(loss), shareholders’ equity, and cash flows for each of the yearyears in the two-year period ended December 31, 2017,2020, and the related notes (collectively, the "consolidatedconsolidated financial statements")statements). We have also audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017,2020, and the results of its operations and its cash flows for each of the yearyears in the two-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinion
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
fraud. Our audit of the consolidated financial statementsaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
/s/ Deloitte & ToucheKPMG LLP
We served as the Company’s auditor from 2017 to 2020.
Portland, Oregon
February 27, 201726, 2021
43
NAUTILUS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Assets | |||||||
| Cash and cash equivalents | $ | 27,893 | $ | 47,874 | |||
| Available-for-sale securities | 57,303 | 31,743 | |||||
| Trade receivables, net of allowances of $119 and $170 | 42,685 | 45,458 | |||||
| Inventories | 53,354 | 47,030 | |||||
| Prepaids and other current assets | 7,240 | 8,020 | |||||
| Income taxes receivable | 17 | 3,231 | |||||
| Total current assets | 188,492 | 183,356 | |||||
| Property, plant and equipment, net | 15,827 | 17,468 | |||||
| Goodwill | 62,030 | 61,888 | |||||
| Other intangible assets, net | 57,743 | 69,800 | |||||
| Deferred income tax assets, non-current | — | 11 | |||||
| Other assets | 684 | 543 | |||||
| Total assets | $ | 324,776 | $ | 333,066 | |||
| Liabilities and Shareholders' Equity | |||||||
| Trade payables | $ | 66,899 | $ | 66,020 | |||
| Accrued liabilities | 10,764 | 12,892 | |||||
| Warranty obligations, current portion | 3,718 | 3,500 | |||||
| Note payable, current portion, net of unamortized debt issuance costs of $7 and $7 | 15,993 | 15,993 | |||||
| Total current liabilities | 97,374 | 98,405 | |||||
| Warranty obligations, non-current | 2,399 | 3,950 | |||||
| Income taxes payable, non-current | 2,955 | 2,403 | |||||
| Deferred income tax liabilities, non-current | 8,558 | 16,991 | |||||
| Other long-term liabilities | 2,315 | 2,481 | |||||
| Note payable, non-current, net of unamortized debt issuance costs of $14 and $21 | 31,986 | 47,979 | |||||
| Total liabilities | 145,587 | 172,209 | |||||
| Commitments and contingencies (Note 21) | |||||||
| Shareholders' equity: | |||||||
| Common stock - no par value, 75,000 shares authorized, 30,305 and 30,825 shares issued and outstanding | — | 578 | |||||
| Retained earnings | 179,448 | 161,496 | |||||
| Accumulated other comprehensive loss | (259 | ) | (1,217 | ) | |||
| Total shareholders' equity | 179,189 | 160,857 | |||||
| Total liabilities and shareholders' equity | $ | 324,776 | $ | 333,066 | |||
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 12,872 | $ | 38,441 | $ | 56,581 | |||||||||||
| Restricted cash | 1,339 | 1,339 | 1,339 | ||||||||||||||
| Available-for-sale securities | — | 73,448 | 36,199 | ||||||||||||||
| Trade receivables, net of allowances | 61,454 | 88,657 | 91,224 | ||||||||||||||
| Inventories | 111,190 | 68,085 | 51,140 | ||||||||||||||
| Prepaids and other current assets | 14,546 | 25,840 | 19,188 | ||||||||||||||
| Other current assets - restricted, current | 3,887 | — | — | ||||||||||||||
| Income taxes receivable | 1,998 | — | 4,021 | ||||||||||||||
| Total current assets | 207,286 | 295,810 | 259,692 | ||||||||||||||
| Property, plant and equipment, net | 32,129 | 24,496 | 23,926 | ||||||||||||||
| Operating lease right-of-use assets | 23,620 | 19,108 | 19,876 | ||||||||||||||
| Goodwill | 24,510 | — | — | ||||||||||||||
| Other intangible assets, net | 9,304 | 9,365 | 9,380 | ||||||||||||||
| Deferred income tax assets, non-current | 8,760 | 2,144 | 2,426 | ||||||||||||||
| Income taxes receivable, non-current | 5,673 | — | — | ||||||||||||||
| Other assets | 2,763 | 3,307 | 2,817 | ||||||||||||||
| Total assets | $ | 314,045 | $ | 354,230 | $ | 318,117 | |||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||
| Trade payables | $ | 53,165 | $ | 98,878 | $ | 96,399 | |||||||||||
| Accrued liabilities | 29,386 | 19,627 | 22,841 | ||||||||||||||
| Operating lease liabilities, current portion | 4,494 | 3,384 | 3,331 | ||||||||||||||
| Financing lease liabilities, current portion | 119 | — | — | ||||||||||||||
| Warranty obligations, current portion | 4,968 | 7,243 | 4,198 | ||||||||||||||
| Income taxes payable | 839 | 5,709 | — | ||||||||||||||
| Debt payable, current portion, net of unamortized debt issuance costs | 2,243 | 3,000 | 2,792 | ||||||||||||||
| Total current liabilities | 95,214 | 137,841 | 129,561 | ||||||||||||||
| Operating lease liabilities, non-current | 20,926 | 17,875 | 18,736 | ||||||||||||||
| Financing lease liabilities, non-current | 395 | — | — | ||||||||||||||
| Warranty obligations, non-current | 1,248 | 1,408 | 1,000 | ||||||||||||||
| Income taxes payable, non-current | 4,029 | 3,657 | 4,309 | ||||||||||||||
| Other long-term liabilities | 1,071 | 607 | 606 | ||||||||||||||
| Debt payable, non-current, net of unamortized debt issuance costs | 27,113 | 10,297 | 10,710 | ||||||||||||||
| Total liabilities | 149,996 | 171,685 | 164,922 | ||||||||||||||
| Commitments and contingencies (Note 23) | 0 | 0 | 0 | ||||||||||||||
| Shareholders' equity: | |||||||||||||||||
| Common stock - no par value, 75,000 shares authorized, 31,268, 30,576 and 30,330 shares issued and outstanding | 6,483 | 2,176 | 3,061 | ||||||||||||||
| Retained earnings | 158,093 | 180,524 | 150,120 | ||||||||||||||
| Accumulated other comprehensive (loss) income | (527) | (155) | 14 | ||||||||||||||
| Total shareholders' equity | 164,049 | 182,545 | 153,195 | ||||||||||||||
| Total liabilities and shareholders' equity | $ | 314,045 | $ | 354,230 | $ | 318,117 | |||||||||||
See accompanying notes to consolidated financial statements.
44
NAUTILUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | $ | 589,534 | $ | 206,075 | $ | 552,560 | $ | 309,285 | |||||||||||||||
| Cost of sales | 441,077 | 126,984 | 323,758 | 198,702 | |||||||||||||||||||
| Gross profit | 148,457 | 79,091 | 228,802 | 110,583 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling and marketing | 99,204 | 23,480 | 78,337 | 94,595 | |||||||||||||||||||
| General and administrative | 51,783 | 12,060 | 36,176 | 30,242 | |||||||||||||||||||
| Research and development | 22,786 | 3,843 | 15,812 | 14,282 | |||||||||||||||||||
| Loss on disposal group, goodwill and other intangible impairment charge | — | — | 20,668 | 72,008 | |||||||||||||||||||
| Total operating expenses | 173,773 | 39,383 | 150,993 | 211,127 | |||||||||||||||||||
| Operating (loss) income | (25,316) | 39,708 | 77,809 | (100,544) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 35 | 45 | 11 | 162 | |||||||||||||||||||
| Interest expense | (1,580) | (214) | (1,498) | (980) | |||||||||||||||||||
| Other, net | (1,369) | (1,363) | (3,587) | (470) | |||||||||||||||||||
| Total other expense, net | (2,914) | (1,532) | (5,074) | (1,288) | |||||||||||||||||||
| (Loss) income from continuing operations before income taxes | (28,230) | 38,176 | 72,735 | (101,832) | |||||||||||||||||||
| Income tax (benefit) expense | (6,026) | 7,595 | 12,198 | (9,537) | |||||||||||||||||||
| (Loss) income from continuing operations | (22,204) | 30,581 | 60,537 | (92,295) | |||||||||||||||||||
| Discontinued operations: | |||||||||||||||||||||||
| Loss from discontinued operations before income taxes | (198) | (82) | (162) | (206) | |||||||||||||||||||
| Income tax expense of discontinued operations | 29 | 95 | 527 | 299 | |||||||||||||||||||
| Loss from discontinued operations | (227) | (177) | (689) | (505) | |||||||||||||||||||
| Net (loss) income | $ | (22,431) | $ | 30,404 | $ | 59,848 | $ | (92,800) | |||||||||||||||
| Basic (loss) income per share from continuing operations | $ | (0.72) | $ | 1.01 | $ | 2.02 | $ | (3.11) | |||||||||||||||
| Basic loss per share from discontinued operations | — | (0.01) | (0.03) | (0.02) | |||||||||||||||||||
| Basic net (loss) income per share | $ | (0.72) | $ | 1.00 | $ | 1.99 | $ | (3.13) | |||||||||||||||
| Diluted (loss) income per share from continuing operations | $ | (0.72) | $ | 0.94 | $ | 1.88 | $ | (3.11) | |||||||||||||||
| Diluted loss per share from discontinued operations | — | (0.01) | (0.02) | (0.02) | |||||||||||||||||||
| Diluted net (loss) income per share | $ | (0.72) | $ | 0.93 | $ | 1.86 | $ | (3.13) | |||||||||||||||
| Shares used in per share calculations: | |||||||||||||||||||||||
| Basic | 31,029 | 30,416 | 30,007 | 29,684 | |||||||||||||||||||
| Diluted | 31,029 | 32,642 | 32,123 | 29,684 | |||||||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net sales | $ | 406,184 | $ | 406,039 | $ | 335,764 | |||||
| Cost of sales | 202,302 | 194,514 | 162,530 | ||||||||
| Gross profit | 203,882 | 211,525 | 173,234 | ||||||||
| Operating expenses: | |||||||||||
| Selling and marketing | 116,222 | 115,437 | 101,618 | ||||||||
| General and administrative | 27,111 | 28,775 | 21,441 | ||||||||
| Research and development | 15,446 | 13,919 | 9,904 | ||||||||
| Asset impairment charge | 8,800 | — | — | ||||||||
| Total operating expenses | 167,579 | 158,131 | 132,963 | ||||||||
| Operating income | 36,303 | 53,394 | 40,271 | ||||||||
| Other income (expense): | |||||||||||
| Interest income | 653 | 234 | 218 | ||||||||
| Interest expense | (1,552 | ) | (1,928 | ) | (22 | ) | |||||
| Other, net | 301 | (119 | ) | (445 | ) | ||||||
| Total other expense, net | (598 | ) | (1,813 | ) | (249 | ) | |||||
| Income from continuing operations before income taxes | 35,705 | 51,581 | 40,022 | ||||||||
| Income tax expense | 8,080 | 16,480 | 13,219 | ||||||||
| Income from continuing operations | 27,625 | 35,101 | 26,803 | ||||||||
| Discontinued operations: | |||||||||||
| Loss from discontinued operations before income taxes | (1,713 | ) | (1,077 | ) | (601 | ) | |||||
| Income tax benefit of discontinued operations | (355 | ) | (154 | ) | (400 | ) | |||||
| Loss from discontinued operations | (1,358 | ) | (923 | ) | (201 | ) | |||||
| Net income | $ | 26,267 | $ | 34,178 | $ | 26,602 | |||||
| Basic income per share from continuing operations | $ | 0.90 | $ | 1.13 | $ | 0.86 | |||||
| Basic loss per share from discontinued operations | (0.04 | ) | (0.03 | ) | (0.01 | ) | |||||
| Basic net income per share | $ | 0.86 | $ | 1.10 | $ | 0.85 | |||||
| Diluted income per share from continuing operations | $ | 0.89 | $ | 1.12 | $ | 0.85 | |||||
| Diluted loss per share from discontinued operations | (0.04 | ) | (0.03 | ) | (0.01 | ) | |||||
| Diluted net income per share | $ | 0.85 | $ | 1.09 | $ | 0.84 | |||||
| Shares used in per share calculations: | |||||||||||
| Basic | 30,671 | 31,032 | 31,288 | ||||||||
| Diluted | 31,010 | 31,301 | 31,589 | ||||||||
See accompanying notes to consolidated financial statements.
45
NAUTILUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 26,267 | $ | 34,178 | $ | 26,602 | |||||
| Other comprehensive income (loss): | |||||||||||
| Unrealized gain (loss) on marketable securities, net of income tax expense (benefit) of $(27), $5, and $1 | (56 | ) | 8 | 2 | |||||||
| Gain (loss) on derivative securities, effective portion, net of income tax expense (benefit) of $171, $(14), and $0 | 240 | (24 | ) | — | |||||||
| Foreign currency translation adjustment, net of income tax expense (benefit) of $1, $(5), and $17 | 774 | 126 | (1,021 | ) | |||||||
| Other comprehensive income (loss) | 958 | 110 | (1,019 | ) | |||||||
| Comprehensive income | $ | 27,225 | $ | 34,288 | $ | 25,583 | |||||
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Net (loss) income | $ | (22,431) | $ | 30,404 | $ | 59,848 | $ | (92,800) | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Unrealized (loss) gain on marketable securities, net of income tax expense of $13, $—, $— and $6 | (4) | (4) | (4) | 6 | |||||||||||||||||||
| Loss on derivative securities, effective portion, net of income tax benefit of $—, $—, $— and $139 | — | — | — | (223) | |||||||||||||||||||
| Foreign currency translation adjustment, net of income tax expense (benefit) of $13, $(5), $(32) and $(27) | (368) | (165) | 955 | 189 | |||||||||||||||||||
| Other comprehensive (loss) income | (372) | (169) | 951 | (28) | |||||||||||||||||||
| Comprehensive (loss) income | $ | (22,803) | $ | 30,235 | $ | 60,799 | $ | (92,828) | |||||||||||||||
See accompanying notes to consolidated financial statements.
46
NAUTILUS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
| Common Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity | |||||||||||||||
| Shares | Amount | |||||||||||||||||
| Balances at January 1, 2015 | 31,333 | $ | 8,033 | $ | 103,347 | $ | (308 | ) | $ | 111,072 | ||||||||
| Net income | — | — | 26,602 | — | 26,602 | |||||||||||||
| Unrealized gain on marketable securities, net of income tax expense of $1 | — | — | — | 2 | 2 | |||||||||||||
Foreign currency translation adjustment, net of income tax expense of $17 | — | — | — | (1,021 | ) | (1,021 | ) | |||||||||||
| Stock-based compensation expense | — | 1,484 | — | — | 1,484 | |||||||||||||
| Common stock issued under equity compensation plan, net of shares withheld for tax payments | 377 | 275 | — | — | 275 | |||||||||||||
| Common stock issued under employee stock purchase plan | 7 | 116 | — | — | 116 | |||||||||||||
| Tax benefit related to stock-based awards | — | 28 | — | — | 28 | |||||||||||||
| Repurchased shares | (712 | ) | (9,140 | ) | (2,427 | ) | — | (11,567 | ) | |||||||||
| Balances at December 31, 2015 | 31,005 | 796 | 127,522 | (1,327 | ) | 126,991 | ||||||||||||
| Net income | — | — | 34,178 | — | 34,178 | |||||||||||||
| Unrealized gain on marketable securities, net of income tax expense of $5 | — | — | — | 8 | 8 | |||||||||||||
| Loss on derivative securities, effective portion, net of income tax benefit of $(14) | — | — | — | (24 | ) | (24 | ) | |||||||||||
| Foreign currency translation adjustment, net of income tax benefit of $(5) | — | — | — | 126 | 126 | |||||||||||||
| Stock-based compensation expense | — | 2,613 | — | — | 2,613 | |||||||||||||
| Common stock issued under equity compensation plan, net of shares withheld for tax payments | 116 | 117 | — | — | 117 | |||||||||||||
| Common stock issued under employee stock purchase plan | 24 | 381 | — | — | 381 | |||||||||||||
| Tax benefit related to stock-based awards | — | 1,857 | — | — | 1,857 | |||||||||||||
| Repurchased shares | (320 | ) | (5,186 | ) | (204 | ) | — | (5,390 | ) | |||||||||
| Balances at December 31, 2016 | 30,825 | 578 | 161,496 | (1,217 | ) | 160,857 | ||||||||||||
| Net income | — | — | 26,267 | — | 26,267 | |||||||||||||
| Unrealized loss on marketable securities, net of income tax benefit of $(27) | — | — | — | (56 | ) | (56 | ) | |||||||||||
| Gain on derivative securities, effective portion, net of income tax expense of $171 | — | — | — | 240 | 240 | |||||||||||||
Foreign currency translation adjustment, net of income tax expense of $1 | — | — | — | 774 | 774 | |||||||||||||
| Stock-based compensation expense | — | 1,884 | (28 | ) | — | 1,856 | ||||||||||||
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 231 | (181 | ) | — | — | (181 | ) | |||||||||||
| Common stock issued under employee stock purchase plan | 37 | 487 | — | — | 487 | |||||||||||||
| Repurchased shares | (788 | ) | (2,768 | ) | (8,287 | ) | — | (11,055 | ) | |||||||||
| Balances at December 31, 2017 | 30,305 | $ | — | $ | 179,448 | $ | (259 | ) | $ | 179,189 | ||||||||
| Common Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Shareholders' Equity | |||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | 29,545 | $ | 215 | $ | 183,290 | $ | (909) | $ | 182,596 | |||||||||||||||||||||||
| Net loss | — | — | (92,800) | — | (92,800) | |||||||||||||||||||||||||||
| Unrealized gain on marketable securities, net of income tax expense of $6 | — | — | — | 6 | 6 | |||||||||||||||||||||||||||
| Loss on derivative securities, effective portion, net of income tax benefit of $139 | — | — | — | (223) | (223) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of income tax benefit of $27 | — | — | — | 189 | 189 | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | 837 | (218) | — | 619 | |||||||||||||||||||||||||||
| Common stock issued under equity compensation plan, net of shares withheld for tax payments | 135 | (32) | — | — | (32) | |||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 101 | 241 | — | — | 241 | |||||||||||||||||||||||||||
| Balances at December 31, 2019 | 29,781 | 1,261 | 90,272 | (937) | 90,596 | |||||||||||||||||||||||||||
| Net income | — | — | 59,848 | — | 59,848 | |||||||||||||||||||||||||||
| Unrealized loss on marketable securities, net of income tax expense of $— | — | — | — | (4) | (4) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of income tax benefit of $32 | — | — | — | 955 | 955 | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | 3,734 | — | — | 3,734 | |||||||||||||||||||||||||||
| Common stock issued under equity compensation plan, net of shares withheld for tax payments | 455 | (2,190) | — | — | (2,190) | |||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 94 | 256 | — | — | 256 | |||||||||||||||||||||||||||
| Balances at December 31, 2020 | 30,330 | 3,061 | 150,120 | 14 | 153,195 | |||||||||||||||||||||||||||
| Net income | — | — | 30,404 | — | 30,404 | |||||||||||||||||||||||||||
| Unrealized loss on marketable securities, net of income tax expense of $— | — | — | — | (4) | (4) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of income tax benefit of $5 | — | — | — | (165) | (165) | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | 1,172 | — | — | 1,172 | |||||||||||||||||||||||||||
| Common stock issued under equity compensation plan, net of shares withheld for tax payments | 246 | (2,057) | — | — | (2,057) | |||||||||||||||||||||||||||
| Balances at March 31, 2021 | 30,576 | 2,176 | 180,524 | (155) | 182,545 | |||||||||||||||||||||||||||
| Net loss | — | — | (22,431) | — | (22,431) | |||||||||||||||||||||||||||
| Unrealized loss on marketable securities, net of income tax expense of $13 | — | — | — | (4) | (4) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of income tax expense of $13 | — | — | — | (368) | (368) | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | 6,262 | — | — | 6,262 | |||||||||||||||||||||||||||
| Common stock issued under equity compensation plan, net of shares withheld for tax payments | 646 | (2,441) | — | — | (2,441) | |||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 46 | 486 | — | — | 486 | |||||||||||||||||||||||||||
| Balances at March 31, 2022 | 31,268 | $ | 6,483 | $ | 158,093 | $ | (527) | $ | 164,049 | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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NAUTILUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| (Loss) income from continuing operations | $ | (22,204) | $ | 30,581 | $ | 60,537 | $ | (92,295) | |||||||||||||||
| Loss from discontinued operations | (227) | (177) | (689) | (505) | |||||||||||||||||||
| Net (loss) income | (22,431) | 30,404 | 59,848 | (92,800) | |||||||||||||||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||||||||
| Depreciation and amortization | 8,615 | 2,017 | 9,448 | 10,811 | |||||||||||||||||||
| Provision for allowance for doubtful accounts | 414 | 852 | 332 | 19 | |||||||||||||||||||
| Inventory lower-of-cost-or-market/NRV adjustments | — | (163) | 2,391 | 770 | |||||||||||||||||||
| Stock-based compensation expense | 6,262 | 1,172 | 3,734 | 619 | |||||||||||||||||||
| Loss on asset dispositions | — | 157 | 709 | 1,191 | |||||||||||||||||||
| Loss on debt extinguishment | — | — | 230 | — | |||||||||||||||||||
| Loss on disposal group, goodwill and other intangible impairment charge | — | — | 20,668 | 72,008 | |||||||||||||||||||
| Loss on other investment in non-controlled affiliates impairment | — | — | 2,500 | — | |||||||||||||||||||
| Deferred income taxes, net of valuation allowances | (7,827) | 312 | (2,008) | (10,613) | |||||||||||||||||||
| Excess tax benefit related to stock-based awards | — | — | |||||||||||||||||||||
| Other | 586 | (619) | (832) | (90) | |||||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||||||||
| Trade receivables | 26,906 | 1,841 | (41,565) | (8,790) | |||||||||||||||||||
| Inventories | (41,774) | (16,813) | (9,584) | 13,237 | |||||||||||||||||||
| Prepaids and other assets | 7,993 | (5,871) | (6,682) | 3,012 | |||||||||||||||||||
| Income taxes receivable | (7,672) | 4,019 | (3,550) | 5,181 | |||||||||||||||||||
| Trade payables | (44,159) | 2,692 | 21,819 | (13,451) | |||||||||||||||||||
| Accrued liabilities and other liabilities, including warranty obligations | 6,521 | 4,807 | 14,202 | (3,677) | |||||||||||||||||||
| Net cash (used in) provided by operating activities | (66,566) | 24,807 | 71,660 | (22,573) | |||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Proceeds from sales and maturities of available-for-sale securities | 73,448 | — | — | 25,271 | |||||||||||||||||||
| Acquisition of business, net of cash acquired | (26,035) | (37,249) | (36,199) | — | |||||||||||||||||||
| Purchases of property, plant and equipment | (13,050) | (2,739) | (9,727) | (8,952) | |||||||||||||||||||
| Proceeds from the sale of disposal group | — | — | 21,410 | — | |||||||||||||||||||
| Purchases of other investments in non-controlled affiliates | — | — | — | (3,500) | |||||||||||||||||||
| Net cash provided by (used in) investing activities | 34,363 | (39,988) | (24,516) | 12,819 | |||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Proceeds from long-term debt | 65,238 | 335 | 45,758 | 32,968 | |||||||||||||||||||
| Payments on long-term debt | (49,930) | (327) | (45,101) | (50,667) | |||||||||||||||||||
| Payment of debt issuance costs | (577) | — | (1,842) | — | |||||||||||||||||||
| Payments on finance lease liabilities | (60) | — | — | — | |||||||||||||||||||
| Proceeds from employee stock purchases | 486 | 103 | 256 | 241 | |||||||||||||||||||
| Proceeds from exercise of stock options | 479 | — | 51 | 75 | |||||||||||||||||||
| Tax payments related to stock award issuances | (2,920) | (2,160) | (2,240) | (107) | |||||||||||||||||||
| Net cash provided by (used in) financing activities | 12,716 | (2,049) | (3,118) | (17,490) | |||||||||||||||||||
| Effect of exchange rate changes | (2,195) | (910) | 2,824 | 189 | |||||||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (21,682) | (18,140) | 46,850 | (27,055) | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 39,780 | 57,920 | 11,070 | 38,125 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 18,098 | $ | 39,780 | $ | 57,920 | $ | 11,070 | |||||||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||||||||
| Cash paid (received) for income taxes, net | $ | 13,983 | $ | (608) | $ | 17,300 | $ | (4,186) | |||||||||||||||
| Cash paid for interest | 655 | 124 | 889 | 1,197 | |||||||||||||||||||
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| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Income from continuing operations | $ | 27,625 | $ | 35,101 | $ | 26,803 | |||||
| Loss from discontinued operations | (1,358 | ) | (923 | ) | (201 | ) | |||||
| Net income | 26,267 | 34,178 | 26,602 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Asset impairment charge | 8,800 | — | — | ||||||||
| Depreciation and amortization | 8,643 | 7,874 | 3,412 | ||||||||
| Bad debt expense | 311 | 289 | 786 | ||||||||
| Inventory lower-of-cost-or-market/NRV adjustments | 1,067 | 245 | 1,583 | ||||||||
| Stock-based compensation expense | 1,856 | 2,613 | 1,484 | ||||||||
| Loss on asset disposals | 56 | 147 | 313 | ||||||||
| Deferred income taxes, net of valuation allowances | (8,556 | ) | 9,510 | 11,669 | |||||||
| Excess tax benefit related to stock-based awards | — | (1,857 | ) | (28 | ) | ||||||
| Other | (117 | ) | 5 | — | |||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade receivables | 2,516 | (694 | ) | (6,812 | ) | ||||||
| Inventories | (7,526 | ) | (3,110 | ) | (7,147 | ) | |||||
| Prepaids and other current assets | 1,080 | (1,415 | ) | 1,365 | |||||||
| Income taxes receivable | 3,214 | (2,792 | ) | (389 | ) | ||||||
| Trade payables | 449 | 6,464 | 4,506 | ||||||||
| Accrued liabilities, including warranty obligations | (3,044 | ) | (5,606 | ) | 3,776 | ||||||
| Net cash provided by operating activities | 35,016 | 45,851 | 41,120 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of business, net of cash acquired | — | (3,468 | ) | (114,062 | ) | ||||||
| Purchases of property, plant and equipment and intangible assets | (3,792 | ) | (4,656 | ) | (5,734 | ) | |||||
| Purchases of available-for-sale-securities | (88,413 | ) | (34,739 | ) | (61,933 | ) | |||||
| Proceeds from maturities of available-for-sale securities | 62,939 | 32,923 | 55,292 | ||||||||
| Proceeds from sales of available-for-sale securities | — | 71 | 3,602 | ||||||||
| Net cash used in investing activities | (29,266 | ) | (9,869 | ) | (122,835 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | — | — | 80,000 | ||||||||
| Payments on long-term debt | (16,000 | ) | (16,000 | ) | — | ||||||
| Proceeds from employee stock purchases | 487 | 381 | 116 | ||||||||
| Proceeds from exercise of stock options | 560 | 356 | 1,050 | ||||||||
| Tax payments related to stock award issuances | (741 | ) | (239 | ) | (775 | ) | |||||
| Excess tax benefit related to stock-based awards | — | 1,857 | 28 | ||||||||
| Payments for stock repurchases | (11,055 | ) | (5,390 | ) | (11,567 | ) | |||||
| Net cash provided by (used in) financing activities | (26,749 | ) | (19,035 | ) | 68,852 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,018 | 149 | (1,565 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | (19,981 | ) | 17,096 | (14,428 | ) | ||||||
| Cash and cash equivalents: | |||||||||||
| Beginning of year | 47,874 | 30,778 | 45,206 | ||||||||
| End of year | $ | 27,893 | $ | 47,874 | $ | 30,778 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for income taxes, net | $ | 11,630 | $ | 11,511 | $ | 1,308 | |||||
| Cash paid for interest | 1,545 | 1,920 | 22 | ||||||||
| Supplemental disclosure of non-cash investing activities: | |||||||||||
| Acquisition consideration owed but not yet paid | $ | — | $ | — | $ | 2,813 | |||||
| Capital expenditures incurred but not yet paid | 404 | 210 | 1,000 | ||||||||
| Supplemental disclosure of non-cash financing activities: | |||||||||||
| Loan fees incurred but not yet paid | $ | — | $ | — | $ | 36 | |||||
| Supplemental disclosure of non-cash investing activities: | |||||||||||||||||||||||
| Capital expenditures incurred but not yet paid | $ | 1,077 | $ | 534 | $ | 908 | $ | 420 | |||||||||||||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above:
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Cash and cash equivalents | $ | 12,872 | $ | 38,441 | $ | 56,581 | $ | 11,070 | |||||||||||||||
| Restricted cash | 1,339 | 1,339 | 1,339 | — | |||||||||||||||||||
| Other current assets - restricted, current | 3,887 | — | — | — | |||||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 18,098 | $ | 39,780 | $ | 57,920 | $ | 11,070 | |||||||||||||||
See accompanying notes to consolidated financial statements.
49
NAUTILUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Nautilus, Inc. and subsidiaries (collectively, "Nautilus","Nautilus," the "Company","Company," "we" or "us") was founded in 1986 and incorporated in the State of Washington in 1993. Our headquarters are located in Vancouver, Washington.
We are committedempower healthier living through individualized connected fitness experiences to providing innovative, quality solutions to help people achieve their fitness goals throughbuild a fit and healthy lifestyle.healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use, primarily in the U.S., Canada, and Europe. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus®, Bowflex®, Octane Fitness®, Schwinn®, JRNY® and and UniversalNautilus®.
We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers through television advertising, catalogs and the Internet.our websites. Our Retail business offers our products through a network of independent retail companies and specialty retailers with stores and websites located in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
Basis of Consolidation and Presentation
On December 30, 2020, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. This document reflects our fourth fiscal quarter, which ended March 31, 2022, of our fiscal year from April 1, 2021 through March 31, 2022.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and relate to Nautilus, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.
Discontinued Operations
Results from discontinued operations relate to the disposal of our former Nautilus® Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation at December 31, 2012. Although there was no revenue related to our former Commercial business during 2015from January 1, 2019 through 2017,March 31, 2022, we continue to have product liability and other legal expenses associated with product previously sold into the Commercial channel.
Results of operations related to the Commercial business have been presented in the consolidated financial statements as discontinued operations for all periods presented.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in the financial statements. Our critical accounting estimates relate to the following:
valuation. Actual results could differ from our estimates.
Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents held in bank accounts in excess of federally-insured limits and trade receivables. Trade receivables are generally unsecured and therefore collection is affected by the economic conditions in each of our principal markets.
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We rely on third-party contract manufacturers in Asia for substantially all of our products and for certain product engineering support. Business operations could be disrupted by natural disasters, difficulties in transporting products from non-U.S. suppliers, as well as political, social or economic instability in the countries where contract manufacturers or their vendors or customers conduct business. While any such contract manufacturing arrangement could be replaced over time, the temporary loss of the services of any primary contract manufacturer could delay product shipments and cause a significant disruption in our operations.
In the fiscal year ended March 31, 2022 ("fiscal 2022"), the year ended December 31, 2020 ("fiscal 2020") we had three vendors each individual accounted for more than 11%, but less than 23%, and for the three-month transition period ended March 31, 2021 we had 2 customers for more than 10%, but less than 50% of our trade payables.
We derive a significant portion of our net sales from a small number of our Retail customers. A loss of business from one or more of these large customers, if not replaced with new business, would negatively affect our operating results and cash flows. In the fiscal 2022 and for fiscal 2020 2 customers and for the three-month transition period ended March 31, 2021 one customer each of 2017, 2016 and 2015, one customerindividually accounted for more than 10%, but less than 15%18%, of our net sales. In the fiscal year ended March 31, 2022 ("fiscal 2022"), the year ended December 31, 2020 ("fiscal 2020") and for the three-month transition period ended March 31, 2021 we had three customers each individual accounted for more than 10%, but less than 39%, of our trade receivables.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less at purchase are considered to be cash equivalents. As of DecemberMarch 31, 2017, and 2016,2022, we did not have any cash equivalents. As of March 31, 2021, cash equivalents consisted of money market funds and commercial paper, andthat totaled $12.9$9.7 million and, $13.6 million, respectively.as of December 31, 2020, cash equivalents consisted of money market funds that totaled $14.9 million.
Restricted Cash
We are required by our banking partner to maintain a restricted bank account to cover for exposures on corporate credit cards and letters of credits. The use of these funds are restricted until the exposure with the banking partner is closed.
Other Assets - Restricted, Current
We have an escrow account for contingent consideration to be paid to the former owners of VAY AG upon achievement of continued employment over an 18 month period ending on March 17, 2023. For additional information, refer to Note 2, Business Acquisition.
Available-For-Sale Securities
We classify our marketable debt securities as available-for-sale and, accordingly, record them at fair value. Marketable securities with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is availableexpected to be used for current operations. Unrealized holding gains and losses, which are immaterial, are excluded from earnings and are reported net of tax in other comprehensive income until realized. Dividend and interest income is recognized when earned. Realized gains and losses, which were not material in 2017fiscal 2022, the transition period ended March 31, 2021 or 2016,fiscal 2020, are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
We periodically evaluate whether declines in fair values of our investments below their cost are "other-than-temporary." This evaluation consists of qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery occurs.
For additional information, refer to Note 4,5, Fair Value Measurements.
Derivative Securities
We record our derivative securities at fair value, and our portfolio currently consists of an interest rate swap contract and foreign currency forward contracts. The fair value of ourOur interest rate swap agreement, which iswas classified as a cash flow hedge, representswas terminated as of June 30, 2019 and the estimated receipts or payments that would be made to terminate the agreement. The amounts$0.1 million, net of tax, amount related to the cash flow hedge are recorded as deferred gains or losses in our consolidated balance sheets with the offset recorded inwas reclassified from accumulated other comprehensive loss, net of tax.
We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. A hypothetical 10% increase in interest rates, or a 10% movement in the
51
currencies underlying our foreign currency derivative positions, would not have material impacts on our results of operations, financial position or cash flows. Gains and losses on foreign currency forward contracts are recognized in the Other, net line of our consolidated statements of operations.
We do not enter into derivative instruments for any purpose other than to manage our interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments. For additional information, refer to Note 7, Derivatives.
Trade Receivables
Accounts receivable primarily consists of trade receivables due from our Retail segment customers. We determine an allowance for doubtful accounts based on historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. For additional information, refer to Note 8, Trade Receivables.
Inventories
Inventories are stated at the lower of cost and net realizable value ("NRV"), with cost determined based on the first-in, first-out method. We establish inventory allowances for excess, slow-moving and obsolete inventory based on inventory levels, expected product life and forecasted sales. Inventories are written down to NRV based on historical demand, competitive factors, changes in technology and product lifecycles. For additional information, refer to Note 9, Inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Improvements or betterments which add new functionality or significantly extend the life of an asset are capitalized. Software costs related to an asset developed for internal use are capitalized after the preliminary project stage, management has committed to the completion of the project and it is probable the project will be complete and used as intended. Expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired, or otherwise disposed of, and the related accumulated depreciation, are removed from the accounts at the time of disposal. Gains and losses resulting from asset sales and dispositions are recognized in the period in which assets are disposed. Depreciation is recognized, using the straight-line method, over the lesser of the estimated useful lives of the assets or, in the case of leasehold improvements, the lease term, including renewal periods if we expect to exercise our renewal
options. Depreciation on automobiles, computer software and equipment, machinery and equipment and furniture and fixtures is determined based on estimated useful lives, which generally range from two-to-seven years, and leasehold improvements five-to-twenty years and furniture and fixtures which generally range from five-to-twenty years. For additional information, refer to Note 10, threeProperty, Plant and Equipment-to-seven years..
Business Combinations
We allocate the purchase price of a business acquisition to the assets acquired and liabilities assumed based upon their estimated fair values at the business combination date. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires us to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. Unanticipated events or circumstances may occur that could affect the accuracy of our fair value estimates, and under different assumptions, the resulting valuations could be materially different, which could impact the operating results we report.
Goodwill
Goodwill consists of the excess of acquisition costsconsideration over the fair values of net assets acquired in business combinations. It is not amortized, but rather is tested at the reporting unit level at least annually for impairment or more frequently if triggering events or changes in circumstances indicate impairment. Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specific events, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined in the most recent quantitative assessment. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative impairment analysis is performed. A quantitative impairment analysis involves estimating the fair value of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions.
52
We make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, growth rates and terminal value. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also use market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables. If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill.
If the facts and determined no impairments were indicatedcircumstances surrounding our assumptions change, our goodwill impairment analysis may fail. Assumptions and estimates to determine far values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in those years. We evaluate goodwill at the reporting unit level. Our goodwill asset related to our Canadian subsidiary is attributable to our Direct reporting unit,business strategy and our goodwill relatedinternal forecasts. For example, if our future operating results do not meet current forecasts or if we continue to the Octane acquisitionexperience a sustained decline in our market capitalization, adjusted for estimated control premium, that is attributabledetermined to be indicative of a reduction in fair value of one or more of our Retail reporting unit. For further information regarding goodwill, see Note 9, units, we may be required to record future impairment charges for goodwill. An impairment could have a material effect on our consolidated balance sheet and results of operations.
Other Intangible Assets
Indefinite-lived intangible assets consist of acquired trademarks, specifically trade names. Indefinite-lived intangible assets are stated at cost and are not amortized; instead, they are tested for impairment at least annually. We assess the value of indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including applicable key assumptions also used in the quantitative assessment listed below. If we determine that it is more likely than not that an indefinite-lived intangible assets is impaired, the quantitative approach is used to assess the asset fair value and the amount of the impairment. We review our indefinite-lived trademarks for impairment in the fourth quarter of each year andor when events or changes in circumstances indicate that the assets may be impaired. The fair value of trademarks is estimated using the relief-from-royalty method to estimate the value of the cost savings and a discounted cash flows method to estimate the value of future income. The sum of these two values for each trademark is the fair value of the trademark. If the carrying amount of trademarks exceeds the estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value.
We tested our indefinite-lived trademarks for impairment in the fourth quartersquarter of 2017, 2016fiscal 2022 and 2015. During the fourth quarter of 2017,fiscal 2020. During the third quarter of fiscal 2020, we identified impairment indicators insold Octane Fitness and the related other intangible assets were reduced by $32.0 million for our Octane Fitness brand name originally acquired through the Octane Fitness acquisition on December 31, 2015. Ongoing weakness in the specialty retail channel, as a result of retailer consolidation, has had a negative impact on Octane branded sales and projected growth trends. We utilized the relief-from-royalty method to quantify the impairment, resulting in an $8.8 million non-cash impairment charge for 2017.name. The impairment charge iswas recorded inas operating expenses on the consolidated statementsConsolidated Statements of operations.Operations. We determinedperform our annual other intangible asset evaluation, which resulted in no impairment was indicated in 2016 and 2015charge recognized for our indefinite-lived intangible assets.March 31, 2022.
Definite-lived intangible assets, primarily acquired trade names, customer relationships, patents and patent rights, are stated at cost, net of accumulated amortization, and are evaluated for impairment as discussed below under Impairment of Long-Lived Assets. We recognize amortization expense for our definite-lived intangible assets on a straight-line basis over the estimated useful lives. For further information regarding other intangible assets, see Note 10,13, Other Intangible Assets.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and definite-lived intangible assets, are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. When such an event or condition occurs, we estimate the future undiscounted cash flows to be derived from the use and eventual disposition of the asset to determine whether a potential impairment exists. If the carrying value exceeds estimated
53
future undiscounted cash flows, we record impairment expense to reduce the carrying value of the asset to its estimated fair value. NoIn accordance ASC 360 — Property, Plant, and Equipment, we performed a test for recoverability of our assets as the goodwill and indefinite-lived intangible asset impairment chargesfrom the decline in our market value relative to the market and our industry identified a long-lived asset impairment indicator in 2019. For a long-lived assets or disposal group classified as held-for-sale to be disposed of, the carrying value is determined in a similar manner, except that fair values are reduced for the cost to sell. The assets and liabilities of a disposal group classified as held-for-sale were recordedpresented separately in 2017, 2016the asset and 2015.liability sections, respectively, of the Consolidated Balance Sheets. The disposal group was structured as a sale of the subsidiary shares and asset sale for the international assets. Based on our testing, we determined that our long-lived assets were recoverable, and a step two impairment charge was not required in fiscal 2022, the three-month transition period ended March 31, 2021 or fiscal 2020.
EquityInvestments
ASU 2016-01 Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in earnings. We do not hold any equity investments where we use quoted market prices to determine the fair values. For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. During the quarter ended December 31, 2020 we recognized a non-cash impairment charge of $2.5 million as a component of other, net on our Consolidated Statements of Operations as we made an assessment of one equity investment after observing impairment indicators upon review of the most recent financial statements and third-party valuation reports, as well as noting a significant adverse change in the general market conditions in which the equity investee operates.
Share Repurchases
Shares of our common stock may be repurchased from time to time as authorized by our Board of Directors. Repurchases may be made in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded from existing cash balances, and repurchased shares are retired and returned to unissued authorized shares. These repurchases are accounted for as reductions to our common stock to the extent available with remaining amounts allocated against retained earnings. As of March 31, 2022, we did not have an authorized share repurchase plan.
Revenue Recognition
Our Direct and Retail revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For our Direct channel, control is transferred when products are shipped to customers as the entity has fulfilled the promise to transfer the goods. For Retail, control is transferred when contractual shipping terms are performed for the customer, generally upon our delivery to the carrier, in accordance with the terms of a sales contract.
Our product sales and shipping revenues are recorded when products are shipped and title passes to customers. In most instances, Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss to the customer upon our delivery to the carrier. For Direct sales, revenue is generally recognized when products are shipped. Revenue is recognizedreported net of applicable sales incentives, such as promotional discounts, returns allowances, contractual rebates, and return allowances.consideration payable to our customers. We estimate the revenue impact of retail sales incentive programs based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time of the sale.
We estimate our liability for product returns based on historical experience, and record the expected customer refund liability as a reduction of revenue, and the expected inventory right of recovery, net of estimated scrap, as a reduction of cost of sales. 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.
We provide standard assurance-type warranties on our products which cover defective materials or nonconforming products, and is included with each product at no additional charge. In addition, we offer service-type/extended warranties for an additional fee to our Direct channel customers and Retail specialty and commercial customers. These warranty contracts provide coverage on labor and parts beyond the standard assurance warranty period.
For our product sales, services, and freight and delivery fees, we are the principal in the contract and recognize revenue at a point in time. For our Direct channel extended warranty contracts, we are the agent and recognize
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revenue on a net basis because our performance obligation is to facilitate the arrangement between our customers and the third-party performance obligor.
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied. Revenue generated from subscriptions is recorded in our Direct segment.
We offer free trials of subscriptions, bundled with product offerings (e.g., subscription for premium content). For these types of transactions that involve multiple performance obligations, the transaction price require allocations to the distinct performance obligation, as the free trial provides a material right. The transaction price is then allocated to each performance obligation based on standalone selling price. We determine stand-alone selling price based on prices charged to customers. Breakage is factored into the determination of the stand-alone selling price of a subscription. Breakage or activation rate, is defined as a percentage of those that never activate a free-trial offering.
Some of our contracts with customers contain multiple performance obligations. For customer contracts that include multiple performance obligations, we account for individual performance obligations if they are distinct. We allocate the transaction price to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price based on prices charged to customers on standalone sales or using expected cost plus margin.
Significant judgement, such as breakage or activation rate, is factored into the determination of the stand-alone selling price of a subscription. Breakage or activation rate, is defined as a percentage of those that never activate a free-trial offering.
Payment terms for our retail partners depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the retail partner. Payment is due at the time of sale for our e-commerce transactions.
Deferred net revenue occurs because sales transactions include future update rights and performance obligations, which are subject to a recognition period. This balance increases from period to period by revenue that is deferred from current sales with these types of service obligations and is reduced by the recognition of revenue from prior sales that were deferred. Generally, revenue is recognized as the services are provided.
Many Direct business customers finance their purchases through a third-party credit provider, for which we pay a commission or financing fee to the credit provider. Revenue for such transactions is recognized based on the sales price charged to the customer, net of promotional discounts, and the related commission or financing fee is included in selling and marketing expense.
Exemptions and Elections
We apply the practical expedient as per ASC 606-10-50-14 and do not disclose information related to remaining performance obligations due to their original expected durations are one year or less.
We expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded in selling and marketing expense.
We generally account for our shipping and handling activities as a fulfillment activity, consistent with the timing of revenue recognition; that is, when our customer takes control of the transferred goods. In the event that a customer were to take control of a product prior to shipment, we make an accounting policy election to treat such shipping and handling activities as a fulfillment cost. For additional information, see Note 5, Revenues.
Sales Discounts and Returns Allowance
Product sales and shipping revenues are reported net of promotional discounts and return allowances. We estimate the revenue impact of retail sales incentive programs based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time of the sale. We estimate our liability for product returns based on historical experience, and record the expected obligationcustomer refund liability as a reduction of revenue.revenue, and the expected inventory right of recovery, net of estimated scrap, as a reduction of cost of sales. 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.
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Activity in our sales discounts and returns allowance was as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Balance, beginning | $ | 6,348 | $ | 6,411 | $ | 4,385 | $ | 4,419 | |||||||||||||||
| Charges to reserve | 49,983 | 6,337 | 22,009 | 18,311 | |||||||||||||||||||
| Reductions for sales discounts and returns | (44,152) | (6,400) | (19,983) | (18,345) | |||||||||||||||||||
| Balance, ending | $ | 12,179 | $ | 6,348 | $ | 6,411 | $ | 4,385 | |||||||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance, January 1 | $ | 5,901 | $ | 5,677 | $ | 4,296 | |||||
| Charges to reserve | 18,377 | 12,935 | 16,700 | ||||||||
| Reductions for sales discounts and returns | (17,358 | ) | (12,711 | ) | (15,569 | ) | |||||
| Business acquisition (Note 2) | — | — | 250 | ||||||||
| Balance, December 31 | $ | 6,920 | $ | 5,901 | $ | 5,677 | |||||
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and excluded from net sales.
Shipping and Handling Fees
Shipping and handling fees billed to customers are recorded net of discounts and included in both net sales and cost of sales. We generally account for our shipping and handling activities as a fulfillment activity, consistent with the timing of revenue recognition; that is, when our customer takes control of the transferred goods.
Cost of Sales
Cost of sales primarily consists of: inventory costs; royalties paid to third parties; employment and occupancy costs of warehouse and distribution facilities, including depreciation of improvements and equipment; transportation expenses; product warranty expenses; distribution information systems expenses; and allocated expenses for shared administrative functions.
Product Warranty Obligations
Our products carry defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs of supplying and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from thirty days to, in limited circumstances, the lifetime of certain product components. We record a liability at the time of sale for the estimated costs of fulfilling future warranty claims. If necessary, we adjust the liability for specific warranty-related matters when they become known and are reasonably estimable. Estimated warranty expense is included in cost of sales, based on historical warranty claim experience and available product quality data. Warranty expense is affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer, product failure rates, and higher or lower than expected repair costs. If warranty expense differs from previous estimates, or if circumstances change such that the assumptions inherent in previous estimates are no longer valid, the amount of product warranty obligations is adjusted accordingly.
Litigation and Loss Contingencies
From time to time, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur. We record expenses for litigation and loss contingencies as a component of general and administrative expense when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. However, if the loss (or an additional loss in excess of the accrual)
is at least a reasonable possibility and material, then we disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannot be made.
Advertising and Promotion
We expense our advertising and promotion costs as incurred. Production costs of television advertising commercials are recorded in prepaids and other current assets until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs are included in selling and marketing expenses and totaled $66.4$61.5 million, $60.7$12.3 million, $36.3 million and $54.8$46.8 million for the years endedfiscal December 31, 20172022, the three-month transition period ended
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March 31, 2021, fiscal 2020 and 2015,fiscal 2019, respectively. Prepaid advertising and promotion costs were $1.5$1.6 million, $4.7 million and $3.5$0.6 million as of for the fiscal year ended March 31, 2022, the three-month transition period ended March 31, 2021, and the year ended December 31, 2017 and 2016,2020, respectively.
Research and Development
Internal research and development costs, which primarily consist of salaries and wages, employee benefits, expenditures for materials, and fees to use licensed technologies, are expensed as incurred. Third-party research and development costs for products under development or being researched, if any, are expensed as the contracted work is performed. In addition, we capitalizeperformed. Improvements or betterments which add new functionality or significantly extend the life of an asset are capitalized. Software costs related to develop softwarean asset developed for internal use in accordance with accounting guidance.are capitalized after the preliminary project stage, management has committed to the completion of the project and it is probable the project will be complete and used as intended.
Income Taxes
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and their respective tax bases.liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are expected to be included, as income or expense, in the applicable tax return. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the enactment. Valuation allowances are provided against deferred income tax assets if we determine it is more likely than not that such assets will not be realized.
Unrecognized Tax Benefits
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination, including resolutions of any related appeals or litigation. We recognize tax-related interest and penalties as a component of income tax expense.
Foreign Currency Translation
We translate the accounts of our non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses, gains and losses are translated at weighted-average exchange rates during the year; and assets and liabilities are translated at the exchange rate on the balance sheet date. Translation gains and losses are reported in our consolidated balance sheetsConsolidated Balance Sheets as a component of accumulated other comprehensive (loss) income.
Gains and losses arising from foreign currency transactions, including transactions between us and our non-U.S. subsidiaries, are recorded as a component of other income (expense) in our consolidated statementsConsolidated Statements of operations.Operations.
Fair Value of Financial Instruments
The carrying values of cash, and cash equivalents and restricted cash, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fair value due to their short maturities.
For additional information on financial instruments recorded at fair value on a recurring basis as of DecemberMarch 31, 2017 and 2016,2022, refer to Note 4,6, Fair Value Measurements.
Stock-Based Compensation
We recognize stock-based compensation expense on a straight-line basis over the applicable vesting period, based on the grant-date fair value of the award. To the extent a stock-based award is subject to performance conditions, the amount of expense recorded in a given period, if any, reflects our assessment of the probability of achieving the performance targets.
Fair value of stock options isand shares subject to our employee stock purchase plan are estimated using the Black-Scholes-Merton optionBlack-Scholes valuation model; fair value of performance share unit ("PSU") awards, restricted stock unit ("RSU") awards and restricted stock awards ("RSA") is based on the closing market price on the day preceding the grant.
Shares to be issued upon the exercise of stock options or the vesting of stock awards will come from newly issued shares.
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Income (Loss) Per Share Amounts
Basic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method. If there is a loss from continuing operations, diluted earnings per share is the same as basic earnings per share.
Newly-Adopted Pronouncements
ASU 2017-042019-12
In January 2017,December 2019, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other2019-12, “Income Taxes (Topic 350) -740): Simplifying the TestAccounting for Goodwill Impairment."Income Taxes.” The amendments in ASU 2017-04 simplifies2019-12 introduce the subsequent measurementfollowing new guidance: (1) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax; and (2) provides guidance to evaluate whether a step-up in tax basis of goodwill by eliminating Step 2relates to a business combination in which book goodwill was recognized or a separate transaction. The amendments in ASU 2019-12 make changes to the following current guidance: (1) making an intra-period allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the goodwill impairment test. An entity should perform its annual, orequity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim goodwill impairment test by comparingperiods; and (4) determining how to apply the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocatedincome tax guidance to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.franchise taxes that are partially based on income. ASU 2017-042019-12 is effective for public companies'business entities' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early2020 with early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017.permitted. Our early adoption of ASU 2017-04 for our annual goodwill impairment testing as of October 1, 2017 did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Pronouncements Not Yet Adopted
ASU 2020-04 and ASU 2015-112021-01
In July 2015,March 2020, the FASB issued ASU 2015-11, “Simplifying2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accountingtransition from reference rates that are expected to be discontinued. This guidance is applicable for the valuation of all inventory not accounted for using the last-in, first-outour borrowing instruments, which use London Inter-bank Offered Rate (“LIFO”LIBOR”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11as a reference rate, which is effective for public companies' annual periods, including interim periods within those fiscal years, beginning afteron March 12, 2020, and we may elect to apply the amendments prospectively through December 15, 2016 on a prospective basis. Early adoption is permitted. Our31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. We do not expect the adoption of ASU 2015-11 in January 2017 did notthis guidance to have a material effectimpact on our financial position, results of operations orand cash flows.
ASU 2017-122020-01
In August 2017,January 2020, the FASB issued ASU 2017-12, "Derivatives2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 provides better alignment of an entity's risk management activities and financial reporting of hedges through changes to both the designation and measurement guidance for qualifying hedging relationships. In addition, the.” The amendments in ASU 2017-12 also simplify2020-01 clarify certain interactions between the recognitionguidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and presentationthe guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the effectsforward contract or exercise of the hedging instrumentpurchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and the hedged item in the financial statements to increase the understandabilityincreasing comparability of the results of an entity's intended hedging strategies.accounting for these interactions. ASU 2017-122020-01 is effective for public companies' fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, beginning after
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, "Financial“Financial Instruments -– Credit Losses (Topic 326) -: Measurement of Credit Losses on Financial Instruments." The amendments in” ASU 2016-13 replace the incurred loss impairment methodology in current GAAP withrequires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November
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2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. ASU 2016-13 is effective for public companies' annual periods, including interim periods within those fiscal years beginning after December 15, 2019, using a modified-retrospective approach, with certain exceptions. Early adoption is permitted. While we2022, including interim periods within those years. We do not expect the adoption of ASU 2016-13 tothis guidance would have a material effect on our business, we are evaluating any potential impact that adoption of ASU 2016-13 may have on our financial position, results of operations orand cash flows.
(2) BUSINESS ACQUISITION
On December 31, 2015,September 17, 2021, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane"VAY AG (“VAY”) for an aggregate base purchase price of $115.0$26.9 million plus net adjustments for working capital and cash acquired on the closing date. We funded the acquisition through an $80.0 million term loan andusing cash on hand. BasedHeadquartered in Brooklyn Park, Minnesota, Octane isZurich, Switzerland, VAY specializes in computer vision and AI technology solutions and has developed software solutions for human motion analysis using any normal RGB (red-green-blue) camera from a leaderdevice, such as a laptop, smartphone, or tablet. With a mission to democratize professional human motion analysis, VAY enables clients in zero-impact training withfitness and health industries to understand and analyze human movement, providing personalized feedback on repetitions and form in real-time.
We accounted for the transaction as a linebusiness combination. Goodwill recorded at the time of fitness equipment focused on Retail specialty and commercial channels. The acquisition of Octane strengthened$24.5 million represents the excess of the purchase price over the fair value of the net tangible and diversifiedintangible assets and liabilities assumed and is not deductible for tax purposes. Goodwill recorded in connection with this acquisition is primarily attributable to VAY's intellectual property base, employee workforce and application to future digital technologies. Acquired assets and liabilities assumed were recorded at estimated fair value on the acquisition date.
Total acquisition costs for fiscal 2022 were $1.0 million and were expensed in general and administrative costs. Since the acquisition occurred on September 17, 2021, no material amount of net sales or net income related to theVAY business was included in our brand portfolio, broadenedreported March 31, 2022 financial statements.
The sellers of VAY have the opportunity to earn additional contingent consideration subject to the achievement of continued employment over an 18 months month period for a total of twenty software engineers. The contingent consideration arrangement of $3.9 million will be paid to the former owners of VAY upon achievement of these milestones and recognized as compensatory expense over the service period. An escrow account was funded for the contingency consideration and is reported on the Consolidated Balance Sheets as Other current assets - restricted, current.
The fair value of acquired technology, which was determined at the acquisition date, primarily uses the cost approach. Other third party costs were also provided and considered in our distributionanalysis, where appropriate. In addition to the costs to reproduce each application, a developer's profit, an opportunity cost and deepened our talent pool. Octane's business is highly complementaryan obsolescence factor were considered. The developer's profit represents the profit margin on a market participate developer's investment in the material, labor and overhead costs necessary to our existing business from both product and channel perspectives.develop the intangible asset.
Purchase Price Allocation
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Table of goodwill of $59.7 million, all of which was assigned to the Retail segment. The goodwill is not deductible for income tax purposes.Contents
The following table summarizes the preliminary fair values of the net assets acquired and liabilities assumed as ofand measurement period adjustments since September 17, 2021, the acquisition date including all measurement period adjustments (in thousands):
| Preliminary valuation at September 17, 2021 | Measurement period adjustments | Adjusted valuation at March 31, 2022 | |||||||||||||||
| Cash | $ | 230 | $ | 637 | $ | 867 | |||||||||||
| Accounts receivable | 9 | — | 9 | ||||||||||||||
| Prepaid expenses | 15 | (2) | 13 | ||||||||||||||
| Deferred tax assets | 58 | 1 | 59 | ||||||||||||||
| Developed technology (included in property, plant and equipment) | 3,000 | — | 3,000 | ||||||||||||||
| Identifiable assets acquired | 3,312 | 636 | 3,948 | ||||||||||||||
| Accrued liabilities | 187 | 722 | 909 | ||||||||||||||
| Unearned revenue | 53 | 3 | 56 | ||||||||||||||
| Deferred tax liabilities, non-current | 591 | — | 591 | ||||||||||||||
| Total liabilities assumed | 831 | 725 | 1,556 | ||||||||||||||
| Net identifiable assets acquired | 2,481 | (89) | 2,392 | ||||||||||||||
| Goodwill | 24,508 | 2 | 24,510 | ||||||||||||||
| Total assets acquired | $ | 26,989 | $ | (87) | $ | 26,902 | |||||||||||
| Final valuation at December 31, 2016 | |||
| Cash | $ | 7,759 | |
| Accounts receivable | 12,476 | ||
| Inventories | 13,134 | ||
| Prepaid expenses | 885 | ||
| Deferred tax assets | 1,303 | ||
| Property, plant and equipment | 3,372 | ||
| Intangible assets | 63,100 | ||
| Total assets acquired | 102,029 | ||
| Accounts payable | 6,497 | ||
| Accrued liabilities | 2,968 | ||
| Warranty obligations | 5,550 | ||
| Deferred tax liabilities, non-current | 21,033 | ||
| Other non-current liabilities | 390 | ||
| Total liabilities assumed | 36,438 | ||
| Net identifiable assets acquired | 65,591 | ||
| Goodwill | 59,705 | ||
| Net assets acquired | $ | 125,296 | |
| (unaudited) | ||||||||
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net sales | $ | 406,039 | $ | 400,078 | ||||
| Net income | 35,683 | 29,352 | ||||||
| Net income per share: | ||||||||
| Basic | $ | 1.15 | $ | 0.94 | ||||
| Diluted | 1.14 | 0.93 | ||||||
(3) DISCONTINUED OPERATIONS
Following is a summary of certain financial information regarding our discontinued operations (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Loss from discontinued operations before income taxes | $ | (198) | $ | (82) | $ | (162) | $ | (206) | |||||||||||||||
| Income tax expense | 29 | 95 | 527 | 299 | |||||||||||||||||||
| Total loss from discontinued operations | $ | (227) | $ | (177) | $ | (689) | $ | (505) | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Loss from discontinued operations before income taxes | $ | (1,713 | ) | $ | (1,077 | ) | $ | (601 | ) | ||
| Income tax benefit | (355 | ) | (154 | ) | (400 | ) | |||||
| Total loss from discontinued operations | $ | (1,358 | ) | $ | (923 | ) | $ | (201 | ) | ||
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(4) TRANSITION PERIOD
We are presenting our litigationconsolidated financial statements for the three-month period ended March 31, 2021. The following tables provide certain unaudited comparative financial information for the same period of the prior year.
| Three-Months Ended March 31, | |||||||||||||||||||||||
| 2021 | (unaudited) 2020 | ||||||||||||||||||||||
| Net sales | $ | 206,075 | $ | 93,722 | |||||||||||||||||||
| Cost of sales | 126,984 | 58,125 | |||||||||||||||||||||
| Gross profit | 79,091 | 35,597 | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling and marketing | 23,480 | 24,686 | |||||||||||||||||||||
| General and administrative | 12,060 | 7,656 | |||||||||||||||||||||
| Research and development | 3,843 | 3,815 | |||||||||||||||||||||
| Total operating expenses | 39,383 | 36,157 | |||||||||||||||||||||
| Operating income (loss) | 39,708 | (560) | |||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 45 | 2 | |||||||||||||||||||||
| Interest expense | (214) | (627) | |||||||||||||||||||||
| Other, net | (1,363) | 41 | |||||||||||||||||||||
| Total other expense, net | (1,532) | (584) | |||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | 38,176 | (1,144) | |||||||||||||||||||||
| Income tax expense (benefit) | 7,595 | (3,446) | |||||||||||||||||||||
| Income from continuing operations | 30,581 | 2,302 | |||||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (177) | (118) | |||||||||||||||||||||
| Net income | $ | 30,404 | $ | 2,184 | |||||||||||||||||||
| Basic income per share from continuing operations | $ | 1.01 | $ | 0.08 | |||||||||||||||||||
| Basic loss per share from discontinued operations | (0.01) | — | |||||||||||||||||||||
Basic net income per share(1) | $ | 1.00 | $ | 0.07 | |||||||||||||||||||
| Diluted income per share from continuing operations | $ | 0.94 | $ | 0.08 | |||||||||||||||||||
| Diluted loss per share from discontinued operations | (0.01) | — | |||||||||||||||||||||
Diluted net income per share(1) | $ | 0.93 | $ | 0.07 | |||||||||||||||||||
| Shares used in per share calculations: | |||||||||||||||||||||||
| Basic | 30,416 | 29,796 | |||||||||||||||||||||
| Diluted | 32,642 | 30,584 | |||||||||||||||||||||
(1) May not add due to rounding.
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| Three-Months Ended March 31, | |||||||||||
| 2021 | (unaudited) 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Income from continuing operations | $ | 30,581 | $ | 2,302 | |||||||
| Loss from discontinued operations | (177) | (118) | |||||||||
| Net income | 30,404 | 2,184 | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 2,017 | 2,810 | |||||||||
| Provision for allowance for doubtful accounts | 852 | 374 | |||||||||
| Inventory lower-of-cost-or-market/NRV adjustments | (163) | 982 | |||||||||
| Stock-based compensation expense | 1,172 | 564 | |||||||||
| Loss on asset dispositions | 157 | — | |||||||||
| Loss on debt extinguishment | — | 230 | |||||||||
| Deferred income taxes, net of valuation allowances | 312 | 6,029 | |||||||||
| Other | (619) | 329 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade receivables | 1,841 | 20,265 | |||||||||
| Inventories | (16,813) | 18,945 | |||||||||
| Prepaids and other assets | (5,871) | 1,934 | |||||||||
| Income taxes receivable | 4,019 | (9,678) | |||||||||
| Trade payables | 2,692 | (40,271) | |||||||||
| Accrued liabilities and other liabilities, including warranty obligations | 4,807 | 1,629 | |||||||||
| Net cash provided by operating activities | 24,807 | 6,326 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of available-for-sale securities | (37,249) | — | |||||||||
| Purchases of property, plant and equipment | (2,739) | (1,694) | |||||||||
| Net cash used in investing activities | (39,988) | (1,694) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | 335 | 44,142 | |||||||||
| Payments on long-term debt | (327) | (30,286) | |||||||||
| Payment of debt issuance costs | — | (1,823) | |||||||||
| Proceeds from employee stock purchases | 103 | — | |||||||||
| Tax payments related to stock award issuances | (2,160) | (44) | |||||||||
| Net cash (used in) provided by financing activities | (2,049) | 11,989 | |||||||||
| Effect of exchange rate changes | (910) | (1,235) | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (18,140) | 15,386 | |||||||||
| Cash and cash equivalents at beginning of period | 57,920 | 11,070 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 39,780 | $ | 26,456 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash (received) paid for income taxes, net | $ | (608) | $ | 43 | |||||||
| Cash paid for interest | 124 | 238 | |||||||||
| Supplemental disclosure of non-cash investing activities: | |||||||||||
| Capital expenditures incurred but not yet paid | $ | 534 | $ | 577 | |||||||
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(5) REVENUES
Our revenues from contracts with Biosig Instruments, Inc. ("Biosig") was settled. The litigation began in 2004customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Product sales | $ | 567,914 | $ | 199,755 | $ | 534,758 | $ | 296,447 | |||||||||||||||
| Extended warranties and services | 7,053 | 2,860 | 8,157 | 6,691 | |||||||||||||||||||
Other(1) | 14,567 | 3,460 | 9,645 | 6,147 | |||||||||||||||||||
| Net sales | $ | 589,534 | $ | 206,075 | $ | 552,560 | $ | 309,285 | |||||||||||||||
(1) Other revenue is primarily subscription revenue, freight and alleged patent infringement in connection with our incorporation of heart rate monitors into certain cardio productsdelivery and royalty income.
Subscriptions
Sales of our former Commercial business. subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied. Revenue generated from subscriptions is recorded in our Direct segment.
We paid Biosig $1.2offer free trials of subscriptions, bundled with product offerings (e.g., subscription for premium content). For these types of transactions that involve multiple performance obligations, the transaction price require allocations to the distinct performance obligation, as the free trial provides a material right. The transaction price is then allocated to each performance obligation based on standalone selling price. We determine stand-alone selling price based on prices charged to customers. Breakage is factored into the determination of the stand-alone selling price of a subscription. Breakage or activation rate, is defined as a percentage of those that never activate a free-trial offering.
Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| United States | $ | 460,237 | $ | 156,607 | $ | 461,521 | $ | 256,182 | |||||||||||||||
| Canada | 74,883 | 26,987 | 43,196 | 24,768 | |||||||||||||||||||
| Europe, the Middle East and Africa | 41,026 | 18,477 | 36,166 | 17,303 | |||||||||||||||||||
| All other | 13,388 | 4,004 | 11,677 | 11,032 | |||||||||||||||||||
| Net sales | $ | 589,534 | $ | 206,075 | $ | 552,560 | $ | 309,285 | |||||||||||||||
As of March 31, 2022, estimated revenue expected to be recognized in the future totaled $32.9 million, underprimarily related to customer order backlog, which includes firm orders for future shipment and unfulfilled orders to our Retail customers, as well as unfulfilled consumer orders within the settlement,Direct channel. As of March 31, 2022, Retail orders were $32.1 million, as retailers are now ordering closer to need compared to last year and Direct orders of $0.8 million as product demand declines. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers, and net of current promotional programs and sales discounts for our Direct customers.
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The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue for which advance consideration is received prior to the mattertransfer of control or the performance obligation is not satisfied. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature, recognized over the next twelve months. Significant changes in contract liabilities balances, including revenue recognized in the reporting period that was dismissed with prejudice. The settlement was expensedincluded in discontinued operations in 2017.opening contract liabilities, are shown below (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Balance, beginning | $ | 5,551 | $ | 6,392 | $ | 1,225 | $ | 816 | |||||||||||||||
| Cash additions | 4,537 | 4,739 | 9,148 | 2,330 | |||||||||||||||||||
| Deferred revenue | 6,875 | — | — | — | |||||||||||||||||||
| Revenue recognition | (10,678) | (5,580) | (3,981) | (1,921) | |||||||||||||||||||
| Balance, ending | $ | 6,285 | $ | 5,551 | $ | 6,392 | $ | 1,225 | |||||||||||||||
(6) FAIR VALUE MEASUREMENTS
Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:
•Level 1 - observable inputs such as quoted prices (unadjusted) in active liquid markets for identical securities as of the reporting date;
•Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; or observable market prices in markets with insufficient volume and/or infrequent transactions; and
•Level 3 - significant inputs that are generally unobservable inputs for which there is little or no market data available, including our own assumptions in determining fair value.
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
| March 31, 2022 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 128 | $ | — | $ | 128 | ||||||||||||||||||
| Total liabilities at fair value | $ | — | $ | 128 | $ | — | $ | 128 | ||||||||||||||||||
The carrying value of our escrow account for $3.9 million contingent consideration to be paid to the former owners of VAY AG upon achievement of continued employment over an 18 month period ending on March 17, 2023 approximates its fair value and falls under Level 3 of the fair value hierarchy.
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| December 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Cash Equivalents | ||||||||||||||||
| Money market funds | $ | 10,946 | $ | — | $ | — | $ | 10,946 | ||||||||
| Commercial paper | — | 1,996 | — | 1,996 | ||||||||||||
| Total cash equivalents | 10,946 | 1,996 | — | 12,942 | ||||||||||||
| Available-for-Sale Securities | ||||||||||||||||
Certificates of deposit(1) | — | 19,875 | — | 19,875 | ||||||||||||
| Corporate bonds | — | 29,239 | — | 29,239 | ||||||||||||
| U.S. government bonds | — | 8,189 | — | 8,189 | ||||||||||||
| Total available-for-sale securities | — | 57,303 | — | 57,303 | ||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate swap contract | — | 372 | — | 372 | ||||||||||||
| Foreign currency forward contracts | — | 390 | — | 390 | ||||||||||||
| Total derivatives | — | 762 | — | 762 | ||||||||||||
| Total assets measured at fair value | $ | 10,946 | $ | 60,061 | $ | — | $ | 71,007 | ||||||||
| December 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Cash Equivalents | ||||||||||||||||
| Money market funds | $ | 9,635 | $ | — | $ | — | $ | 9,635 | ||||||||
| Commercial paper | — | 3,999 | — | 3,999 | ||||||||||||
| Total cash equivalents | 9,635 | 3,999 | — | 13,634 | ||||||||||||
| Available-for-Sale Securities | ||||||||||||||||
Certificates of deposit(1) | — | 22,820 | — | 22,820 | ||||||||||||
| Corporate bonds | — | 6,922 | — | 6,922 | ||||||||||||
| U.S. government bonds | — | 2,001 | — | 2,001 | ||||||||||||
| Total available-for-sale securities | — | 31,743 | — | 31,743 | ||||||||||||
| Total assets measured at fair value | $ | 9,635 | $ | 35,742 | $ | — | $ | 45,377 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate swap contract | $ | — | $ | (38 | ) | $ | — | $ | (38 | ) | ||||||
| Total liabilities measured at fair value | $ | — | $ | (38 | ) | $ | — | $ | (38 | ) | ||||||
| March 31, 2021 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash Equivalents | ||||||||||||||||||||||||||
| Money market funds | $ | 9,679 | $ | — | $ | — | $ | 9,679 | ||||||||||||||||||
| Total cash equivalents | 9,679 | — | — | 9,679 | ||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||
| Commercial paper | — | 9,994 | — | 9,994 | ||||||||||||||||||||||
| Corporate bonds | — | 8,227 | — | 8,227 | ||||||||||||||||||||||
| U.S. government bonds | — | 55,227 | — | 55,227 | ||||||||||||||||||||||
| Total assets at fair value | $ | 9,679 | $ | 73,448 | $ | — | $ | 83,127 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 672 | $ | — | $ | 672 | ||||||||||||||||||
| Total liabilities at fair value | $ | — | $ | 672 | $ | — | $ | 672 | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash Equivalents | ||||||||||||||||||||||||||
| Money market funds | $ | 14,902 | $ | — | $ | — | $ | 14,902 | ||||||||||||||||||
| Total cash equivalents | 14,902 | — | — | 14,902 | ||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||
| Commercial paper | — | 5,993 | — | 5,993 | ||||||||||||||||||||||
| Corporate bonds | — | 2,067 | — | 2,067 | ||||||||||||||||||||||
| U.S. government bonds | — | 28,139 | — | 28,139 | ||||||||||||||||||||||
| Total available-for-sale securities | — | 36,199 | — | 36,199 | ||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Foreign currency forward contracts | — | 228 | — | 228 | ||||||||||||||||||||||
| Total assets at fair value | $ | 14,902 | $ | 36,427 | $ | — | $ | 51,329 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 15 | $ | — | $ | 15 | ||||||||||||||||||
| Total liabilities at fair value | $ | — | $ | 15 | $ | — | $ | 15 | ||||||||||||||||||
For our assets measured at fair value on a recurring basis, we recognize transfers between levels at the actual date of the event or change in circumstance that caused the transfer. There were no transfers between levels during fiscal 2022, the yearsthree-month transition period ended DecemberMarch 31, 2017 and 2016.2021 or fiscal 2020. Additionally, we did not have any changes to our valuation techniques during the years ended December 31, 2017 and 2016.any of these periods.
We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from inputs, other than quoted market prices in active
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markets for identical assets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in comprehensive (loss) income until realized.
The fair values of our interest rate swap contract and our foreign currency forward contracts are calculated as the present value of estimated future cash flows using discount factors derived from relevant Level 2 market inputs, including forward curves and volatility levels.
From time to time, we enter into interest rate swaps to fix a portion of our interest expense, and foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. We do not enter into derivative instruments for any purpose other than to manage interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments.
We may hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. As of DecemberMarch 31, 2017,2022, total outstanding contract notional amounts were $22.1 million. At December 31, 2017, these outstanding balance sheet hedging derivatives$33.5 million and had maturities of 90106 days or less.
The fair value of our derivative instruments was included in our consolidated balance sheetsConsolidated Balance Sheets as follows (in thousands):
| Balance Sheet Classification | As of March 31, | As of December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||
| Derivative instruments not designated as cash flow hedges: | |||||||||||||||||||||||
| Foreign currency forward contracts | Prepaids and other current assets | $ | — | $ | — | $ | 228 | ||||||||||||||||
| Accrued liabilities | 128 | 672 | 15 | ||||||||||||||||||||
| Balance Sheet Classification | As of December 31, | |||||||||
| 2017 | 2016 | |||||||||
| Derivative instruments designated as cash flow hedges: | ||||||||||
| Interest rate swap contract | Prepaids and other current assets | $ | 134 | $ | — | |||||
| Other assets | 238 | — | ||||||||
| Accrued liabilities | — | (38 | ) | |||||||
| $ | 372 | $ | (38 | ) | ||||||
| Derivative instruments not designated as cash flow hedges: | ||||||||||
| Foreign currency forward contracts | Prepaids and other current assets | $ | 390 | $ | — | |||||
| $ | 390 | $ | — | |||||||
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The effect of derivative instruments on our consolidated statements of operations was as follows (in thousands):
| Statement of Operations Classification | Year Ended December 31, | |||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| Derivative instruments designated as cash flow hedges: | ||||||||||||||
| Gain (loss) recognized in other comprehensive income before reclassifications | --- | $ | 80 | $ | (450 | ) | $ | — | ||||||
| Loss reclassified from accumulated other comprehensive income to earnings for the effective portion | Interest expense | (207 | ) | (626 | ) | — | ||||||||
| Income tax benefit | Income tax expense | 47 | 200 | — | ||||||||||
| Derivative instruments not designated as cash flow hedges: | ||||||||||||||
| Loss recognized in earnings | Other, net | $ | (382 | ) | $ | — | $ | — | ||||||
| Income tax benefit | Income tax expense | 86 | — | — | ||||||||||
| Statement of Operations Classification | Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||
| Derivative instruments designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Loss recognized in other comprehensive income before reclassifications | --- | $ | — | $ | — | $ | — | $ | (128) | ||||||||||||||||||||
| Gain reclassified from accumulated other comprehensive income to earnings for the effective portion | Interest expense | — | — | — | 125 | ||||||||||||||||||||||||
| Income tax expense | Income tax (benefit) expense | — | — | — | (30) | ||||||||||||||||||||||||
| Derivative instruments not designated as cash flow hedges: | |||||||||||||||||||||||||||||
| (Loss) gain recognized in earnings | Other, net | $ | (30) | $ | (1,066) | $ | (2,419) | $ | 458 | ||||||||||||||||||||
| Income tax (expense) benefit | Income tax (benefit) expense | (7) | (212) | 597 | (43) | ||||||||||||||||||||||||
For additional information related to our derivatives, see Notes 46 and 15.18.
Trade receivables, net, consisted of the following (in thousands):
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Trade receivables | $ | 62,052 | $ | 89,834 | $ | 91,561 | |||||||||||
| Allowance for doubtful accounts | (598) | (1,177) | (337) | ||||||||||||||
| Trade receivables, net of allowance | $ | 61,454 | $ | 88,657 | $ | 91,224 | |||||||||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Trade receivables | $ | 42,804 | $ | 45,628 | |||
| Allowance for doubtful accounts | (119 | ) | (170 | ) | |||
| $ | 42,685 | $ | 45,458 | ||||
Changes in our allowance for doubtful trade receivables were as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Balance, beginning | $ | 1,177 | $ | 337 | $ | 45 | $ | 99 | |||||||||||||||
| Charges to bad debt expense | 414 | 852 | 332 | 19 | |||||||||||||||||||
| Write-offs, net | (993) | (12) | (40) | (73) | |||||||||||||||||||
| Balance, ending | $ | 598 | $ | 1,177 | $ | 337 | $ | 45 | |||||||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance, January 1 | $ | 170 | $ | 918 | $ | 108 | |||||
| Charges to bad debt expense | 311 | 289 | 786 | ||||||||
| Recoveries (write-offs), net | (362 | ) | (1,037 | ) | 24 | ||||||
| Balance, December 31 | $ | 119 | $ | 170 | $ | 918 | |||||
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Our inventories consisted of the following (in thousands):
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Finished goods | $ | 104,988 | $ | 63,918 | $ | 48,371 | |||||||||||
| Parts and components | 6,202 | 4,167 | 2,769 | ||||||||||||||
| Total inventories | $ | 111,190 | $ | 68,085 | $ | 51,140 | |||||||||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Finished goods | $ | 48,771 | $ | 43,130 | |||
| Parts and components | 4,583 | 3,900 | |||||
| $ | 53,354 | $ | 47,030 | ||||
Property, plant and equipment consisted of the following (in thousands):
Estimated Useful Life (in years) | As of December 31, | ||||||||||
| 2017 | 2016 | ||||||||||
| Automobiles | 5 | to | 6 | $ | 23 | $ | 139 | ||||
| Leasehold improvements | 4 | to | 20 | 3,542 | 3,388 | ||||||
| Computer software and equipment | 3 | to | 7 | 17,024 | 25,899 | ||||||
| Machinery and equipment | 3 | to | 5 | 15,178 | 13,085 | ||||||
| Furniture and fixtures | 5 | to | 20 | 2,295 | 2,238 | ||||||
Work in progress (1) | N/A | 1,052 | 768 | ||||||||
| Total cost | 39,114 | 45,517 | |||||||||
| Accumulated depreciation | (23,287 | ) | (28,049 | ) | |||||||
| $ | 15,827 | $ | 17,468 | ||||||||
| Estimated Useful Life (in years) | As of March 31, | As of December 31, | |||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Automobiles | 5 | $ | 23 | $ | 23 | $ | 23 | ||||||||||||||||||||||
| Leasehold improvements | 4 | to | 20 | 3,150 | 3,059 | 3,059 | |||||||||||||||||||||||
| Computer software and equipment | 2 | to | 7 | 44,852 | 36,956 | 34,324 | |||||||||||||||||||||||
| Machinery and equipment | 3 | to | 5 | 16,447 | 15,699 | 15,527 | |||||||||||||||||||||||
| Furniture and fixtures | 5 | to | 20 | 2,634 | 2,586 | 2,587 | |||||||||||||||||||||||
Work in progress (1) | N/A | 6,678 | 1,314 | 2,155 | |||||||||||||||||||||||||
| Total cost | 73,784 | 59,637 | 57,675 | ||||||||||||||||||||||||||
| Accumulated depreciation | (41,655) | (35,141) | (33,749) | ||||||||||||||||||||||||||
| Total property, plant and equipment, net | $ | 32,129 | $ | 24,496 | $ | 23,926 | |||||||||||||||||||||||
(1) Work in progress primarily includes production tooling and equipment and information technology assets.assets and production tooling.
Depreciation expense was as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Depreciation expense | $ | 8,554 | $ | 2,002 | $ | 7,779 | $ | 7,314 | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Depreciation expense | $ | 5,387 | $ | 4,320 | $ | 2,558 | |||||
We have several noncancelable operating leases, primarily for office space, that expire at various dates over the next five years. These leases generally contain renewal options to extend for 1 lease term of five years. For leases that we are reasonably certain we will exercise the lease renewal options, the options were considered in determining the lease term, and associated potential option payments are included in the lease payments. The payments used in the renewal term were estimated using the percentage rate increase of historical rent payments for each location where the renewal will be exercised.
Payments due under the lease contracts include annual fixed payments for office space. Variable payments including payments for our proportionate share of the building’s property taxes, insurance, and common area maintenance are treated as non-lease components and are recognized in the period for which the costs occur.
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The components of lease cost were as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Operating lease expense | $ | 5,822 | $ | 1,035 | $ | 4,404 | $ | 4,518 | |||||||||||||||
| Amortization of right of use assets of finance leases assets | 57 | — | — | — | |||||||||||||||||||
| Interest expense of finance lease liabilities | 6 | — | — | — | |||||||||||||||||||
| Total lease expense | $ | 5,885 | $ | 1,035 | $ | 4,404 | $ | 4,518 | |||||||||||||||
Other information related to leases was as follows (dollars in thousands):
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Supplemental cash flow information related to leases was as follows: | |||||||||||||||||
| Operating leases: | |||||||||||||||||
| Operating lease right-of-use assets | $ | 23,620 | $ | 19,108 | $ | 19,876 | |||||||||||
| Operating lease liabilities, non-current | $ | 20,926 | $ | 17,875 | $ | 18,736 | |||||||||||
| Operating lease liabilities, current | 4,494 | 3,384 | 3,331 | ||||||||||||||
| Total operating lease liabilities | $ | 25,420 | $ | 21,259 | $ | 22,067 | |||||||||||
| Finance leases: | |||||||||||||||||
| Property, plant and equipment, at cost | $ | 569 | $ | — | $ | — | |||||||||||
| Accumulated depreciation | (57) | — | — | ||||||||||||||
| Property, plant and equipment, net | $ | 512 | $ | — | $ | — | |||||||||||
| Finance lease liabilities, non-current | $ | 395 | $ | — | $ | — | |||||||||||
| Finance lease liabilities, current | 119 | — | — | ||||||||||||||
| Total finance lease liabilities | $ | 514 | $ | — | $ | — | |||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities: | |||||||||||||||||
| Operating cash flow from operating leases | $ | 6,485 | $ | 1,076 | $ | 3,906 | |||||||||||
| Finance cash flows from finance leases | 60 | — | — | ||||||||||||||
| Additional operating lease information: | |||||||||||||||||
| ROU assets obtained in exchange for operating lease obligations | $ | 10,323 | $ | — | $ | — | |||||||||||
| ROU assets obtained in exchange for finance lease obligations | 569 | — | — | ||||||||||||||
| Reductions to ROU assets resulting from reductions to operating lease obligations | 1,358 | 268 | 3,239 | ||||||||||||||
| Increases to ROU assets resulting from remeasurement of lease obligations | — | — | 3,929 | ||||||||||||||
| Weighted Average Remaining Lease Term: | |||||||||||||||||
| Operating leases | 3.1 years | 6.9 years | 7.1 years | ||||||||||||||
| Finance leases | 4.5 years | N/A | N/A | ||||||||||||||
| Weighted Average Discount Rate: | |||||||||||||||||
| Operating leases | 4.65 | % | 4.95 | % | 4.94 | % | |||||||||||
| Finance leases | 2.14 | % | — | % | — | % | |||||||||||
We determined the discount rate for leases using a portfolio approach to determine an incremental borrowing rate to calculate the right-of-use assets and lease liabilities.
69
Maturities of lease liabilities under non-cancelable leases were as follows (in thousands):
| As of March 31, 2022 | |||||||||||
| Operating leases | Finance leases | ||||||||||
| Year ending: | |||||||||||
| 2023 | $ | 5,668 | $ | 120 | |||||||
| 2024 | 5,543 | 120 | |||||||||
| 2025 | 5,601 | 120 | |||||||||
| 2026 | 4,517 | 120 | |||||||||
| 2027 | 2,359 | 60 | |||||||||
| Thereafter | 5,796 | — | |||||||||
| Total undiscounted lease payments | 29,484 | 540 | |||||||||
| Less imputed interest | (4,064) | (26) | |||||||||
| Total lease liabilities | $ | 25,420 | $ | 514 | |||||||
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(12) GOODWILL
The rollforward of goodwill was as follows (in thousands):
| Direct | Total | ||||||||||||||||
| Balance, March 31, 2021 | $ | — | $ | — | |||||||||||||
| Business acquisition (Note 2) | 24,510 | 24,510 | |||||||||||||||
| Balance, March 31, 2022 | $ | 24,510 | $ | 24,510 | |||||||||||||
| Direct | Retail | Total | |||||||||
| Balance, January 1, 2015 | $ | 2,520 | $ | — | $ | 2,520 | |||||
| Currency exchange rate adjustment | (407 | ) | — | (407 | ) | ||||||
| Business acquisition (Note 2) | — | 58,357 | 58,357 | ||||||||
| Balance, December 31, 2015 | 2,113 | 58,357 | 60,470 | ||||||||
| Currency exchange rate adjustment | 67 | 3 | 70 | ||||||||
| Measurement period adjustments (Note 2) | — | 1,348 | 1,348 | ||||||||
| Balance, December 31, 2016 | 2,180 | 59,708 | 61,888 | ||||||||
| Currency exchange rate adjustment | 155 | (13 | ) | 142 | |||||||
| Balance, December 31, 2017 | $ | 2,335 | $ | 59,695 | $ | 62,030 | |||||
In accordance with ASC 350 — Intangibles — Goodwill and Other, we perform our goodwill and indefinite-lived trade names impairment valuations annually, on March 31, or sooner if triggering events are identified. As of March 31, 2022, we had a total of $24.5 million of goodwill resulting from our VAY acquisition in September 2021 (Note 2), which is 100% assigned to our Direct reporting unit.
We performedassigned assets and liabilities to each reporting unit based on either specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit. We determined the fair value of our annual goodwill impairment evaluations duringreporting units in Step 1 of the fourth quartersASC 350 analysis using the income approach and the market approach. In addition, we determined the fair value by adding a control premium observed from recent transactions of 2017, 2016,comparable companies to determine the reasonableness of that assumption and 2015. Our 2017the fair values of the reporting units estimated in Step 1. Significant unobservable inputs and 2015 evaluationsassumptions inherent in the valuation methodologies from Level 3 inputs were performed using a qualitative assessmentemployed and include, but were not limited to, prospective financial information, growth rates, terminal value, royalty rates, discount rates, and comparable multiples from publicly traded companies in our industry. We compared the carrying amount of each reporting unit andto its respective fair value. We reconciled the aggregate fair values of the reporting units determined that itin Step 1 (as described above) to the enterprise market capitalization plus a reasonable control premium. This total value was not more-likely-than-not thatcompared to a trailing 30-day average market capitalization of approximately $137 million as of March 31, 2022.
The Direct reporting unit's fair value exceeded the carrying value by more than 10%.
As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair value of anyvalues estimated for each individual reporting unit and our conclusion of no impairment charge for goodwill and indefinite-lived intangibles.
The indefinite-lived intangible assets evaluation was less than itsperformed using the relief from royalty method. This analysis was based on the estimated future cash flows generated for each separate brand/trademark. We compared the carrying amount. Our 2016 test was conducted usingamount to the estimated fair values. Based on our evaluation, the indefinite-lived intangible assets were recoverable.
Subsequent to year end and through the date of this filing, we are observing continued market volatility including a quantitative valuation duefurther decline in our market capitalization, which, in part, increases the possibility of a future impairment charge in the near term. If the facts and circumstances surrounding our assumptions change, our goodwill impairment analysis may fail. Assumptions and estimates to determine far values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our acquisitionbusiness strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we continue to experience a sustained decline in our market capitalization, adjusted for estimated control premium, that is determined to be indicative of Octanea reduction in fair value one or more of our reporting units, we may be required to record future impairment charges for goodwill. An impairment could have a material effect on December 31, 2015. We determined no impairmentsour consolidated balance sheet and results of goodwill were indicated in 2017, 2016 and 2015.operations.
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(13) OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following (in thousands):
| Estimated Useful Life (in years) | As of March 31, | As of December 31, | |||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Indefinite-lived trademarks | N/A | $ | 9,052 | $ | 9,052 | $ | 9,052 | ||||||||||||||||||||||
| Patents | 7 | to | 24 | 1,043 | 1,443 | 1,443 | |||||||||||||||||||||||
| 10,095 | 10,495 | 10,495 | |||||||||||||||||||||||||||
| Accumulated amortization - definite-lived intangible assets | (791) | (1,130) | (1,115) | ||||||||||||||||||||||||||
| $ | 9,304 | $ | 9,365 | $ | 9,380 | ||||||||||||||||||||||||
Estimated Useful Life (in years) | As of December 31, | ||||||||||
| 2017 | 2016 | ||||||||||
Indefinite-lived trademarks(1) | N/A | $ | 23,252 | $ | 32,052 | ||||||
| Definite-lived trademarks | 10 | to | 15 | 2,600 | 2,600 | ||||||
| Patents | 8 | to | 24 | 15,187 | 31,487 | ||||||
| Customer relationships | 10 | to | 15 | 24,700 | 24,700 | ||||||
| 65,739 | 90,839 | ||||||||||
| Accumulated amortization - definite-lived intangible assets | (7,996 | ) | (21,039 | ) | |||||||
| $ | 57,743 | $ | 69,800 | ||||||||
Amortization expense was as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Amortization expense | $ | 61 | $ | 15 | $ | 1,669 | $ | 3,497 | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Amortization expense | $ | 3,256 | $ | 3,554 | $ | 854 | |||||
Future amortization of definite-lived intangible assets is as follows (in thousands):
| 2023 | $ | 61 | |||
| 2024 | 61 | ||||
| 2025 | 61 | ||||
| 2026 | 47 | ||||
| 2027 | 3 | ||||
| Thereafter | 19 | ||||
| $ | 252 | ||||
| 2018 | $ | 3,164 | |
| 2019 | 3,134 | ||
| 2020 | 3,108 | ||
| 2021 | 3,078 | ||
| 2022 | 3,078 | ||
| Thereafter | 18,929 | ||
| $ | 34,491 | ||
Accrued liabilities consisted of the following (in thousands):
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Payroll and related liabilities | $ | 10,405 | $ | 6,616 | $ | 9,702 | |||||||||||
| Deferred revenue | 6,285 | 5,551 | 6,401 | ||||||||||||||
Reserves(1) | 4,433 | 2,624 | 2,784 | ||||||||||||||
Legal settlement(2) | 4,250 | — | — | ||||||||||||||
| Other | 4,013 | 4,836 | 3,954 | ||||||||||||||
| Total accrued liabilities | $ | 29,386 | $ | 19,627 | $ | 22,841 | |||||||||||
(1) Reserves primarily consists of inventory, sales return, sales tax and product liability reserves.
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Payroll and related liabilities | $ | 3,659 | $ | 4,579 | |||
| Other | 7,105 | 8,313 | |||||
| Total accrued liabilities | $ | 10,764 | $ | 12,892 | |||
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Changes in our product warranty obligations were as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Balance, beginning | $ | 8,651 | $ | 5,198 | $ | 5,717 | $ | 5,575 | |||||||||||||||
| Accruals | 5,924 | 4,896 | 4,703 | 5,103 | |||||||||||||||||||
| Payments | (8,359) | (1,443) | (5,222) | (4,961) | |||||||||||||||||||
| Balance, ending | $ | 6,216 | $ | 8,651 | $ | 5,198 | $ | 5,717 | |||||||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance, January 1 | $ | 7,450 | $ | 8,545 | $ | 2,246 | |||||
| Accruals | 3,008 | 2,480 | 2,302 | ||||||||
| Payments | (4,341 | ) | (3,575 | ) | (1,553 | ) | |||||
| Business acquisition (Note 2) | — | — | 5,550 | ||||||||
| Balance, December 31 | $ | 6,117 | $ | 7,450 | $ | 8,545 | |||||
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(16) BORROWINGS
Wells Fargo Bank Credit Agreement
On December 31, 2015October 29, 2021, we entered into an amendment (the “Amendment”) toamended our existing Credit Agreement dated December 5, 2014,January 31, 2020, with JPMorgan ChaseWells Fargo Bank, N.A.National Association (“Chase Bank”Wells Fargo”) that provided forand the lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders agreed, among other things, to make available to us an $80 millionasset-based revolving loan facility, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan to finance the acquisition described in Note 2, Business Acquisition, abovefacility (the “Term Loan”Loan Facility” and together with the ABL Revolving Facility, the “Credit Facility”)., in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The amendment increased the aggregate principal amount available under the ABL Revolving Facility from $55.0 million to $100.0 million (the “Revolver”), subject to a borrowing base. The maturity date of the Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million, as of the effective date of the amendment, and will amortize on a new 60-month straight line basis to coincide with the extended maturity date. In connection with the credit amendment we recorded $0.6 million in new financing costs as Other assets on our existing $20 million revolving lineConsolidated Balance Sheets. The repayment of credit with Chase Bank areobligations under the Credit Agreement is secured by substantially all of the assets of Nautilus. The Term Loan matures on December 31, 2020. The Amendment also extended the maturity date of our existing revolving line of creditassets. Principal and interest amounts are required to December 31, 2020.be paid as scheduled.
As of DecemberMarch 31, 2017, we had2022, outstanding borrowings of $48.0totaled $29.4 million, onwith $10.1 million and $19.3 million under our term loanTerm Loan Facility and no letters of credit issued under the Credit Agreement.Revolver, respectively. As of DecemberMarch 31, 2017,2022, we were in compliance with the financial covenants of the Credit Agreement and $20.0$65.8 million was available for borrowing under the lineABL Revolving Facility.
Interest on the Revolver will accrue at the Secured Overnight Financing Rate (“SOFR”) plus a margin of credit.
| 2018 | $ | 16,000 | |
| 2019 | 16,000 | ||
| 2020 | 16,000 | ||
| $ | 48,000 | ||
| Payments due by period | ||||||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||
| Debt obligations, including interest | $ | 30,714 | $ | 2,737 | $ | 7,549 | $ | 20,428 | $ | — | ||||||||||||||||||||||
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that include a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding.
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(17) INCOME TAXES
Income Tax Expense
Income (loss) from continuing operations before income taxes was as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| U.S. | $ | (32,904) | $ | 35,262 | $ | 68,555 | $ | (102,004) | |||||||||||||||
| Non-U.S. | 4,674 | 2,914 | 4,180 | 172 | |||||||||||||||||||
| (Loss) income from continuing operations before income taxes | $ | (28,230) | $ | 38,176 | $ | 72,735 | $ | (101,832) | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| U.S. | $ | 34,259 | $ | 50,651 | $ | 39,242 | |||||
| Non-U.S. | 1,446 | 930 | 780 | ||||||||
| $ | 35,705 | $ | 51,581 | $ | 40,022 | ||||||
Income tax expense (benefit) from continuing operations was as follows (in thousands):
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Current: | |||||||||||||||||||||||
| U.S. federal | $ | 362 | $ | 5,212 | $ | 9,465 | $ | 164 | |||||||||||||||
| U.S. state | (5) | 1,267 | 3,834 | 419 | |||||||||||||||||||
| Non-U.S. | 1,444 | 804 | 1,065 | 453 | |||||||||||||||||||
| Total current | 1,801 | 7,283 | 14,364 | 1,036 | |||||||||||||||||||
| Deferred: | |||||||||||||||||||||||
| U.S. federal | (6,881) | 365 | (517) | (9,431) | |||||||||||||||||||
| U.S. state | (940) | 84 | (1,629) | (540) | |||||||||||||||||||
| Non-U.S. | (6) | (137) | (20) | (602) | |||||||||||||||||||
| Total deferred | (7,827) | 312 | (2,166) | (10,573) | |||||||||||||||||||
| Income tax (benefit) expense | $ | (6,026) | $ | 7,595 | $ | 12,198 | $ | (9,537) | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Current: | |||||||||||
| U.S. federal | $ | 14,409 | $ | 6,765 | $ | 858 | |||||
| U.S. state | 1,887 | 318 | 171 | ||||||||
| Non-U.S. | 330 | 118 | 355 | ||||||||
| Total current | 16,626 | 7,201 | 1,384 | ||||||||
| Deferred: | |||||||||||
| U.S. federal | (9,418 | ) | 8,130 | 11,324 | |||||||
| U.S. state | 819 | 1,037 | 573 | ||||||||
| Non-U.S. | 53 | 112 | (62 | ) | |||||||
| Total deferred | (8,546 | ) | 9,279 | 11,835 | |||||||
| $ | 8,080 | $ | 16,480 | $ | 13,219 | ||||||
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Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations:
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| U.S. statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||||||
| State tax, net of U.S. federal tax benefit | 3.6 | 2.8 | 3.8 | 3.8 | |||||||||||||||||||
| Non-U.S. income taxes | (0.8) | 0.3 | 0.4 | — | |||||||||||||||||||
| Nondeductible operating expenses | (0.5) | 0.9 | 0.3 | (0.4) | |||||||||||||||||||
| Foreign-derived intangible income deduction | — | (1.3) | (0.8) | — | |||||||||||||||||||
| Section 162(m) limitation | (5.4) | — | 0.7 | — | |||||||||||||||||||
| Non-deductible foreign employee stock compensation | (1.2) | — | — | — | |||||||||||||||||||
| Non-deductible acquisition related expenses | (1.8) | — | — | — | |||||||||||||||||||
| Research and development credit | 2.3 | (0.9) | (1.0) | 0.5 | |||||||||||||||||||
| Change in deferred tax measurement rate | 0.2 | 0.1 | (5.5) | (0.1) | |||||||||||||||||||
| Change in uncertain tax positions | (1.0) | 0.2 | 0.2 | 0.1 | |||||||||||||||||||
| Excess tax benefits from stock plans | 5.4 | (3.1) | (1.5) | (0.2) | |||||||||||||||||||
| Change in valuation allowance | (0.4) | (0.1) | 34.3 | (1.5) | |||||||||||||||||||
| Impairment of intangibles | — | — | — | (13.6) | |||||||||||||||||||
| Capital losses | — | — | (34.8) | — | |||||||||||||||||||
| Other | (0.1) | — | (0.3) | (0.2) | |||||||||||||||||||
| Effective income tax rate | 21.3 | % | 19.9 | % | 16.8 | % | 9.4 | % | |||||||||||||||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| U.S. statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
| State tax, net of U.S. federal tax benefit | 5.0 | 2.4 | 2.6 | |||||
| Non-U.S. income taxes | (0.1 | ) | 0.3 | (0.1 | ) | |||
| Nondeductible operating expenses | 0.8 | 0.3 | 0.8 | |||||
| Research and development credit | (1.5 | ) | (1.0 | ) | (0.6 | ) | ||
Change in deferred tax measurement rate (1) | (15.3 | ) | (0.1 | ) | — | |||
| Change in uncertain tax positions | 0.8 | (5.1 | ) | 1.1 | ||||
| Excess tax benefits from stock plans | (2.1 | ) | — | — | ||||
| Change in valuation allowance | 0.1 | 0.2 | (5.8 | ) | ||||
| Other | (0.1 | ) | (0.1 | ) | — | |||
| Effective income tax rate | 22.6 | % | 31.9 | % | 33.0 | % | ||
The income tax benefits from continuing operations for the period ended March 31, 2022 were primarily driven by the loss generated in the U.S. The effective tax rate from continuing operations for the same period was primarily affected by the Section 162(m) limitation and the non-deductible GAAP book expenses that are not allowed for income tax purposes as a result of our acquisition of VAY.
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Deferred Income Taxes
Individually significant components of deferred income tax assets and liabilities were as follows (in thousands):
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Deferred income tax assets: | |||||||||||||||||
| Accrued liabilities | $ | 5,828 | $ | 4,355 | $ | 4,113 | |||||||||||
| Allowance for doubtful accounts | 89 | 276 | 83 | ||||||||||||||
| Inventory valuation | 222 | 223 | 260 | ||||||||||||||
| Capitalized indirect inventory costs | 1,044 | 1,043 | 649 | ||||||||||||||
| Stock-based compensation expense | 895 | 739 | 978 | ||||||||||||||
| Deferred rent | 6,065 | 5,211 | 5,408 | ||||||||||||||
| Deferred revenue | 960 | 43 | 16 | ||||||||||||||
| Interest expense | 383 | — | — | ||||||||||||||
| Net operating loss carryforward | 2,194 | 1,317 | 1,427 | ||||||||||||||
| Basis difference on long-lived assets | 1,189 | 1,205 | 1,216 | ||||||||||||||
| Credit carryforward | 1,048 | 276 | 276 | ||||||||||||||
| Capital losses | 25,744 | 25,565 | 26,126 | ||||||||||||||
| Other | 290 | 279 | 89 | ||||||||||||||
| Gross deferred income tax assets | 45,951 | 40,532 | 40,641 | ||||||||||||||
| Valuation allowance | (26,510) | (26,335) | (26,985) | ||||||||||||||
| Deferred income tax assets, net of valuation allowance | 19,441 | 14,197 | 13,656 | ||||||||||||||
| Deferred income tax liabilities: | |||||||||||||||||
| Prepaid advertising | (273) | (1,133) | (134) | ||||||||||||||
| Other prepaids | (135) | (573) | (923) | ||||||||||||||
| Basis difference of long-lived assets | (4,740) | (5,664) | (5,275) | ||||||||||||||
| Deferred rent | (5,532) | (4,682) | (4,867) | ||||||||||||||
| Other | (1) | (1) | (31) | ||||||||||||||
| Deferred income tax liabilities | (10,681) | (12,053) | (11,230) | ||||||||||||||
| Net deferred income tax assets | $ | 8,760 | $ | 2,144 | $ | 2,426 | |||||||||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Deferred income tax assets: | |||||||
| Accrued liabilities | $ | 3,000 | $ | 5,089 | |||
| Allowance for doubtful accounts | 12 | 40 | |||||
| Inventory valuation | 254 | 199 | |||||
| Capitalized indirect inventory costs | 383 | 497 | |||||
| Stock-based compensation expense | 897 | 1,346 | |||||
| Deferred rent | 588 | 865 | |||||
| Accrued royalty | — | 429 | |||||
| Net operating loss carryforward | 1,715 | 2,377 | |||||
| Basis difference on long-lived assets | 548 | 1,052 | |||||
| Credit carryforward | 634 | 615 | |||||
| Other | 179 | 140 | |||||
| Gross deferred income tax assets | 8,210 | 12,649 | |||||
| Valuation allowance | (914 | ) | (886 | ) | |||
| Deferred income tax assets, net of valuation allowance | 7,296 | 11,763 | |||||
| Deferred income tax liabilities: | |||||||
| Prepaid advertising | (370 | ) | (1,302 | ) | |||
| Other prepaids | (610 | ) | (744 | ) | |||
| Basis difference of long-lived assets | (14,856 | ) | (26,215 | ) | |||
| Undistributed earnings of foreign subsidiaries | — | (457 | ) | ||||
| Other | (18 | ) | (25 | ) | |||
| Deferred income tax liabilities | (15,854 | ) | (28,743 | ) | |||
| Net deferred income tax liabilities | $ | (8,558 | ) | $ | (16,980 | ) | |
Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheetsConsolidated Balance Sheets as follows (in thousands):
| As of March 31, | As of December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Deferred income tax assets, non-current | $ | 8,760 | $ | 2,144 | $ | 2,426 | |||||||||||
| Deferred income tax liabilities, non-current | — | — | — | ||||||||||||||
| Net deferred income tax assets (liabilities) | $ | 8,760 | $ | 2,144 | $ | 2,426 | |||||||||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Deferred income tax assets, non-current | — | 11 | |||||
| Deferred income tax liabilities, non-current | (8,558 | ) | (16,991 | ) | |||
| Net deferred income tax liabilities | $ | (8,558 | ) | $ | (16,980 | ) | |
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified.
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As of DecemberMarch 31, 2017,2022, we had a valuation allowance against net deferred income tax assets of $0.9$26.5 million. Of the remaining valuation allowance, $0.7$25.7 million primarily relates to domestic capital losses and $0.5 million relates to state tax credit carryforwards and state net operating loss carryforwards as we currently do not anticipate generating income of appropriate character to utilize those credits.deferred tax assets. The remainder of $0.2$0.3 million relates to certain foreign net operating loss carryforwards.intangible assets which are not more likely than not to be realized due the indefinite nature of the deferred tax assets. Should it be determined in the future that it is more likely than not that our domestic deferred income tax assets will be realized, an additionalappropriate portion of valuation allowance would be released during the period in which such an assessment is made. There have been no material changes to our foreign operations since December 31, 2016, and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2017.
Income Tax Carryforwards
As of DecemberMarch 31, 2017,2022, we had the following income tax carryforwards (in millions):
| Amount | Expires in | |||||||||||||
| Net operating loss carryforwards | ||||||||||||||
| U.S. federal | $ | 4.0 | Indefinite | |||||||||||
| U.S. state | $ | 18.4 | 2028 - 2042 | |||||||||||
| U.S. state | $ | 1.4 | Indefinite | |||||||||||
| Capital loss carryforwards | ||||||||||||||
| U.S federal and state | $ | 101.3 | 2025 | |||||||||||
| Income tax credit carryforwards | ||||||||||||||
| U.S. federal | $ | 0.7 | 2042 | |||||||||||
| U.S. state | $ | 0.4 | Indefinite | |||||||||||
| Amount | Expires in | |||||
| Net operating loss carryforwards | ||||||
| U.S. state | $ | 32.0 | 2018 - 2035 | |||
| China | $ | 0.8 | 2020 - 2022 | |||
| Income tax credit carryforwards | ||||||
| U.S. state | $ | 0.9 | 2018 - 2031 | |||
The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change.
Unrecognized Tax Benefits
Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands):
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance, January 1 | $ | 1,970 | $ | 2,519 | $ | 2,768 | |||||
| Additions for tax positions taken in prior years | 38 | 21 | 1 | ||||||||
| Reductions for tax positions taken in prior years | (5 | ) | (523 | ) | (426 | ) | |||||
| Additions for tax positions related to the current year | 211 | 83 | 43 | ||||||||
| Lapses of statutes of limitations | (11 | ) | (130 | ) | — | ||||||
| Other | (9 | ) | — | 133 | |||||||
| Balance, December 31 | $ | 2,194 | $ | 1,970 | $ | 2,519 | |||||
| Year Ended March 31, | Three-Months Ended March 31, (transition period) | Year Ended December 31, | |||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Balance, beginning | $ | 2,374 | $ | 2,323 | $ | 2,338 | $ | 2,330 | |||||||||||||||
| Additions for tax positions taken in prior years | 133 | — | 4 | 44 | |||||||||||||||||||
| Reductions for tax positions taken in prior years | — | — | — | (81) | |||||||||||||||||||
| Additions for tax positions related to the current year | 103 | 51 | 109 | 87 | |||||||||||||||||||
| Lapses of statutes of limitations | — | — | (20) | (42) | |||||||||||||||||||
| Other | (828) | — | (108) | — | |||||||||||||||||||
| Balance, ending | $ | 1,782 | $ | 2,374 | $ | 2,323 | $ | 2,338 | |||||||||||||||
Of the $2.2$1.8 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of DecemberMarch 31, 2017, $2.02022, $1.7 million would affect our effective tax rate if recognized.
We recorded tax-related interest and penalty expense (benefit) of $0.3$0.1 million $(1.9)for both 2022 and 2021 and $0.4 million and $0.5 million in 2017, 2016 and 2015, respectively.for 2020. We had a cumulative liability for interest and penalties related to uncertain tax positions as of DecemberMarch 31, 20172022 and 20162021 of $1.0$2.3 million and $0.7$2.2 million, respectively.
Our U.S. federal income tax returns for 20092008 through 20172022 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 20072008 through 20172022 are open to review, depending on the respective statute of limitation in each state. Currently the Company's U.S corporate income tax returns for 2016 through 2019
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are under IRS examination. In addition, we file income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.
As of DecemberMarch 31, 2017,2022, we believe it is reasonably likely that, within the next 12twelve months, $0.8$0.1 million of the previously unrecognized tax benefits related to certain non-U.S. filing positions may be recognized.recognized due to the expirations of the statutes of limitations and an anticipated deregistration of a certain foreign entity.
Accumulated other comprehensive (loss) income, (loss), net of applicable taxes, reported on our consolidated balance sheetsConsolidated Balance Sheets consists of unrealized holding gains and losses on available-for-sale securities, effective portions of gains and losses of derivative securities designated as cash flow hedges, and foreign currency translation adjustments. The following table sets forth the changes in accumulated other comprehensive (loss) income, (loss), net of tax (in thousands) for the periods presented:
| Unrealized Loss on Available-for-Sale Securities | Foreign Currency Translation Adjustments | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||||||||||||
| Balance, December 2019 | $ | — | $ | (937) | $ | (937) | ||||||||||||||||||||
| Current period other comprehensive (loss) income before reclassifications | (4) | 955 | 951 | |||||||||||||||||||||||
| Net other comprehensive (loss) income during period | (4) | 955 | 951 | |||||||||||||||||||||||
| Balance, December 31, 2020 | (4) | 18 | 14 | |||||||||||||||||||||||
| Current period other comprehensive loss before reclassifications | (4) | (165) | (169) | |||||||||||||||||||||||
| Net other comprehensive loss during period | (4) | (165) | (169) | |||||||||||||||||||||||
| Balance, March 31, 2021 | (8) | (147) | (155) | |||||||||||||||||||||||
| Current period other comprehensive loss before reclassifications | (4) | (368) | (372) | |||||||||||||||||||||||
| Net other comprehensive loss during period | (4) | (368) | (372) | |||||||||||||||||||||||
| Balance, March 31, 2022 | $ | (12) | $ | (515) | $ | (527) | ||||||||||||||||||||
| Unrealized Gain (Loss) on Available-for-Sale Securities | Gain (loss) on Derivative Securities | Foreign Currency Translation Adjustments | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
| Balance, January 1, 2015 | $ | (18 | ) | $ | — | $ | (290 | ) | $ | (308 | ) | |||||
| Current period other comprehensive income (loss) | 2 | — | (1,021 | ) | (1,019 | ) | ||||||||||
| Balance, December 31, 2015 | (16 | ) | — | (1,311 | ) | (1,327 | ) | |||||||||
| Current period other comprehensive income (loss) before reclassifications | 8 | (450 | ) | 126 | (316 | ) | ||||||||||
| Reclassification of amounts to earnings | — | 426 | — | 426 | ||||||||||||
| Net other comprehensive income (loss) during period | 8 | (24 | ) | 126 | 110 | |||||||||||
| Balance, December 31, 2016 | (8 | ) | (24 | ) | (1,185 | ) | (1,217 | ) | ||||||||
| Current period other comprehensive income (loss) before reclassifications | (56 | ) | 80 | 774 | 798 | |||||||||||
| Reclassification of amounts to earnings | — | 160 | — | 160 | ||||||||||||
| Net other comprehensive income (loss) during period | (56 | ) | 240 | 774 | 958 | |||||||||||
| Balance, December 31, 2017 | $ | (64 | ) | $ | 216 | $ | (411 | ) | $ | (259 | ) | |||||
2015 Long-Term Incentive Plan
Upon adoption, there were approximately 4.8 million shares available for issuance under the 2015 Plan. The number of shares available for issuance upon adoption of the 2015 Plan included new shares approved, plus any shares of common stock which were previously reserved for issuance under our preceding plan andthat were not subject to grant as of April 28, 2015, or as to which the stock-based compensation award is forfeited on or after April 28, 2015. The number of shares available for issuance is reduced by (i) two2 shares for each share delivered in settlement of any stock appreciation rights, RSA, RSU or PSU awards, and (ii) one1 share for each share delivered in settlement of a stock option award. In no event shall more than 1.0 million aggregate shares of common stock subject to stock options, stock appreciation rights, RSA, RSU or PSU awards be granted to any one participant in any one year under the 2015 Plan.
2015 Long-Term Incentive Plan, As Amended
On May 1, 2020, Nautilus shareholders approved the amendment and restatement of our 2015 Plan (the "Amended 2015 Plan"). Prior to the amendment, there were approximately 4.8 million shares available for issuance under the
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2015 Plan, 3.5 million shares originally reserved under the previous Long Term Incentive Plan and 1.3 million shares of common stock authorized under the 2015 Plan. The Amended 2015 Plan added an additional 2.0 million shares to be reserved for issuance. Upon adoption, there were approximately 6.8 million shares available for issuance under the Amended 2015 Plan.
The maximum aggregate number of shares of common stock subject to stock options, stock appreciation rights, restricted stock or stock unit awards which may be granted to any one participant in any one year under the Amended 2015 Plan is 1.0 million.
The aggregate number of shares available for issuance under the Amended 2015 Plan will be reduced by one and half (1.5) shares for each share delivered in settlement of any stock appreciation rights, restricted stock, restricted stock unit or performance unit award, and 1 (1) share for each share delivered in settlement of a stock option award.
At DecemberMarch 31, 2017,2022, we had 4.20.7 million shares available for future grant under our Amended 2015 Plan, and a total of 4.93.5 million shares of our common stock are reserved for future issuance pursuant to awards currently outstanding under the Amended 2015 Plan and our previous plan combined.
Stock Option Activity
Stock option activity was as follows (shares in thousands):
| Options Outstanding | Weighted- Average Exercise Price | ||||||||||
| Outstanding at December 31, 2020 | 740 | $ | 2.20 | ||||||||
| Forfeited, canceled or expired | (22) | 8.22 | |||||||||
| Exercised | (9) | 11.5 | |||||||||
| Outstanding at March 31, 2021 | 710 | 1.89 | |||||||||
| Forfeited, canceled or expired | (1) | 2.72 | |||||||||
| Exercised | (238) | 2.01 | |||||||||
| Outstanding at March 31, 2022 | 471 | 1.82 | |||||||||
| Options Outstanding | Weighted- Average Exercise Price | |||||
| Outstanding at December 31, 2016 | 433 | $ | 5.03 | |||
| Forfeited, canceled or expired | (1 | ) | 15.58 | |||
| Exercised | (135 | ) | 4.15 | |||
| Outstanding at December 31, 2017 | 297 | $ | 5.37 | |||
Certain information regarding options outstanding at DecemberMarch 31, 20172022 was as follows:
| Options Outstanding | Options Exercisable | Options Vested and Expected to Vest | |||||||||||||||
| Number (in thousands) | 471 | 244 | 471 | ||||||||||||||
| Weighted-average exercise price | $ | 1.82 | $ | 1.85 | $ | 1.82 | |||||||||||
| Aggregate intrinsic value (in thousands) | $ | 1,101 | $ | 1,101 | $ | 571 | |||||||||||
| Weighted average remaining contractual term (in years) | 5.4 | 5.5 | 5.4 | ||||||||||||||
| Options Outstanding | Options Exercisable | Options Vested and Expected to Vest | |||||||||
| Number (in thousands) | 297 | 291 | 297 | ||||||||
| Weighted-average exercise price | $ | 5.37 | $ | 5.19 | $ | 5.37 | |||||
| Aggregate intrinsic value (in thousands) | $ | 2,405 | $ | 2,401 | $ | 2,405 | |||||
| Weighted average remaining contractual term (in years) | 2.1 | 2.0 | 2.1 | ||||||||
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RSA Activity
Compensation expense for RSAs is recognized over the estimated vesting period. Following is a summary of RSA activity (shares in thousands):
| RSAs Outstanding | Weighted- Average Grant Date Fair Value per Share | ||||||||||
| Outstanding at December 31, 2020 | 117 | $ | 8.90 | ||||||||
| Outstanding at March 31, 2021 | 117 | 8.90 | |||||||||
| Granted | 26 | 16 | |||||||||
| Vested | (88) | 6.64 | |||||||||
| Outstanding at March 31, 2022 | 55 | 15.88 | |||||||||
| RSAs Outstanding | Weighted- Average Grant Date Fair Value per Share | |||||
| Outstanding at December 31, 2016 | 44 | $ | 16.31 | |||
| Granted | 17 | 17.60 | ||||
| Vested | (14 | ) | 17.91 | |||
| Outstanding at December 31, 2017 | 47 | $ | 16.28 | |||
RSU Activity
Compensation expense for RSUs is recognized over the estimated vesting period. Following is a summary of RSU activity (shares in thousands):
| RSUs Outstanding | Weighted- Average Grant Date Fair Value per Share | ||||||||||
| Outstanding at December 31, 2020 | 1,722 | $ | 4.91 | ||||||||
| Granted | 52 | 27.58 | |||||||||
| Vested | (331) | 5.83 | |||||||||
| Outstanding at March 31, 2021 | 1,443 | 5.52 | |||||||||
| Granted | 602 | 12.11 | |||||||||
| Forfeited, canceled or expired | (102) | 9.12 | |||||||||
| Vested | (592) | 5.05 | |||||||||
| Outstanding at March 31, 2022 | 1,351 | 8.39 | |||||||||
| RSUs Outstanding | Weighted- Average Grant Date Fair Value per Share | |||||
| Outstanding at December 31, 2016 | 109 | $ | 18.17 | |||
| Granted | 108 | 16.94 | ||||
| Forfeited, canceled or expired | (24 | ) | 17.78 | |||
| Vested | (2 | ) | 19.07 | |||
| Outstanding at December 31, 2017 | 191 | $ | 17.64 | |||
PSU Activity
Compensation expense for PSUs is recognized over the estimated requisite service period based on the number of PSUs ultimately expected to vest.
In February 2014, we granted PSU awards to certain of our executive officers covering a total of 82,494 shares of our common stock. The PSUs vested in 2017 based on achievement of goals established for operating income and revenue growth for the three-year performance period ended 2016. These awards vested in full in 2017 at the 150% maximum achievement for a total of 123,739 shares.
In May 2020, we granted PSU awards to certain of our executive officers and management team covering a total of 262,999 shares of our common stock. The PSUs vest based on achievement of the goal that measures our relative total shareholder return against pre-approved peers over a three-year performance period ending May 5, 2023. The number of shares that ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150%. These awards are expected to vest at approximately 115% achievement, net of any forfeitures.100% achievement. As of DecemberMarch 31, 2017,2022, approximately 44,900212,000 PSU shares remained, net of actual forfeitures to date.
In December 2015,May and September 2021, we granted PSU awards to a certain of our executive officerofficers and management team personnel covering a total of 117,230510,404 shares of our common stock. The PSUs vest based on achievement of certainour goal regarding paid subscribers, cumulative revenue and cumulative adjusted operating income and operating margin goals forover a three-year performance period.period ending May 14, 2024. The number of shares vesting under the PSU awardsthat ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of
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shares that vest can range from 30% of the PSU awards if minimum thresholds are achieved to a maximum of 200%. These awards are expected to vest at 100% achievement. As of DecemberMarch 31, 2017, approximately 13,6002022, 498,137 PSU shares remained, net of actual forfeitures to date. These awards were authorized for replacement by our Board of Directors during 2017 and will be processed in 2018.
In February 2016,2022, we granted PSU awards to certain of our executive officers and management team covering a total of 54,818271,938 shares of our common stock. The PSUs vest based on achievement of goals establishedthe goal of the closing price for growth in operating income asour common stock reaching $10 and having a percentagevolume weighted average price of net revenue and return on invested capital over aat least $10 for 60 consecutive trading days at any time thereafter during the three-year performance period.period ending February 23, 2025. The number of shares that ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from 60%50% of the PSU awards if minimum thresholds are achieved to a maximum of 150%100%. These awards are expected to vest at 100% achievement. As of DecemberMarch 31, 2017, approximately 48,6002022, 271,938 PSU shares remained, net of actual forfeitures to date.
Following is a summary of PSU activity (shares in thousands):
| PSUs Outstanding | Weighted- Average Grant Date Fair Value per Share | ||||||||||
| Outstanding at December 31, 2020 | 323 | $ | 7.62 | ||||||||
| Forfeited, canceled or expired | (60) | 11.90 | |||||||||
| Outstanding at March 31, 2021 | 263 | 6.64 | |||||||||
| Granted and additional goal shares awarded | 782 | 9.61 | |||||||||
| Forfeited, canceled or expired | (63) | 8.74 | |||||||||
| Outstanding at March 31, 2022 | 982 | 8.87 | |||||||||
| PSUs Outstanding | Weighted- Average Grant Date Fair Value per Share | |||||
| Outstanding at December 31, 2016 | 264 | $ | 14.66 | |||
| Granted and additional goal shares awarded | 113 | 13.84 | ||||
| Forfeited, canceled or expired | (81 | ) | 16.99 | |||
| Vested | (124 | ) | 8.23 | |||
| Outstanding at December 31, 2017 | 172 | $ | 17.65 | |||
