UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




FORM	10-Q

(Mark One)



~~[x]~~☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2019



~~[ ]~~☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-31321




NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)



Washington		94-3002667
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

17750 S.E. 6th Way

Vancouver, Washington98683

(Address of principal executive offices, including zip code)

~~(360)~~ (360) 859-2900

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	NLS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	[ ]	Accelerated filer ~~[x]~~	[x]	Non-accelerated filer	[ ]	Smaller reporting company ~~[ ]~~	☒	Emerging growth company ~~[ ]~~	☐
			~~(Do not check if a smaller reporting company)~~			If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ~~[ ]~~☐ No [x]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

The number of shares outstanding of the registrant's common stock as of ~~October~~July 31, ~~2017~~2019 was ~~30,707,103~~29,728,321 shares.

NAUTILUS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019



	PART I
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1722
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2634
Item 4.	Controls and Procedures	2734

	PART II
Item 1.	Legal Proceedings	2835
Item 1A.	Risk Factors	28
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	2835
Item 6.	Exhibits	2935
Signatures		2936

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NAUTILUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands)

As of
September 30, 2017    December 31, 2016
Assets
Cash and cash equivalents $ 30,481
   $ 47,874
Available-for-sale securities 47,295
31,743
Trade receivables, net of allowances of $472 and $170 38,534
   45,458
Inventories 57,646
   47,030
Prepaids and other current assets 6,795
   8,020
Income taxes receivable 61
   3,231
Total current assets 180,812
183,356
Property, plant and equipment, net 16,166
   17,468
Goodwill 62,045
   61,888
Other intangible assets, net 67,354
   69,800
Deferred income tax assets, non-current —
11
Other assets 456
   543
Total assets $ 326,833
$ 333,066
Liabilities and Shareholders' Equity
Trade payables $ 62,146
   $ 66,020
Accrued liabilities 8,056
   12,892
Warranty obligations, current portion 3,253
   3,500
Note payable, current portion, net of unamortized debt issuance costs
of $7 and $7
15,993
15,993
Total current liabilities 89,448
98,405
Warranty obligations, non-current 3,048

3,950
Income taxes payable, non-current 2,646
   2,403
Deferred income tax liabilities, non-current 16,868
16,991
Other non-current liabilities 2,365
   2,481
Note payable, non-current, net of unamortized debt issuance costs
of $16 and $21
35,984
47,979
Total liabilities 150,359
172,209
Commitments and contingencies (Note 14)

Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 30,707 and
30,825 shares issued and outstanding
826
   578
Retained earnings 175,969
   161,496
Accumulated other comprehensive loss (321 )    (1,217 )
Total shareholders' equity 176,474
   160,857
Total liabilities and shareholders' equity $ 326,833
   $ 333,066



	As of
	June 30, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	7,921		$	38,125
Available-for-sale securities	—			25,392
Trade receivables, net of allowances of $47 and $99	29,039			45,847
Inventories	51,981			68,465
Prepaids and other current assets	7,158			7,980
Income taxes receivable	3,042			5,653
Total current assets	99,141			191,462
Property, plant and equipment, net	22,340			22,216
Operating lease right-of-use assets	22,524			—
Goodwill	—			63,452
Other intangible assets, net	44,856			55,240
Other assets	4,406			574
Total assets	$	193,267		$	332,944
Liabilities and Shareholders' Equity
Trade payables	$	31,540		$	87,265
Accrued liabilities	9,318			8,370
Operating lease liabilities, current portion	3,657			—
Warranty obligations, current portion	3,045			3,213
Note payable, current portion, net of unamortized debt issuance costs of $0 and $7	—			15,993
Total current liabilities	47,560			114,841
Operating lease liabilities, non-current	20,860			—
Warranty obligations, non-current	2,443			2,362
Income taxes payable, non-current	3,677			3,427
Deferred income tax liabilities, non-current	3,108			11,888
Other non-current liabilities	103			1,837
Debt payable, non-current, net of unamortized debt issuance costs of $262 and $7	20,600			15,993
Total liabilities	98,351			150,348
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 29,728 and 29,545 shares issued and outstanding	213			215
Retained earnings	95,629			183,290
Accumulated other comprehensive loss	(926		)	(909		)
Total shareholders' equity	94,916			182,596
Total liabilities and shareholders' equity	$	193,267		$	332,944

See accompanying Notes to Condensed Consolidated Financial Statements.

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net sales	$	59,004		$	75,498		$	143,404		$	190,311
Cost of sales	41,487			41,850			90,045			97,792
Gross profit	17,517			33,648			53,359			92,519
Operating expenses:
Selling and marketing	17,631			22,084			51,674			58,847
General and administrative	9,443			6,327			17,098			13,237
Research and development	3,849			4,035			8,160			8,536
Goodwill and intangible impairment charge	72,008			—			72,008			—
Total operating expenses	102,931			32,446			148,940			80,620
Operating (loss) income	(85,414		)	1,202			(95,581		)	11,899
Other (expense) income:
Interest income	(3		)	294			162			566
Interest expense	(223		)	(268		)	(428		)	(561		)
Other, net	171			31			(222		)	18
Total other (expense) income, net	(55		)	57			(488		)	23
(Loss) income from continuing operations before income taxes	(85,469		)	1,259			(96,069		)	11,922
Income tax (benefit) expense	(6,725		)	252			(8,841		)	2,775
(Loss) income from continuing operations	(78,744		)	1,007			(87,228		)	9,147
Discontinued operations:
Loss from discontinued operations before income taxes	(51		)	(11		)	(65		)	(28		)
Income tax expense of discontinued operations	73			68			150			132
Loss from discontinued operations	(124		)	(79		)	(215		)	(160		)
Net (loss) income	$	(78,868	)	$	928		$	(87,443	)	$	8,987

Basic (loss) income per share from continuing operations	$	(2.65	)	$	0.03		$	(2.94	)	$	0.30
Basic loss per share from discontinued operations	—			—			(0.01		)	(0.01		)
Basic net (loss) income per share⁽¹⁾	$	(2.66	)	$	0.03		$	(2.95	)	$	0.30

Diluted (loss) income per share from continuing operations	$	(2.65	)	$	0.03		$	(2.94	)	$	0.30
Diluted loss per share from discontinued operations	—			—			(0.01		)	(0.01		)
Diluted net (loss) income per share⁽¹⁾	$	(2.66	)	$	0.03		$	(2.95	)	$	0.29
Shares used in per share calculations:
Basic	29,678			30,193			29,626			30,253
Diluted	29,678			30,476			29,626			30,533

Three Months Ended September 30, Nine Months Ended September 30,
2017
2016 2017 2016
Net sales $ 88,132

$ 80,818
$ 278,413
$ 280,275
Cost of sales 46,817

41,601
136,975
132,852
Gross profit 41,315

39,217
141,438
147,423
Operating expenses:

Selling and marketing 18,028

21,394
79,321
81,284
General and administrative 6,305

6,177
21,106
21,611
Research and development 3,617

3,435
11,114
10,444
Total operating expenses 27,950

31,006
111,541
113,339
Operating income 13,365

8,211
29,897
34,084
Other income (expense):
Interest income 170
60
476
182
Interest expense (377 ) (489 ) (1,233 ) (1,469 )
Other, net 46
211
109
(49 )
Total other expense, net (161 )
(218 ) (648 ) (1,336 )
Income from continuing operations before income taxes 13,204

7,993
29,249
32,748
Income tax expense 4,862

148
10,156
9,621
Income from continuing operations 8,342

7,845
19,093
23,127
Discontinued operations:
Loss from discontinued operations before income taxes (40 )
(308 ) (1,695 ) (612 )
Income tax expense (benefit) of discontinued operations 61

(57 ) (425 ) (53 )
Loss from discontinued operations (101 )
(251 ) (1,270 ) (559 )
Net income $ 8,241

$ 7,594
$ 17,823
$ 22,568

Basic income per share from continuing operations $ 0.27

$ 0.25
$ 0.62
$ 0.74
Basic loss per share from discontinued operations —

(0.01 ) (0.04 ) (0.02 )
Basic net income per share⁽¹⁾
$ 0.27

$ 0.24
$ 0.58
$ 0.73

Diluted income per share from continuing operations $ 0.27
$ 0.25
$ 0.61
$ 0.74
Diluted loss per share from discontinued operations —
(0.01 ) (0.04 ) (0.02 )
Diluted net income per share $ 0.27
$ 0.24
$ 0.57
$ 0.72
Shares used in per share calculations:
Basic 30,749

31,118
30,739
31,069
Diluted 31,075
31,385
31,098
31,340

⁽¹⁾ May not add due to rounding.

See accompanying Notes to Condensed Consolidated Financial Statements.

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited and in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net (loss) income	$	(78,868	)	$	928		$	(87,443	)	$	8,987
Other comprehensive (loss) income:
Unrealized (loss) gain on available-for-sale securities, net of income tax expense (benefit) of $1, $11, $6 and $(7)	(9		)	34			6			(3		)
(Loss) gain on derivative securities, effective portion, net of income tax expense (benefit) of $(106), $4, $(139) and $32	(123		)	12			(223		)	156
Foreign currency translation, net of income tax expense (benefit) of $(9), $3, $(64) and $0	72			(338		)	200			(455		)
Other comprehensive (loss) income	(60		)	(292		)	(17		)	(302		)
Comprehensive (loss) income	$	(78,928	)	$	636		$	(87,460	)	$	8,685

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 8,241
$ 7,594
$ 17,823
$ 22,568
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities, net of income tax expense (benefit) of $13, $0, $(4) and $16 22
—
(6 ) 26
Gain (loss) on derivative securities, effective portion, net of income tax expense (benefit) of $14, $150, $79 and $(326) 23
248
130
(539 )
Foreign currency translation, net of income tax expense (benefit) of $1, $(1), $3 and $(6) 371
(45 ) 772
397
Other comprehensive income (loss) 416
203
896
(116 )
Comprehensive income $ 8,657
$ 7,797
$ 18,719
$ 22,452

See accompanying Notes to Condensed Consolidated Financial Statements.

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited and in thousands)



	Common Stock				Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
	Shares	Amount			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balances at December 31, 2018	29,545	$	215		$	183,290		$	(909	)	$	182,596
Net loss	—	—			(8,575		)	—			(8,575		)
Unrealized gain on marketable securities, net of income tax expense of $5	—	—			—			15			15
Loss on derivative securities, effective portion, net of income tax benefit of $33	—	—			—			(100		)	(100		)
Foreign currency translation adjustment, net of income tax benefit of $55	—	—			—			128			128
Stock-based compensation expense	—	(147		)	(218		)	—			(365		)
Common stock issued under equity compensation plan, net of shares withheld for tax payments	48	(68		)	—			—			(68		)
Balances at March 31, 2019	29,593	—			174,497			(866		)	173,631
Net loss	—	—			(78,868		)	—			(78,868		)
Unrealized loss on marketable securities, net of income tax expense of $1	—	—			—			(9		)	(9		)
Loss on derivative securities, effective portion, net of income tax benefit of $106	—	—			—			(123		)	(123		)
Foreign currency translation adjustment, net of income tax benefit of $9	—	—			—			72			72
Stock-based compensation expense	—	9			—			—			9
Common stock issued under equity compensation plan, net of shares withheld for tax payments	87	36			—			—			36
Common stock issued under employee stock purchase plan	48	168			—			—			168
Balances at June 30, 2019	29,728	$	213		$	95,629		$	(926	)	$	94,916

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited and in thousands)



	Common Stock					Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
	Shares		Amount			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balances at December 31, 2017	30,305		$	—		$	179,448		$	(259	)	$	179,189
Net income	—		—			8,059			—			8,059
Unrealized loss on marketable securities, net of income tax benefit of $18	—		—			—			(37		)	(37		)
Gain on derivative securities, effective portion, net of income tax expense of $28	—		—			—			144			144
Foreign currency translation adjustment, net of income tax benefit of $3	—		—			—			(117		)	(117		)
Stock-based compensation expense	—		479			—			—			479
Common stock issued under equity compensation plan, net of shares withheld for tax payments	67		(99		)	—			—			(99		)
Repurchased shares	(211	)	(150		)	(2,568		)	—			(2,718		)
Balances at March 31, 2018	30,161		230			184,939			(269		)	184,900
Net income	—		—			928			—			928
Unrealized gain on marketable securities, net of income tax expense of $11	—		—			—			34			34
Gain on derivative securities, effective portion, net of income tax expense of $4	—		—			—			12			12
Foreign currency translation adjustment, net of income tax expense of $3	—		—			—			(338		)	(338		)
Stock-based compensation expense	—		268			—			—			268
Common stock issued under equity compensation plan, net of shares withheld for tax payments	87		(198		)	—			—			(198		)
Common stock issued under employee stock purchase plan	20		232			—			—			232
Repurchased shares	(31	)	(70		)	(178		)	—			(248		)
Balances at June 30, 2018	30,237		$	462		$	185,689		$	(561	)	$	185,590

See accompanying Notes to Condensed Consolidated Financial Statements.

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
(Loss) income from continuing operations	$	(87,228	)	$	9,147
Loss from discontinued operations	(215		)	(160		)
Net (loss) income	(87,443		)	8,987
Adjustments to reconcile net (loss) income to cash (used in) provided by
operating activities:
Depreciation and amortization	5,192			4,468
Provision (benefit) for allowance for doubtful accounts	52			(39		)
Inventory lower-of-cost-or-market/NRV adjustments	491			179
Stock-based compensation (benefit) expense	(356		)	747
Loss on asset dispositions	536			1
Goodwill and intangible impairment charge	72,008			—
Deferred income taxes, net of valuation allowance	(9,372		)	1,323
Other	(108		)	23
Changes in operating assets and liabilities:
Trade receivables	16,755			17,506
Inventories	16,457			10,821
Prepaids and other assets	2,329			(734		)
Income taxes receivable	2,611			(4,115		)
Trade payables	(56,234		)	(20,659		)
Accrued liabilities and other liabilities, including warranty obligations	(134		)	(1,919		)
Net cash (used in) provided by operating activities	(37,216		)	16,589
Cash flows from investing activities:
Purchases of available-for-sale securities	—			(29,522		)
Proceeds from sales and maturities of available-for-sale securities	25,271			26,815
Purchases of property, plant and equipment	(3,874		)	(4,228		)
Purchases of other investments in non-controlled affiliates	(3,500		)	—
Net cash provided by (used in) investing activities	17,897			(6,935		)
Cash flows from financing activities:
Proceeds from long-term debt	529			—
Payments on long-term debt	(11,667		)	(8,000		)
Payments for stock repurchases	—			(3,127		)
Proceeds from employee stock purchases	168			—
Proceeds from exercise of stock options	75			492
Tax payments related to stock award issuances	(107		)	(396		)
Net cash used in financing activities	(11,002		)	(11,031		)
Effect of exchange rate changes on cash and cash equivalents	117			(587		)
Decrease in cash and cash equivalents	(30,204		)	(1,964		)
Cash and cash equivalents:
Beginning of period	38,125			27,893
End of period	$	7,921		$	25,929
Supplemental disclosure of cash flow information:
Cash paid for interest	$	677		$	558
Cash (received) paid for income taxes, net	(2,324		)	6,366
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid	$	537		$	437

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Income from continuing operations $ 19,093
$ 23,127
Loss from discontinued operations (1,270 ) (559 )
Net income 17,823
22,568
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 6,386
5,748
Provision for allowance for doubtful accounts 375
183
Inventory lower-of-cost-or-market/NRV adjustments 294
72
Stock-based compensation expense 1,938
2,045
Loss on asset dispositions 58
107
Deferred income taxes, net of valuation allowance (193 ) 5,707
Excess tax benefit related to stock-based awards —
(1,852 )
Other (101 ) 6
Changes in operating assets and liabilities:
Trade receivables 6,532
13,633
Inventories (11,056 ) (4,716 )
Prepaids and other current assets 1,644
(413 )
Income taxes receivable 3,170
(5,397 )
Trade payables (4,275 ) (15,475 )
Accrued liabilities, including warranty obligations (5,875 ) (7,286 )
Net cash provided by operating activities 16,720
14,930
Cash flows from investing activities:
Purchases of available-for-sale securities (57,054 ) (22,972 )
Proceeds from maturities of available-for-sale securities 41,620
24,818
Proceeds from sales of available-for-sale securities —
71
Acquisition of business, net of cash acquired —
(3,468 )
Purchases of property, plant and equipment (2,726 ) (3,237 )
Net cash used in investing activities (18,160 ) (4,788 )
Cash flows from financing activities:
Payments on long-term debt (12,000 ) (12,000 )
Payments for stock repurchases (4,848 ) —
Proceeds from exercise of stock options and employee stock plan purchases 548
531
Tax payments related to stock award issuances (741 ) (221 )
Excess tax benefit related to stock-based awards —
1,852
Net cash used in financing activities (17,041 ) (9,838 )
Effect of exchange rate changes on cash and cash equivalents 1,088
87
Increase (decrease) in cash and cash equivalents (17,393 ) 391
Cash and cash equivalents:
Beginning of period 47,874
30,778
End of period $ 30,481
$ 31,169
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,228
$ 1,462
Cash paid for income taxes, net 5,686
11,331
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid $ 336
$ 922

See accompanying Notes to Condensed Consolidated Financial Statements.

NAUTILUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) GENERAL INFORMATION

Basis of Consolidation and Presentation

The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Nautilus, Inc. and its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 (the ~~“2016~~“2018 Form 10-K”).

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. Further information regarding significant estimates can be found in our ~~2016~~2018 Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, and our results of operations, comprehensive (loss) income and ~~comprehensive income~~shareholders' equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~,2018 and our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. Interim results are not necessarily indicative of results for a full year. Our revenues typically vary seasonally, and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.

Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.

~~New~~Recent Accounting Pronouncements

Recently Adopted Pronouncements

~~ASU 2017-12~~ASUs 2018-11, 2018-10, 2018-01 and 2016-02

In ~~August 2017,~~February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)." ASU 2016-02 replaces the existing guidance in Accounting Standards Codification ("ASC") 840, Leases. The new standard requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, "Land Easement Practical Expedient for Transition to Topic 842"; ASU 2018-10, "Codification Improvements to Topic 842, Leases;" and ASU 2018-11, "Targeted Improvements." The new standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating. For finance leases, the lessee recognizes interest expense and amortizes the ROU asset, and, for operating leases, the lessee recognizes lease expense on a straight-line basis.

The new standard was effective for us on January 1, 2019. A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard were not provided for dates and periods prior to January 1, 2019.

The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permitted us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification, and initial direct costs. We elected the use-of-hindsight with respect to determining lease terms. We did not elect the practical expedient pertaining to land easements as it is not applicable to us.

The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Variable payments, including payments for the Company's proportionate share of the building's property taxes, insurance, and common area maintenance, are treated as non-lease components and are recognized in earnings in the period for which the costs occur.

The new standard had a material effect on our financial statements with the most significant effects relating to the recognition of new ROU assets and lease liabilities on our balance sheet for our facilities operating leases, and providing significant new disclosures about our leasing activities.

We reviewed our existing vendor contracts for potential embedded leases, as well as renewal options and whether exercises of renewal options were reasonably certain. Based on our analyses of our existing operating and financing leases, we recognized additional operating lease liabilities of approximately $25 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum lease payments under current leasing standards for existing operating leases, net of reductions for the impacts of deferred rents and lease incentives. The additional disclosures required by the ASU are included in Note 8, Leases.

ASU 2018-09

In July 2018, the FASB issued ASU 2018-09, "Codification Improvements." The FASB has a standing project to address suggestions received from stakeholders on the ASC and to make other incremental improvements to GAAP. This perpetual project facilitates ASC updates for technical corrections, clarifications, and other minor improvements, and these amendments are referred to as Codification improvements. ASU 2018-09 includes amendments affecting a wide variety of topics and applies to all reporting entities within the scope of the affected accounting guidance. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in the ASU do not require transition guidance and are effective upon issuance of the ASU. However, many of the amendments in the ASU have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. Our adoption of ASU 2018-09 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.

ASU 2018-07

In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting." ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards with certain exceptions. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Further, Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. ASU 2018-07 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Our adoption of ASU 2018-07 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.

ASU 2018-02

In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA, thereby eliminating the stranded tax effects and improving the usefulness of reported information to financial statement users. ASU 2018-02 is effective for all entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for public business entities for which financial statements have not yet been issued. Our adoption of ASU 2018-02 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.

ASU 2017-12

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging ~~Activities".~~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 amendments in ASU 2017-12 also simplify the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity's intended hedging strategies. ASU 2017-12 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. ~~Early application is permitted in any interim period after issuance of the new standard, with effect of adoption reflected as of the beginning of the fiscal year of adoption.~~ For cash flow and net investment hedges existing as of the adoption date, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income

and opening retaining earnings. Amended presentation and disclosure guidance is required only prospectively, and certain transition elections are available upon adoption. ~~While we do not expect the~~Our adoption of ASU 2017-12 ~~to have a~~as of January 1, 2019 had no material ~~effect on our business, we are evaluating any potential~~ impact ~~that adoption of ASU 2017-12 may have~~ on our financial position, results of operations or cash flows.

Recently Issued Pronouncements Not Yet Adopted

ASU ~~2017-09~~2019-01

In ~~May 2017,~~March 2019, the FASB issued ASU ~~2017-09, "Compensation - Stock Compensation~~2019-01, "Leases (Topic ~~718) - Scope~~842): Codification Improvements." The amendments in ~~Modification Accounting".~~ ASU 2017-09 provides clarity and reduces diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. An entity should account for the effects of a modification unless all of certain criteria are met. Those criteria relate to fair value, vesting conditions and classification of the modified award. If all2019-01 address three conditions are the same for the modified award as for the original award, then the entity should not account for the effects of the modification. ASU 2017-09 is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim

period, for public business entities for reporting periods for which financial statements have not yet been issued. We do not expect the adoption of ASU 2017-09 to have a material effect on our financial position, results of operations or cash flows.

~~ASU 2017-04~~

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment". ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparingissues (1) determining the fair value of ~~a reporting unit with its carrying amount,~~the underlying asset by lessors that are not manufactures or dealers; (2) presentation on the statement of cash flows of sales-type 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 allocateddirect financing leases; and (3) transition disclosures related 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.Topic 250, Accounting Changes and Error Corrections. ASU ~~2017-04~~2019-01 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 ~~on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We~~with early application permitted. While we do not expect the adoption of ASU ~~2017-04~~2019-01 to have a material effect on our business, we are evaluating the potential impact that ASU 2019-01 may have on our financial position, results of operations orand cash flows.

ASU ~~2016-15~~2018-15

In August ~~2016,~~2018, the FASB issued ASU ~~2016-15, "Statement of Cash Flows (Topic 230)~~2018-15, "Intangibles - ~~Classification of Certain Cash Receipts~~Goodwill and ~~Cash Payments.~~Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The amendments in ASU ~~2016-15 are intended~~2018-15 align the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement ("CCA") that is a service contract with the requirements for capitalizing implementation costs incurred to ~~add~~develop or ~~clarify~~obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected. ASU 2018-15 also includes provisions for expensing the capitalized implementation costs over the term of the hosting arrangement, and application of impairment and abandonment guidance onunder Subtopics 350-40 and 360-10, respectively. Further, the ~~classification of certain cash receipts and payments~~amendments include presentation requirements in the ~~statement of cash flows, with the intent of reducing diversity in practice~~entity's financial statements for the ~~eight (8) types of cash flows identified.~~capitalized implementation costs and related amortization expense. ASU ~~2016-15~~2018-15 is effective for public ~~companies'~~business entities for fiscal years, ~~including~~and interim periods within those fiscal years, beginning after December 15, ~~2017.~~2019. Early adoption is ~~permitted. Entities must apply~~permitted, and the ~~guidance~~amendments should be applied either retrospectively or prospectively to all ~~periods presented, but may apply it prospectively if retrospective application would be impracticable.~~implementation costs incurred after the date of adoption. We expect to have presentation changes to our consolidated balance sheets, otherwise, we do not expect the adoption of ASU ~~2016-15~~2018-15 to have a material impact to our financial statements or to our business processes.

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, which was finalized in August 2018. The main provisions include removals, modifications, and additions of specific disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption, while all other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity may early adopt upon issuance of ASU 2018-13 those amendments that remove or modify disclosures and delay adoption of the additional disclosures until the effective date. While we do not expect the adoption of ASU 2018-13 to have a material effect on our business, we are evaluating the potential impact that the new ASU may have on our financial position, results of operations orand cash flows.

ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, "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 with~~requires 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. 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 we~~including interim periods within those fiscal years. We are currently assessing the impact of adopting this standard but do not expect the adoption of ~~ASU 2016-13~~this guidance to ~~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 or cash flows.~~

~~ASU 2016-09~~

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted subject to certain requirements, and the method of application (i.e., retrospective, modified retrospective or prospective) depends on the transaction area that is being amended. Related to forfeitures, we changed our accounting treatment of forfeiture expense reversals from "at vest date" to "at forfeiture date." We applied the guidance on a modified retrospective basis, which resulted in a cumulative effective adjustment (in thousands) of $28 reduction to beginning retained earnings. In addition, related to excess tax benefits, we recognized all current period expense through the statement of operations and presented excess tax benefits as an operating cash flow, applied prospectively, with no adjustment to prior periods. The adoption of ASU 2016-09 in January 2017 did not have a material impact on our financial position, results of operations orand cash flows.

~~ASU 2016-02~~

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 replaces the existing guidance in Accounting Standards Codification ("ASC") 840, Leases. The new standard would require companies and other organizations to include lease obligations on their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization(2) REVENUES

Revenue Recognition

Revenues are recognized when control of the ROU asset, and for operating leases the lessee would recognize a straight-line total lease expense. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for public companies' annual periods, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently assessing the impact that ASU 2016-02 will have on our consolidated financial statements,

and expect that the primary impact upon adoption will be the recognition, on a discounted basis, of our minimum commitments under non-cancellable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease liabilities.

~~ASU 2015-11~~

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. Our adoption of ASU 2015-11 in January 2017 did not have a material effect on our financial position, results of operations or cash flows.

~~ASU 2014-09~~

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 replaces most existing revenue recognition guidance, and requires companies to recognize revenue based upon the transfer of promised goods ~~and/~~or services is transferred to our customers, in an amount that reflects the consideration ~~to which the entity expects~~we expect to be entitled to in exchange for those goods ~~and/~~or services. ~~In addition,~~Our product sales and shipping revenues are reported net of promotional discounts, returns allowances, contractual rebates, and consideration payable to our customers. We estimate the ~~new guidance requires enhanced disclosures, including~~ revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginningimpact of retail sales incentive programs based on ~~or after December 15, 2017, applied retrospectively to each prior period presented or retrospectively with a cumulative effect adjustment recognized as~~the planned duration of the ~~adoption date.~~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 ~~do not plan to early adopt this new standard,~~estimate our liability for product returns based on historical experience, and ~~accordingly, will adopt~~record the ~~new standard on January 1, 2018. We~~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 ~~planning to adopt using~~adjusted in the ~~full retrospective method.~~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 revenue on a net basis because our performance obligation is to facilitate the arrangement between our customers and the third-party performance obligor.

For customer contracts that include multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price based on prices charged to customers or using expected cost plus margin.

Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Product sales	$	56,326	$	71,470	$	136,458	$	181,220
Extended warranties and services	1,168		1,737		3,637		5,219
Other⁽¹⁾	1,510		2,291		3,309		3,872
Net sales	$	59,004	$	75,498	$	143,404	$	190,311

⁽¹⁾ Other revenue is primarily freight and delivery and royalty income.

Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
United States	$	48,897	$	65,498	$	119,085	$	169,079
Canada	3,557		3,283		11,486		9,066
All other	6,550		6,717		12,833		12,166
Net sales	$	59,004	$	75,498	$	143,404	$	190,311

As of June 30, 2019, estimated revenue expected to be recognized in the future totaled $1.8 million, primarily related to customer order backlog, which includes firm orders for future shipment to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. Retail orders of $1.4 million and Direct orders of $0.4 million comprise our backlog as of June 30, 2019. 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.

The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue, all of which are short-term in nature. The revenue recognized from contract liabilities and the remaining balances are presented in accrued liabilities and are shown below (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Balance, beginning of period	$	479		$	693		$	816		$	1,084
Cash additions	351			304			512			993
Revenue recognition	(268		)	(249		)	(766		)	(1,329		)
Balance, end of period	$	562		$	748		$	562		$	748

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 ~~identified~~been less than one year. These costs are recorded in selling and ~~made substantial progress in analyzing~~marketing expense.

We generally account for our ~~principal revenue streams by channel, including potential impacts on~~shipping and handling activities as a fulfillment activity, consistent with the timing of ~~recognition of variable consideration and contract costs, primarily sales commissions, and on presentation of~~revenue recognition; that is, when our ~~installation and services revenue. In addition, we are nearing completion of our review of significant contracts and evaluation~~customer takes control of the ~~potential changes~~transferred goods. In the event that a customer were to ~~our business processes, controls, systems~~take control of a product prior to shipment, we make an accounting policy election to treat such shipping and disclosures resulting from adoption of the new standard. We expect to finish these assessments during the fourth quarter of 2017. Based on our analyses to date, we have identified potential accounting and financial reporting impacts to our business processes, controls, systems and disclosureshandling activities as a result of the new standard, and we are planning for those changes. Further, while we do not expect the adoption of ASU 2014-09, as amended, to have a material effect on our financial position, results of operations or cash flows, we do anticipate significant additional disclosure requirements upon adoption of the new standard.

~~(2) DISCONTINUED OPERATIONS~~

There was no revenue related to discontinued operations for the three and nine months ended September 30, 2017. However, we continue to have product liability expenses associated with product previously sold into the Commercial channel.fulfillment cost.

(3) INVESTMENTS

During the six months ended June 30, 2019, we made strategic equity securities investments to increase our digital capabilities. Effective January 1, 2018, we adopted ASU Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which 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 use quoted market prices to determine the fair values of equity securities with readily determinable 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. Management assesses each of these investments on an individual basis.

The accounting guidance related to the classification and measurement of certain equity investments requires us to account for these investments at fair value or to elect to account for these investments under the "practicability exception," which permits measurement of these investments at cost, minus impairments, plus or minus observable changes in price for each reporting period. As of June 30, 2019, we had elected the practicability exception for equity investments without readily determinable fair values of $3.5 million and have not recognized any impairments or any upward adjustments on either an annual or cumulative basis due to observable price changes.

As of June 30, 2019, the carrying values of our equity securities were included in the following line item in our consolidated balance sheets (in thousands):



	Measurement Alternative - No Readily Determinable Fair Value
Other assets	$	3,500

(4) 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 ~~as of September 30, 2017 and December 31, 2016~~ were as follows (in thousands):

September 30, 2017
Level 1 Level 2 Level 3 Total
Assets:
Cash Equivalents
Money market funds $ 6,848
$ —
$ —
$ 6,848
Commercial paper —
1,998
—
1,998
Total cash equivalents 6,848
1,998
—
8,846
Available-for-Sale Securities
Certificates of deposit⁽¹⁾
—
14,974
—
14,974
Commercial paper —
1,998
—
1,998
Corporate bonds —
25,313
—
25,313
U.S. government bonds —
5,010
—
5,010
Total available-for-sale securities —
47,295
—
47,295
Derivatives
Interest rate swap contract —
170
—
170
Total assets measured at fair value $ 6,848
$ 49,463
$ —
$ 56,311

Liabilities:
Derivatives
Foreign currency forward contracts $ —
$ (65 ) $ —
$ (65 )
Total liabilities measured at fair value $ —
$ (65 ) $ —
$ (65 )



	June 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash Equivalents
Money market funds	$	3	$	—	$	—	$	3
Total cash equivalents	3		—		—		3
Derivatives
Foreign currency forward contracts	—		62		—		62
Total derivatives	—		62		—		62
Total assets measured at fair value	$	3	$	62	$	—	$	65

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 )



	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash Equivalents
Money market funds	$	7,646	$	—	$	—	$	7,646
Total cash equivalents	7,646		—		—		7,646
Available-for-Sale Securities
Certificates of deposit⁽¹⁾	—		10,379		—		10,379
Corporate bonds	—		7,522		—		7,522
U.S. government bonds	—		7,491		—		7,491
Total available-for-sale securities	—		25,392		—		25,392
Derivatives
Interest rate swap contract	—		363		—		363
Foreign currency forward contracts	—		240		—		240
Total derivatives	—		603		—		603
Total assets measured at fair value	$	7,646	$	25,995	$	—	$	33,641

⁽¹⁾ All certificates of deposit are within current FDIC insurance limits.

We did not have any liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.

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 the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, nor for the year ended December 31, ~~2016.~~2018.

We did not have any changes to our valuation techniques during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, nor for the year ended December 31, ~~2016.~~2018.

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 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 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.

We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangible assets and certain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

ASC 350 — Intangibles — Goodwill and Other, requires us to 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 ~~did not~~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.

We perform ~~any valuations on assets or liabilities that are valued at fair value on~~ a ~~nonrecurring basis~~goodwill and indefinite-lived asset impairment evaluation during ~~the first nine months of 2017. During~~ the fourth quarter of ~~2016,~~each year. However, as a result of the decline in our market value relative to the market and our industry, identified as a triggering event, we performed an interim Step 1 evaluation and a market capitalization reconciliation during the second quarter of 2019.

The goodwill evaluation was performed using a quantitative assessment at each reporting unit level and we determined that is was more-likely-than-not that the fair value of goodwill assigned to our ~~annual~~reporting units was less than the carrying amount. We assigned 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 reporting units in Step 1 of the ASC 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 comparable companies to determine the reasonableness of that assumption and the fair values of the reporting units estimated in Step 1. Significant unobservable inputs and assumptions inherent in the valuation methodologies from Level 3 inputs were employed 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 to its respective fair value. We reconciled the aggregate fair values of the reporting units determined in Step 1 (as described above) to the enterprise market capitalization plus a reasonable control premium. We determined both reporting units were impaired and recorded a$63.5 million non-cash goodwill ~~and~~impairment.

The indefinite-lived ~~trade names impairment analyses effective as~~intangible assets evaluation was performed using the relief from royalty method during the second quarter of ~~October 1, 2016. During~~2019. This analysis was based on the ~~nine months ended September 30, 2017 and~~estimated future cash flows generated for each separate brand/trademark. We compared the carrying amount to the estimated fair values. Based on our evaluation, the Octane trademark with a carrying value of $14.2 million was written down to its fair value of $5.7 million, resulting in a $8.5 million non-cash intangible asset impairment.

During the year ended December 31, ~~2016, we did not record any other-than-temporary impairments on our financial~~2018, there were no assets ~~required to be measured~~or liabilities that were recorded at fair value on a nonrecurring basis.

The carrying values of cash and cash equivalents, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fair value due to their short maturities. The carrying value of our term loan approximates its fair value and falls under Level 2 of the fair value hierarchy, as the interest rate is variable and based on current market rates.

~~(4)~~(5) DERIVATIVES

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.

As of ~~September~~June 30, ~~2017,~~2019, we ~~had~~terminated a ~~$52.0~~$20.0 million interest rate swap ~~outstanding~~ with JPMorgan Chase Bank, N.A. ~~This~~The termination of this interest rate swap ~~matures on December 31, 2020~~discontinued the cash flow hedging relationship for our line of credit and ~~has a fixed rate~~had unrealized gains. As of ~~1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark. At September~~June 30, ~~2017, the one-month LIBOR rate was 1.24%.~~2019, we reclassified $0.1 million , net of tax, of unrealized gains from accumulated other comprehensive losses to other income.

We typically designate all interest rate swaps as cash flow hedges and, accordingly, record the change in fair value for the effective portion of these interest rate swaps in accumulated other comprehensive income rather than current period earnings until the underlying hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016,~~2019, there was no ineffectiveness. ~~As of September 30, 2017, we expect to reclassify a gain of less than $0.1 million from accumulated other comprehensive income to earnings within the next twelve months.~~

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 ~~September~~June 30, ~~2017,~~2019, total outstanding contract notional amounts were ~~$18.3~~$9.3 million. At ~~September~~June 30, ~~2017,~~2019, these outstanding balance sheet hedging derivatives had maturities of 90 days or less.

The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):


	Balance Sheet Classification		As of							Balance Sheet Classification		As of
		September 30, 2017				December 31, 2016				Balance Sheet Classification	June 30, 2019				December 31, 2018
Derivative instruments designated as cash flow hedges:
Interest rate swap contract	Balance Sheet Classification	Prepaids and other current assets		$	170			$	—		Prepaids and other current assets		$	—			$	291
	Accrued liabilities		—				38			Other assets		—				72
			$	170			$	38				$	—			$	363

Derivative instruments not designated as cash flow hedges:
Foreign currency forward contracts	Accrued liabilities		$	65			$	—		Prepaids and other current assets		$	—			$	240
										Accrued liabilities		62				—
												$	62			$	240

The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):



	Statement of Operations Classification	Three Months Ended June 30,						Six Months Ended June 30,
	Statement of Operations Classification	2019			2018			2019			2018
Derivative instruments designated as cash flow hedges:
(Loss) income recognized in other comprehensive (loss) income before reclassifications	---	$	(93	)	$	54		$	(128	)	$	214
Income reclassified from accumulated other comprehensive (loss) income to earnings for the effective portion	Interest expense	44			54			125			75
Income tax expense	Income tax (benefit) expense	(14		)	(12		)	(30		)	(17		)

Derivative instruments not designated as cash flow hedges:
Income (loss) recognized in earnings	Other, net	$	218		$	(895	)	$	(287	)	$	(1,924	)
Income tax (expense) benefit	Income tax (benefit) expense	(32		)	204			69			448

Statement of Operations Classification Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Derivative instruments designated as cash flow hedges:
Income (loss) recognized in other comprehensive income before reclassifications --- $ 8
$ 84
$ 6
$ (896 )
Loss reclassified from accumulated other comprehensive income to earnings for the effective portion Interest expense (26 ) (167 ) (189 ) (480 )
Income tax benefit Income tax expense 11
3
65
123

Derivative instruments not designated as cash flow hedges:
Loss recognized in earnings Other, net $ (53 ) $ —
$ (53 ) $ —
Income tax benefit Income tax expense 18
—
18
—

For additional information related to our derivatives, see Notes 34 and ~~10.~~12.

~~(5)~~(6) INVENTORIES

Inventories are stated at the lower of cost and net realizable value, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):


	As of				As of
	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Finished goods	$	53,271	$	43,130	$	46,363	$	63,257
Parts and components	4,375		3,900		5,618		5,208
Total inventories	$	57,646	$	47,030	$	51,981	$	68,465

~~(6)~~(7) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):


	Estimated Useful Life (in years)			As of						Estimated Useful Life (in years)			As of
	Estimated Useful Life (in years)			September 30, 2017			December 31, 2016			Estimated Useful Life (in years)			June 30, 2019			December 31, 2018
Automobiles	5	to	6	$	23		$	139		5			$	23		$	23
Leasehold improvements	4	to	20	3,426			3,388			4	to	20	3,831			3,782
Computer software and equipment	3	to	7	26,138			25,899			2	to	7	23,073			23,776
Machinery and equipment	3	to	5	14,732			13,085			3	to	5	17,565			16,756
Furniture and fixtures	5	to	20	2,230			2,238			5	to	20	2,832			2,827
Work in progress⁽¹⁾	N/A			1,647			768			N/A			3,305			1,590
Total cost				48,196			45,517						50,629			48,754
Accumulated depreciation				(32,030		)	(28,049		)				(28,289		)	(26,538		)
Total property, plant and equipment, net				$	16,166		$	17,468					$	22,340		$	22,216

⁽¹⁾ Work in progress includes ~~computer software~~information technology assets and production tooling.

Depreciation expense was as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Depreciation expense	$	1,632	$	1,244	$	3,307	$	2,873

~~(7)~~(8) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The rollforward of goodwill was as follows (in thousands):

Direct Retail Total
Balance, January 1, 2016 $ 2,113
$ 58,357
$ 60,470
Currency exchange rate adjustment 67
3
70
Business acquisition - measurement period adjustments —
1,348
1,348
Balance, December 31, 2016 2,180
59,708
61,888
Currency exchange rate adjustment 168
(11 ) 157
Balance, September 30, 2017 $ 2,348
$ 59,697
$ 62,045



	Direct			Retail			Total
Balance, January 1, 2018	$	2,335		$	59,695		$	62,030
Currency exchange rate adjustment	(185		)	5			(180		)
Business acquisition	1,602			—			1,602
Balance, December 31, 2018	3,752			59,700			63,452
Currency exchange rate adjustment	55			—			55
Goodwill impairment charge	(3,807		)	(59,700		)	(63,507		)
Balance, June 30, 2019	$	—		$	—		$	—

In accordance ASC 350 — Intangibles — Goodwill and Other, we perform a goodwill and indefinite-lived asset impairment evaluation during the fourth quarter of each year. However, as a result of the decline in our market value relative to the market and our industry, identified as a triggering event, we performed an interim evaluation and a market capitalization reconciliation during the second quarter of 2019, which resulted in a non-cash goodwill and indefinite-lived intangible assets impairment charge of $72.0 million, $63.5 million and $8.5 million respectively.

Other Intangible Assets

Other intangible assets consisted of the following (in thousands):


	Estimated Useful Life (in years)			As of						Estimated Useful Life (in years)			As of
	Estimated Useful Life (in years)			September 30, 2017			December 31, 2016			Estimated Useful Life (in years)			June 30, 2019			December 31, 2018
Indefinite-lived trademarks(1)	N/A			$	32,052		$	32,052		N/A			$	14,752		$	23,252
Definite-lived trademarks	10	to	15	2,600			2,600			5	to	15	2,850			2,850
Patents	8	to	24	15,187			31,487			7	to	24	14,243			14,243
Customer relationships	10	to	15	24,700			24,700			10	to	15	24,700			24,700
				74,539			90,839						56,545			65,045
Accumulated amortization - definite-lived intangible assets				(7,185		)	(21,039		)				(11,689		)	(9,805		)
Other intangible assets, net				$	67,354		$	69,800					$	44,856		$	55,240

⁽¹⁾ During the second quarter of 2019, we identified impairment indicators with our indefinite-lived trademarks resulting in an $8.5 million non-cash intangible impairment charge.

Amortization expense was as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Amortization expense $ 812
$ 817
$ 2,446
$ 2,738



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Amortization expense	$	1,074	$	785	$	1,884	$	1,595

Future amortization of definite-lived intangible assets is as follows (in thousands):


Remainder of 2017	$	810
2018	3,164
2019	3,134
Remainder of 2019			$	1,610
2020	3,108		3,198
2021	3,078		3,168
2022			3,168
2023			3,168
Thereafter	22,008		15,792
	$	35,302	$	30,104

~~(8)~~(9) LEASES

We have several noncancellable 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 one 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.

The components of lease cost were as follows (in thousands):



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Operating lease expense	$	1,138	$	2,257

Leases with an initial term of 12 months or less ("short-term lease") are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. The short-term lease expense for the three and six months ended June 30, 2019 was $0.1 million and $0.2 million, respectively.

Minimum rental lease payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of rent abatement and incentives. Rental expense for operating leases for the three and six months ended June 30, 2019 was $1.0 million and $2.1 million, respectively.

Other information related to leases was as follows (dollars in thousands):



	As of
	June 30, 2019
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flow from operating leases	$	2,267
Additional operating lease information:
ROU assets obtained in exchange for operating lease obligations	$	24,212
Reductions to ROU assets resulting from reductions to operating lease obligations	$	1,689
Weighted average remaining operating lease term	4.2 years
Weighted average discount rate on operating leases	4.49%

Amounts disclosed for ROU assets obtained in exchange for lease obligations include amounts added to the carrying amount of ROU assets resulting from lease modifications and reassessments including transition liabilities upon adoption of ASC 842 on January 1, 2019. We determined the discount rate for leases using an incremental borrowing rate to calculate the ROU assets and lease liabilities.

Maturities of operating lease liabilities under noncancellable leases were as follows (in thousands):



	As of
	June 30, 2019
2019 - remaining	$	2,318
2020	4,691
2021	4,717
2022	4,567
2023	3,813
Thereafter	8,081
Total undiscounted lease payments	28,187
Less imputed interest	(3,670		)
Total lease liabilities	$	24,517

Under ASC 840, Leases, future minimum lease payments under noncancellable operating leases payments were as follows (in thousands):



	As of
	December 31, 2018
Year ending:
2019	$	5,366
2020	5,279
2021	4,147
2022	2,729
2023	1,698
Thereafter	2,647
Total minimum lease payments	$	21,866

(10) ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):


	As of				As of
	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Payroll and related liabilities	$	2,199	$	4,579	$	4,440	$	3,620
Other	5,857		8,313		4,878		4,750
Total accrued liabilities	$	8,056	$	12,892	$	9,318	$	8,370

~~(9)~~(11) PRODUCT WARRANTIES

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.

Changes in our product warranty obligations were as follows (in thousands):


	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2019			2018
Balance, beginning of period	$	7,450		$	8,545		$	5,575		$	6,117
Accruals	2,163			2,132			2,703			1,834
Payments	(3,312		)	(2,857		)	(2,790		)	(2,249		)
Balance, end of period	$	6,301		$	7,820		$	5,488		$	5,702

~~(10)~~(12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth the changes in accumulated other comprehensive income (loss), net of tax (in thousands) for the periods presented:

Unrealized Gain (Loss) on Available-for-Sale Securities Gain on Derivative Securities (Effective Portion) Foreign Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss)
Balance, July 1, 2017 $ (36 ) $ 83
$ (784 ) $ (737 )
Current period other comprehensive income
before reclassifications
22
8
371
401
Reclassification of amounts to earnings —
15
—
15
Net other comprehensive income during period 22
23
371
416
Balance, September 30, 2017 $ (14 ) $ 106
$ (413 ) $ (321 )



	Unrealized Gain (Loss) on Available-for-Sale Securities			Gain (Loss) on Derivative Securities			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Income (Loss)
Balance, March 31, 2019	$	9		$	123		$	(998	)	$	(866	)
Current period other comprehensive income (loss) before reclassifications	3			(93		)	72			(18		)
Amounts reclassified from accumulated other comprehensive (loss) income	(12		)	(30		)	—			(42		)
Net other comprehensive (loss) income during period	(9		)	(123		)	72			(60		)
Balance, June 30, 2019	$	—		$	—		$	(926	)	$	(926	)

Unrealized Loss on Available-for-Sale Securities Gain (Loss) on Derivative Securities (Effective Portion) Foreign Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss)
Balance, January 1, 2017 $ (8 ) $ (24 ) $ (1,185 ) $ (1,217 )
Current period other comprehensive income (loss) before reclassifications (6 ) 6
772
772
Reclassification of amounts to earnings —
124
—
124
Net other comprehensive income (loss) during period (6 ) 130
772
896
Balance, September 30, 2017 $ (14 ) $ 106
$ (413 ) $ (321 )



	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, 2019	$	(6	)	$	223		$	(1,126	)	$	(909	)
Current period other comprehensive income (loss) before reclassifications	19			(128		)	200			91
Amounts reclassified from accumulated other comprehensive (loss) income	(13		)	(95		)	—			(108		)
Net other comprehensive income (loss) during period	6			(223		)	200			(17		)
Balance, June 30, 2019	$	—		$	—		$	(926	)	$	(926	)

Unrealized Gain on Available-for-Sale Securities Gain (Loss) on Derivative Securities (Effective Portion) Foreign Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss)
Balance, July 1, 2016 $ 10
$ (787 ) $ (869 ) $ (1,646 )
Current period other comprehensive income (loss) before reclassifications —
84
(45 ) 39
Reclassification of amounts to earnings —
164
—
164
Net other comprehensive income (loss) during period —
248
(45 ) 203
Balance, September 30, 2016 $ 10
$ (539 ) $ (914 ) $ (1,443 )



	Unrealized Gain (Loss) on Available-for-Sale Securities			Gain (Loss) on Derivative Securities			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Income (Loss)
Balance, March 31, 2018	$	(101	)	$	360		$	(528	)	$	(269	)
Current period other comprehensive income (loss) before reclassifications	34			54			(338		)	(250		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			(42		)	—			(42		)
Net other comprehensive income (loss) during period	34			12			(338		)	(292		)
Balance, June 30, 2018	$	(67	)	$	372		$	(866	)	$	(561	)

Unrealized Gain (Loss) on Available-for-Sale Securities Loss on Derivative Securities (Effective Portion) Foreign Currency Translation Adjustments Accumulated Other Comprehensive Loss
Balance, January 1, 2016 $ (16 ) $ —
$ (1,311 ) $ (1,327 )
Current period other comprehensive income (loss) before reclassifications 26
(896 ) 397
(473 )
Reclassification of amounts to earnings —
357
—
357
Net other comprehensive income (loss) during period 26
(539 ) 397
(116 )
Balance, September 30, 2016 $ 10
$ (539 ) $ (914 ) $ (1,443 )



	Unrealized Loss on Available-for-Sale Securities			Gain (Loss) on Derivative Securities			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Income (Loss)
Balance, January 1, 2018	$	(64	)	$	216		$	(411	)	$	(259	)
Current period other comprehensive (loss) income before reclassifications	(3		)	214			(455		)	(244		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			(58		)	—			(58		)
Net other comprehensive (loss) income during period	(3		)	156			(455		)	(302		)
Balance, June 30, 2018	$	(67	)	$	372		$	(866	)	$	(561	)

~~(11)~~(13) STOCK REPURCHASE PROGRAM

On ~~May 4, 2016,~~February 21, 2018 our Board of Directors authorized ~~the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4, 2018.~~

~~On April 25, 2017, our Board of Directors authorized an additional~~a $15.0 million share repurchase ~~program, bringing the total authorization under existing programs to $25.0 million.~~program. Under ~~the new~~this program, shares of our common stock may be repurchased from time to time through ~~April 25, 2019.~~ February 21, 2020. As of June 30, 2019, repurchases under this program totaled $1.0 million.

Repurchases may be made under the program in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cash balances, and repurchased shares will be retired and returned to unissued authorized shares.

As of ~~September~~June 30, ~~2017,~~2019, there was ~~$18.2~~$14.0 million remaining available for repurchases under the share repurchase ~~programs.~~program.

Cumulative repurchases pursuant to the ~~programs~~program are as follows:

Quarter Ended Number of Shares Repurchased Amount Average Price Per Share
December 31, 2016 120,996 $1,957,882 $16.18
March 31, 2017 218,515 3,426,959 15.68
September 30, 2017 86,856 1,420,934 16.36
Totals-to-Date 426,367 $6,805,775 $15.96



Quarter Ended	Number of Shares	Repurchased Amount		Average Price Per Share
December 31, 2018	75,813	$	1,008,652	$	13.30
March 31, 2019	—	—		—
June 30, 2019	—	—		—
Totals to date	75,813	$	1,008,652	$	13.30

~~(12)~~(14) INCOME (LOSS) PER SHARE

Basic per share amounts were computed using the weighted average number of common shares outstanding. Diluted 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. The weighted average numbers of shares outstanding used to compute income (loss) per share were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Shares used to calculate basic income per share 30,749
31,118
30,739
31,069
Dilutive effect of outstanding stock options, performance stock units and restricted stock units 326
267
359
271
Shares used to calculate diluted income per share 31,075
31,385
31,098
31,340



	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Shares used to calculate basic income (loss) per share	29,678	30,193	29,626	30,253
Dilutive effect of outstanding stock options, performance stock units and restricted stock units	—	283	—	280
Shares used to calculate diluted income (loss) per share	29,678	30,476	29,626	30,533

The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income per share. In the case of stock options, this is because the average market price did not exceed the exercise price.



	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Stock options	7	—	17	—
Restricted stock units	1	—	29	—

In the case of restricted stock units, this is because unrecognized compensation expense exceeds the current value of the awards (i.e., grant date market value was higher than current average market price). These shares may be dilutive potential common shares in the future (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Stock options 7
4
8
11



	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Stock options	94	5	104	11
Restricted stock units	305	—	227	2

~~(13)~~(15) SEGMENT AND ENTERPRISE-WIDE INFORMATION

~~In accordance with FASB ASC 280,~~ ~~Segment Reporting, we determined that we~~We have two operating segments, - Direct and Retail. There ~~have been~~were no changes in our operating segments during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019.

We evaluate performance using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is the measure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories, goodwill and other intangible assets. Unallocated assets primarily include cash and cash equivalents, available-for-sale securities, derivative securities, shared information technology infrastructure,

distribution centers, corporate headquarters, prepaids and other current assets, deferred income tax assets and other assets. Capital expenditures directly attributable to the Direct and Retail segments were not significant in any period.

Following is summary information by reportable segment (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Net sales:
Direct	$	33,986		$	33,710		$	147,800		$	159,884		$	20,834		$	34,824		$	67,548		$	106,025
Retail	53,505			46,223			128,393			117,939			37,453			39,185			74,274			82,178
Royalty	641			885			2,220			2,452			717			1,489			1,582			2,108
Consolidated net sales	$	88,132		$	80,818		$	278,413		$	280,275		$	59,004		$	75,498		$	143,404		$	190,311
Contribution:
Direct	$	5,289		$	2,584		$	23,141		$	31,253		$	(6,334	)	$	739		$	(10,876	)	$	12,030
Retail	12,118			9,164			20,427			17,225			(247		)	3,568			(969		)	7,489
Royalty	638			871			2,206			2,419			717			1,488			1,582			2,105
Consolidated contribution	$	18,045		$	12,619		$	45,774		$	50,897		$	(5,864	)	$	5,795		$	(10,263	)	$	21,624

Reconciliation of consolidated contribution to income from continuing operations:
Reconciliation of consolidated contribution to (loss) income from continuing operations:
Consolidated contribution	$	18,045		$	12,619		$	45,774		$	50,897		$	(5,864	)	$	5,795		$	(10,263	)	$	21,624
Amounts not directly related to segments:
Operating expenses	(4,680		)	(4,408		)	(15,877		)	(16,813		)	(79,550		)	(4,593		)	(85,318		)	(9,725		)
Other expense, net	(161		)	(218		)	(648		)	(1,336		)	(55		)	57			(488		)	23
Income tax expense	(4,862		)	(148		)	(10,156		)	(9,621		)
Income from continuing operations	$	8,342		$	7,845		$	19,093		$	23,127
Income tax benefit (expense)													6,725			(252		)	8,841			(2,775		)
(Loss) income from continuing operations													$	(78,744	)	$	1,007		$	(87,228	)	$	9,147

There was no material change in the allocation of assets by segment during the ~~first nine~~six months ~~of 2017~~ended June 30, 2019, and, accordingly, assets by segment are not presented.

~~Certain~~The following customers ~~individually represented~~accounted for 10% or more of total net sales as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Customer:
Customer #1 18.5 % 17.2 % 13.5 % 12.1 %
Customer #2 13.7 % *
*
*



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Amazon.com	20.9	%	12.3	%	12.1	%	*
Dick's Sporting Goods	*		11.0	%	*		10.6	%

^*Less than 10% of total net sales.

~~(14)~~(16) BORROWINGS

Line of Credit

On March 29, 2019, we entered into a Credit Agreement with JPMorgan Chase Bank, N.A. (“Chase Bank”) that provides for a $40.0 million revolving line of credit. The term of the Credit Agreement expires on March 29, 2022 and is secured by substantially all of our assets.

The Credit Agreement contains customary covenants for financings of this type, including, among other terms and conditions, revolving availability subject to a calculated borrowing base, minimum cash reserves and minimum fixed charge cover ratio covenants, as well as limitations and conditions on our ability to (i) create, incur, assume or be liable for indebtedness; (ii) dispose of assets outside the ordinary course of business; (iii) acquire, merge or consolidate with or into another person or entity; (iv) create, incur or allow any lien on any of our property; (v) make investments; or (vi) pay dividends or make distributions, in each case subject to certain exceptions. In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods), as well as a subjective acceleration clause.

The interest rate applicable to each advance under the revolving line of credit is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an applicable margin. As of June 30, 2019, our borrowing rate for line of credit advances was 4.44%.

As of June 30, 2019, we had $20.6 million of outstanding borrowings under the line of credit which we used to pay off a term loan. As of June 30, 2019, we were in compliance with the financial covenants of the Credit Agreement and $14.1 million was available for borrowing under the line of credit. Any outstanding balance is due and payable on March 29, 2022.

(17) COMMITMENTS AND CONTINGENCIES

Guarantees, Commitments and Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2017~~2019, we had nozero standby letters of credit.

We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of ~~September~~June 30, ~~2017~~2019, we had approximately ~~$37.5~~$20.4 million in noncancelable market-based purchase obligations, primarily for inventory purchases expected to be received within the next twelve months. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses.

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 indemnification obligations vary from contract to contract, and generally a maximum obligation is not stated within the agreements. We hold insurance policies that mitigate potential losses arising from certain types of indemnification obligations. Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no related liabilities were recorded as of ~~September~~June 30, ~~2017.~~2019.

Legal Matters

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.

Litigation and jury verdicts are, to some degree, inherently unpredictable, and although we have determined that a loss is not probable in connection with any current legal proceeding, it is reasonably possible that a loss may be incurred in connection with proceedings to which we are a party. Assessment of whether incurrence of a loss is probable, or a reasonable possibility, in connection with a particular proceeding, and estimation of the loss, or a range of loss, involves complex judgments and numerous uncertainties. Management is unable to estimate a range of reasonably possible losses related to litigation in which the damages sought are indeterminate, or the legal and factual basis for the relevant claims have not been developed with specificity. As such, zero liability is recorded as of September 30, 2017.

We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates accordingly. We evaluate, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would make a loss probable or reasonably possible, and whether the amount of a probable or reasonably possible loss is estimable. Among other factors, we evaluate the advice of internal and external counsel, the outcomes from similar litigation, current status of the lawsuits (including settlement initiatives), legislative developments and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. Further, while we face contingencies that are reasonably possible to occur, we are unable to estimate the possible loss or range of loss at this time. As such, zero liability is recorded as of June 30, 2019.

~~Indemnification Settlement~~

During the three months ended September 30, 2017, we received payment in settlement of an indemnification claim related to the December 31, 2015 purchase of Octane. The settlement totaled $1.5 million, and was related to excess royalty expense, obsolete inventory, duty on tooling equipment, and uncollectible accounts receivable. These amounts were credited to the condensed consolidated statement of operations for the third quarter of 2017 in the line items for selling and marketing and cost of sales in accordance with the accountingAs of the ~~original costs.~~date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 (the ~~“2016~~“2018 Form 10-K”). All references to the ~~third~~second quarter and first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018 mean the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Unless the context otherwise requires, “Nautilus,” “we,” “us” and “our” refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.

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, a digital transformation of health and fitness products, 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. Our profit margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, costs associated with acquisition or license of products and technologies, product warranty costs, the cost of 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.~~organization, including executive management transition. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, the Internet and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development ~~activities.~~activities and enhancements to existing products. 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 of any future growth or profitability. For more information, see our discussion of risk factors located at Part I, Item 1A of our ~~2016~~2018 Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-looking statements. Forward-looking statements include any statements related to our future business, ~~and~~ financial ~~performance;~~performance or operating results; anticipated fluctuations in net sales due to seasonality; plans and expectations regarding gross and operating margins; plans and expectations regarding research and development expenses and capital ~~expenditures;~~expenditures and anticipated results from such expenditures and other investments in our capabilities and resources; anticipated losses from discontinued operations; ~~results of media investment in the Direct segment;~~ plans for new product introductions, strategic partnerships and anticipated demand for our new and existing products; and statements regarding our inventory and working capital requirements and the sufficiency of our financial resources. These forward-looking statements, and others we make from time-to-time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including our ability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs, changes in consumer fitness trends, changes in the media consumption habits of our target consumers or the effectiveness, availability and price of media time consistent with our cost and audience profile parameters, greater than anticipated costs or delays associated with launch of new products, ~~our ability to successfully integrate acquired businesses,~~weaker than expected demand for new or existing products, a decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace or the availability from retailers of heavily discounted competitive products, an adverse change in the availability of credit for our customers who finance their purchases, our ability to pass along vendor raw material price increases and other cost pressures, including increased shipping costs and unfavorable foreign currency exchange rates, our ability to hire and retain key management personnel, our ability to effectively develop, market and sell future products, our ability to protect our intellectual property, the introduction of competing products, and our ability to get foreign-sourced product through customs in a timely manner. Additional assumptions, risks and uncertainties are described in Part I, Item 1A, "Risk Factors," in our ~~2016~~2018 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.

Overview

We are committed to providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. 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, Europe and ~~Europe.~~Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus^®, Bowflex^®, Octane Fitness^®, Schwinn^®and Universal^®.

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~~the Internet and ~~the Internet.~~catalogs. 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.

Our results for the second quarter were impacted by lower sales; however, we believe the appropriate improvements are being implemented into our overall business to address this trend. The primary actions taken include extensive, in-depth consumer insights research, which we anticipate will lead to a major repositioning of the Bowflex brand, as well as a new advertising and communication campaign, which we expect will begin airing in the third quarter of 2019 across television, social media, other digital platforms. Additionally, we expect to launch many targeted new products across all our channels in the second half of 2019. In parallel, we plan to continue our digital transformation with updated digital experience platforms on key new products, moving toward our goal of having all our products with subscription-based digital experience offerings.

Net sales for the first ~~nine~~six months of ~~2017~~2019 were ~~$278.4~~$143.4 million, reflecting a 24.6% decrease ~~of $1.9 million, or 0.7%,~~ as compared to net sales of ~~$280.3~~$190.3 million for the first ~~nine~~six months of ~~2016.~~2018. Net sales of our Direct segment decreased ~~$12.1~~by $38.5 million, or ~~7.6%~~36.3%, in the first ~~nine~~six months of ~~2017,~~2019, compared to the first ~~nine~~six months of ~~2016,~~2018, primarily due to ~~a decline in TreadClimber~~lower sales of our Bowflex Max Trainer^® ~~sales.~~ product.

Net sales of our Retail segment ~~increased~~decreased by ~~$10.5~~$7.9 million, or ~~8.9%~~9.6%, in the first ~~nine~~six months of ~~2017,~~2019, compared to the first ~~nine~~six months of ~~2016,~~2018, reflecting ~~increases for both traditional and e-commerce customers across multiple product categories.~~lower order volume from certain customers.

Royalty income for the first six months of 2019 decreased by $0.5 million compared to the same period in the prior year, which included payment of royalties related to a new agreement.

Gross profit for the first ~~nine~~six months of ~~2017~~2019 was ~~$141.4~~$53.4 million, or ~~50.8%~~37.2% of net sales, a decrease of ~~$6.0~~$39.2 million, or ~~4.1%~~42.3%, as compared to gross profit of ~~$147.4~~$92.5 million, or ~~52.6%~~48.6% of net sales, for the first ~~nine~~six months of ~~2016.~~2018. The decrease in gross profit dollars was primarily due to lower Direct sales coupled with lower gross margin percentages in both the ~~decrease in net sales.~~Direct and Retail segments. Gross margin percentage points decreased ~~1.8%,~~11.4% due to ~~a shift in segment mix, reflecting an increased percentage~~unfavorable product-mix and under absorption of ~~Retail sales, and a decline in the Direct channel margin.~~operations fixed costs due to lower net sales.

Operating expenses for the first ~~nine~~six months of ~~2017~~2019 were ~~$111.5~~$148.9 million, ~~a decrease~~an increase of ~~$1.8~~$68.3 million, or ~~1.6%~~84.7%, as compared to operating expenses of ~~$113.3~~$80.6 million for the first ~~nine~~six months of ~~2016.~~2018. The ~~decrease~~increase in operating expenses was primarily related to ~~decreased sales~~a goodwill and ~~marketing~~intangible impairment charge of $72.0 million, partially offset by lower media spending and stock compensation expense. ~~The decrease in sales and marketing expense was due to a retroactive financing fees rebate of $2.1 million, and a $1.0 million settlement payment received in connection with an indemnification claim.~~

Operating ~~income~~loss for the first ~~nine~~six months of ~~2017~~2019 was ~~$29.9~~$95.6 million, a decrease of ~~$4.2~~$107.5 million, or ~~12.3%~~903.3%, as compared to operating income of ~~$34.1~~$11.9 million for the first ~~nine~~six months of ~~2016.~~2018. The decrease in operating income for the first ~~nine~~six months of ~~2017~~2019 compared to the first ~~nine~~six months of ~~2016~~2018 was driven ~~primarily~~ by a goodwill and intangible impairment charge and lower gross margins associated with our sales during the ~~lower net sales and gross margin dollars.~~period.

~~Income~~Loss from continuing operations was ~~$19.1~~$87.2 million for the first ~~nine~~six months of ~~2017,~~2019, or ~~$0.61~~$2.94 per diluted share, compared to income from continuing operations of ~~$23.1~~$9.1 million, or ~~$0.74~~$0.30 per diluted share, for the first ~~nine~~six months of ~~2016.~~2018. The effective tax rates for the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018 were ~~34.7%~~9.2% and ~~29.4%~~23.3%, respectively. The ~~5.3%~~14.1% year-over-year percentage rate ~~increase~~differential was due primarily to the ~~release of previously unrecognized tax benefits associated with certain non-U.S. filing positions during~~goodwill and intangible impairment charge in the ~~third~~second quarter of ~~2016.~~2019, for which no tax benefit was recognized consequently reducing the effective tax rate for the period.

Net ~~income~~loss for the first ~~nine~~six months of ~~2017~~2019 was ~~$17.8~~$87.4 million, compared to net income of ~~$22.6~~$9.0 million for the first ~~nine~~six months of ~~2016.~~2018. Net loss per diluted share was $2.95 for the first six months of 2019, compared to net income per diluted share ~~was $0.57~~of $0.29 for the first ~~nine~~six months of ~~2017, compared to $0.72 for the first nine months of 2016.~~2018.

Discontinued Operations

Results from discontinued operations relate to the disposal of our former 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 either the ~~2017~~2019 or ~~2016~~2018 periods, we continue to ~~have~~incur product liability and other legal expenses associated with product previously sold into the Commercial channel.

RESULTS OF OPERATIONS

Results of operations information was as follows (dollars in thousands):


	Three Months Ended September 30,						Change					Three Months Ended June 30,						Change
	2017			2016			$			%		2019			2018			$			%
Net sales	$	88,132		$	80,818		$	7,314		9.0	%	$	59,004		$	75,498		$	(16,494	)	(21.8	)%
Cost of sales	46,817			41,601			5,216			12.5	%	41,487			41,850			(363		)	(0.9	)%
Gross profit	41,315			39,217			2,098			5.3	%	17,517			33,648			(16,131		)	(47.9	)%
Operating expenses:
Selling and marketing	18,028			21,394			(3,366		)	(15.7	)%	17,631			22,084			(4,453		)	(20.2	)%
General and administrative	6,305			6,177			128			2.1	%	9,443			6,327			3,116			49.2	%
Research and development	3,617			3,435			182			5.3	%	3,849			4,035			(186		)	(4.6	)%
Goodwill and intangible impairment charge												72,008			—			72,008			—	%
Total operating expenses	27,950			31,006			(3,056		)	(9.9	)%	102,931			32,446			70,485			217.2	%
Operating income	13,365			8,211			5,154			62.8	%
Operating (loss) income												(85,414		)	1,202			(86,616		)	(7,206.0	)%
Other income (expense):
Interest income	170			60			110					(3		)	294			(297		)
Interest expense	(377		)	(489		)	112					(223		)	(268		)	45
Other, net	46			211			(165		)			171			31			140
Total other expense, net	(161		)	(218		)	57
Income from continuing operations before income taxes	13,204			7,993			5,211
Income tax expense	4,862			148			4,714
Income from continuing operations	8,342			7,845			497
Total other (expense) income, net												(55		)	57			(112		)
(Loss) income from continuing operations before income taxes												(85,469		)	1,259			(86,728		)
Income tax (benefit) expense												(6,725		)	252			(6,977		)
(Loss) income from continuing operations												(78,744		)	1,007			(79,751		)
Loss from discontinued operations, net of taxes	(101		)	(251		)	150					(124		)	(79		)	(45		)
Net income	$	8,241		$	7,594		$	647
Net (loss) income												$	(78,868	)	$	928		$	(79,796	)


	Nine Months Ended September 30,						Change					Six Months Ended June 30,						Change
	2017			2016			$			%		2019			2018			$			%
Net sales	$	278,413		$	280,275		$	(1,862	)	(0.7	)%	$	143,404		$	190,311		$	(46,907	)	(24.6	)%
Cost of sales	136,975			132,852			4,123			3.1	%	90,045			97,792			(7,747		)	(7.9	)%
Gross profit	141,438			147,423			(5,985		)	(4.1	)%	53,359			92,519			(39,160		)	(42.3	)%
Operating expenses:
Selling and marketing	79,321			81,284			(1,963		)	(2.4	)%	51,674			58,847			(7,173		)	(12.2	)%
General and administrative	21,106			21,611			(505		)	(2.3	)%	17,098			13,237			3,861			29.2	%
Research and development	11,114			10,444			670			6.4	%	8,160			8,536			(376		)	(4.4	)%
Goodwill and intangible impairment charge												72,008			—			72,008			—	%
Total operating expenses	111,541			113,339			(1,798		)	(1.6	)%	148,940			80,620			68,320			84.7	%
Operating income	29,897			34,084			(4,187		)	(12.3	)%
Other income (expense):
Operating (loss) income												(95,581		)	11,899			(107,480		)	(903.3	)%
Other (expense) income:
Interest income	476			182			294					162			566			(404		)
Interest expense	(1,233		)	(1,469		)	236					(428		)	(561		)	133
Other, net	109			(49		)	158					(222		)	18			(240		)
Total other expense, net	(648		)	(1,336		)	688
Income from continuing operations before income taxes	29,249			32,748			(3,499		)
Income tax expense	10,156			9,621			535
Income from continuing operations	19,093			23,127			(4,034		)
Total other (expense) income, net												(488		)	23			(511		)
(Loss) income from continuing operations before income taxes												(96,069		)	11,922			(107,991		)
Income tax (benefit) expense												(8,841		)	2,775			(11,616		)
(Loss) income from continuing operations												(87,228		)	9,147			(96,375		)
Loss from discontinued operations, net of taxes	(1,270		)	(559		)	(711		)			(215		)	(160		)	(55		)
Net income	$	17,823		$	22,568		$	(4,745	)
Net (loss) income												$	(87,443	)	$	8,987		$	(96,430	)

Results of operations information by segment was as follows (dollars in thousands):


	Three Months Ended September 30,						Change						Three Months Ended June 30,						Change
	2017			2016			$				%		2019			2018			$				%
Net sales:
Direct	$	33,986		$	33,710		$	276			0.8	%	$	20,834		$	34,824		$	(13,990	)		(40.2	)%
Retail	53,505			46,223			7,282				15.8	%	37,453			39,185			(1,732		)		(4.4	)%
Royalty	641			885			(244		)		(27.6	)%	717			1,489			(772		)		(51.8	)%
	$	88,132		$	80,818		$	7,314			9.0	%	$	59,004		$	75,498		$	(16,494	)		(21.8	)%
Cost of sales:
Direct	$	12,401		$	11,579		$	822			7.1	%	$	11,807		$	14,073		$	(2,266	)		(16.1	)%
Retail	34,413			30,008			4,405				14.7	%	29,680			27,776			1,904				6.9	%
Royalty	3			14			(11		)		(78.6	)%	—			1			(1		)		—	%
	$	46,817		$	41,601		$	5,216			12.5	%	$	41,487		$	41,850		$	(363	)		(0.9	)%
Gross profit:
Direct	$	21,585		$	22,131		$	(546	)		(2.5	)%	$	9,027		$	20,751		$	(11,724	)		(56.5	)%
Retail	19,092			16,215			2,877				17.7	%	7,773			11,409			(3,636		)		(31.9	)%
Royalty	638			871			(233		)		(26.8	)%	717			1,488			(771		)		(51.8	)%
	$	41,315		$	39,217		$	2,098			5.3	%	$	17,517		$	33,648		$	(16,131	)		(47.9	)%
Gross margin:
Direct	63.5		%	65.7		%	(220		)	basis points			43.3		%	59.6		%	(1,630		)	basis points
Retail	35.7		%	35.1		%	60			basis points			20.8		%	29.1		%	(830		)	basis points


	Nine Months Ended September 30,						Change						Six Months Ended June 30,						Change
	2017			2016			$				%		2019			2018			$				%
Net sales:
Direct	$	147,800		$	159,884		$	(12,084	)		(7.6	)%	$	67,548		$	106,025		$	(38,477	)		(36.3	)%
Retail	128,393			117,939			10,454				8.9	%	74,274			82,178			(7,904		)		(9.6	)%
Royalty	2,220			2,452			(232		)		(9.5	)%	1,582			2,108			(526		)		(25.0	)%
	$	278,413		$	280,275		$	(1,862	)		(0.7	)%	$	143,404		$	190,311		$	(46,907	)		(24.6	)%
Cost of sales:
Direct	$	52,525		$	53,732		$	(1,207	)		(2.2	)%	$	32,125		$	40,429		$	(8,304	)		(20.5	)%
Retail	84,436			79,087			5,349				6.8	%	57,920			57,360			560				1.0	%
Royalty	14			33			(19		)		(57.6	)%	—			3			(3		)		(100.0	)%
	$	136,975		$	132,852		$	4,123			3.1	%	$	90,045		$	97,792		$	(7,747	)		(7.9	)%
Gross profit:
Direct	$	95,275		$	106,152		$	(10,877	)		(10.2	)%	$	35,423		$	65,596		$	(30,173	)		(46.0	)%
Retail	43,957			38,852			5,105				13.1	%	16,354			24,818			(8,464		)		(34.1	)%
Royalty	2,206			2,419			(213		)		(8.8	)%	1,582			2,105			(523		)		(24.8	)%
	$	141,438		$	147,423		$	(5,985	)		(4.1	)%	$	53,359		$	92,519		$	(39,160	)		(42.3	)%
Gross margin:
Direct	64.5		%	66.4		%	(190		)	basis points			52.4		%	61.9		%	(950		)	basis points
Retail	34.2		%	32.9		%	130			basis points			22.0		%	30.2		%	(820		)	basis points

The following table compares the net sales of our major product lines within each business segment (dollars in thousands):


	Three Months Ended September 30,				Change					Three Months Ended June 30,				Change
	2017		2016		$			%		2019		2018		$			%
Direct net sales:
Cardio products⁽¹⁾	$	30,087	$	30,548	$	(461	)	(1.5	)%	$	16,083	$	29,464	$	(13,381	)	(45.4	)%
Strength products⁽²⁾	3,899		3,162		737			23.3	%	4,751		5,360		(609		)	(11.4	)%
	33,986		33,710		276			0.8	%	20,834		34,824		(13,990		)	(40.2	)%
Retail net sales:
Cardio products⁽¹⁾	39,389		33,280		6,109			18.4	%	26,045		30,412		(4,367		)	(14.4	)%
Strength products⁽²⁾	14,116		12,943		1,173			9.1	%	11,408		8,773		2,635			30.0	%
	53,505		46,223		7,282			15.8	%	37,453		39,185		(1,732		)	(4.4	)%

Royalty	641		885		(244		)	(27.6	)%	717		1,489		(772		)	(51.8	)%
	$	88,132	$	80,818	$	7,314		9.0	%	$	59,004	$	75,498	$	(16,494	)	(21.8	)%


	Nine Months Ended September 30,				Change					Six Months Ended June 30,				Change
	2017		2016		$			%		2019		2018		$			%
Direct net sales:
Cardio products⁽¹⁾	$	133,421	$	149,074	$	(15,653	)	(10.5	)%	$	55,690	$	93,673	$	(37,983	)	(40.5	)%
Strength products⁽²⁾	14,379		10,810		3,569			33.0	%	11,858		12,352		(494		)	(4.0	)%
	147,800		159,884		(12,084		)	(7.6	)%	67,548		106,025		(38,477		)	(36.3	)%
Retail net sales:
Cardio products⁽¹⁾	96,249		86,739		9,510			11.0	%	56,741		66,622		(9,881		)	(14.8	)%
Strength products⁽²⁾	32,144		31,200		944			3.0	%	17,533		15,556		1,977			12.7	%
	128,393		117,939		10,454			8.9	%	74,274		82,178		(7,904		)	(9.6	)%

Royalty	2,220		2,452		(232		)	(9.5	)%	1,582		2,108		(526		)	(25.0	)%
	$	278,413	$	280,275	$	(1,862	)	(0.7	)%	$	143,404	$	190,311	$	(46,907	)	(24.6	)%

⁽¹⁾ Cardio products include: Max Trainer^®,TreadClimber^®, HVT™, Zero Runner^®, treadmills, exercise bikes and ellipticals.
⁽¹⁾ Cardio products include: Max Trainer^®,TreadClimber^®, HVT™, LateralX^®, Zero Runner^®, treadmills, exercise bikes and ellipticals.										⁽¹⁾ Cardio products include: Max Trainer^®,TreadClimber^®, HVT™, LateralX^®, Zero Runner^®, treadmills, exercise bikes and ellipticals.
⁽²⁾ Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.	⁽²⁾ Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.									⁽²⁾ Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.

Direct

Direct net sales ~~increased 0.8%~~decreased by 40.2% for the three month period ended ~~September~~June 30, ~~2017~~2019 compared to the same period of ~~2016 as new products, including the Bowflex HVT~~^TM~~, offset~~2018, reflecting a decline in ~~TreadClimber~~sales of the Bowflex MaxTrainer^® ~~sales. For~~products. Year-over-year sales were also likely lower due to reduced media spending of 45.8% in the ~~nine months~~three month period ended ~~September~~June 30, ~~2017, Direct net sales decreased 7.6%~~2019 compared to the same period of ~~2016~~2018 as we prepared to launch new marketing content in the third quarter of 2019.

For the six months ended June 30, 2019, Direct net sales decreased 36.3% compared to the same period of 2018, due to a 40.5% decline in ~~TreadClimber~~cardio product sales, primarily related to Bowflex MaxTrainer^® ~~sales, partially offset by~~products. We believe improvements are being implemented that we believe will be effective in addressing this trend. The primary actions taken include extensive, in-depth consumer insights research, which we expect will lead to a ~~33.0% increase~~major repositioning of the Bowflex brand, as well as a new advertising and communication campaign, which we expect will begin airing in ~~strength product sales.~~the third quarter of 2019 across television, social media, other digital platforms.

Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the ~~third~~second quarter of ~~2017~~2019 were ~~53.7%~~53.2%, compared to ~~47.9%~~55.5% in the same period of ~~2016. We continue to experience improved~~2018. The decrease in approvals reflects lower credit approval rates due to our media strategy, which focuses on generation of responses from consumers with relatively high credit quality. Additionally, our Tier 1 credit provider has noted strong performance from our account portfolio, and, due to that credit profile, has progressively expanded its approval standards. We remain focused on maintaining a healthy payment balance between cash and financed purchases.quality applications.

~~The $0.8 million increase in~~For the three and six month periods ended June 30, 2019, cost of sales of our Direct business ~~for the three month period ended September 30, 2017~~decreased by $2.3 million and $8.3 million, respectively, as compared to the same ~~period~~periods of ~~2016 was~~2018, due to the ~~higher volume of sales. The $1.2 million~~ decrease in ~~cost of sales of our Direct business for the nine months ended September 30, 2017 compared to the same period of 2016 was due to lower~~ net sales.

For the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2019, Direct gross margins decreased ~~220~~by 1,630 and ~~190~~950 basis points, respectively, as compared to the same periods of ~~2016 primarily~~2018, due to unfavorable overhead absorption related to decreased net sales and unfavorable product ~~mix and higher discounting for older products.~~mix.

Retail

Retail net sales ~~increased 15.8%~~decreased 4.4% and ~~8.9%~~9.6% for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2019, respectively, compared to the same periods of ~~2016.~~2018. The decrease in the three and six month periods was due primarily to a decline in sales of the Max Trainer line, partially offset by increases in ~~both periods reflected growth~~sales of other modalities. We expect sales in ~~traditional~~the second half of 2019 to include planned new product introductions and ~~e-commerce customers across multiple product categories.~~in-store merchandising in key customers.

The increases in cost of sales of our Retail business for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2019 compared to the same periods of ~~2016~~2018 were primarily related to the ~~increases in Retail net sales as discussed above.~~decreased gross margin rate related to unfavorable product mix.

For the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2019, Retail gross ~~margin increased~~margins decreased by 60830 and ~~130~~820 basis points, respectively, compared to the same periods of ~~2016~~2018, due to ~~favorable~~unfavorable overhead absorption related to decreased net sales and unfavorable product mix.

Operating Expenses

Operating expenses for the first six months of ~~fixed costs over~~2019 were $148.9 million, an increase of $68.3 million, or 84.7%, as compared to operating expenses of $80.6 million for the ~~increased sales volume~~first six months of 2018. The increase in operating expenses was primarily related to a goodwill impairment charge of $72.0 million, partially offset by lower media spending and ~~the one-time settlement of an indemnification claim.~~stock compensation expense.

Selling and Marketing


Dollars in thousands	Three Months Ended September 30,		Change		Three Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Selling and marketing	$18,028	$21,394	$(3,366)	(15.7)%	$17,631	$22,084	$(4,453)	(20.2)%
As % of net sales	20.5%	26.5%			29.9%	29.3%


Dollars in thousands	Nine Months Ended September 30,		Change		Six Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Selling and marketing	$79,321	$81,284	$(1,963)	(2.4)%	$51,674	$58,847	$(7,173)	(12.2)%
As % of net sales	28.5%	29.0%			36.0%	30.9%

The ~~$3.4 million decrease~~decreases in selling and marketing expense in the three and six month ~~period~~periods ended ~~September~~June 30, ~~2017~~2019 compared to the same ~~period~~periods of ~~2016 was~~2018 were primarily due to lower ~~variable selling expenses~~media spending of ~~$2.6 million, primarily related to lower financing fees reflecting a retroactive contract adjustment of $2.1~~$5.5 million and ~~receipt of a one-time settlement payment of $1.0~~$7.1 million, ~~for an indemnification claim.~~

respectively. The ~~$2.0 million~~ decrease in ~~selling and marketing expense in~~ the ~~nine~~three month period ended ~~September~~June 30, ~~2017 as compared~~2019 was partially offset by consumer research and consulting costs. We recently announced selection of the FIG creative agency to enhance our advertising and creative campaign for the ~~same period of 2016 was related to a $4.7 million decrease in variable selling costs, including the factors~~Bowflex brand across TV, social media, and digital platforms. As noted above, ~~and lower marketing program costs of $1.0 million, offset by increases of $2.9 million in media~~we expect to launch a major new multi-media advertising and ~~$0.8 million~~communication campaign behind the Bowflex brand and new products in ~~photo and video production costs.~~the third quarter of 2019.

Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:


Dollars in thousands	Three Months Ended September 30,		Change		Three Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Media advertising	$11,114	$10,790	$324	3.0%	$6,553	$12,082	$(5,529)	(45.8)%


Dollars in thousands	Nine Months Ended September 30,		Change		Six Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Media advertising	$43,704	$40,804	$2,900	7.1%	$26,255	$33,368	$(7,113)	(21.3)%

The ~~increases~~decreases in media advertising infor the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the same periods of ~~2016~~2018 reflected ~~lower response rates that drove the increased investments~~a scale back in ~~advertising.~~

spending resulting from unfavorable media return on investments.

General and Administrative


Dollars in thousands	Three Months Ended September 30,		Change		Three Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
General and administrative	$6,305	$6,177	$128	2.1%	$9,443	$6,327	$3,116	49.2%
As % of net sales	7.2%	7.6%			16.0%	8.4%


Dollars in thousands	Nine Months Ended September 30,		Change		Six Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
General and administrative	$21,106	$21,611	$(505)	(2.3)%	$17,098	$13,237	$3,861	29.2%
As % of net sales	7.6%	7.7%			11.9%	7.0%

The increase in general and administrative for the three ~~months~~month period ended ~~September~~June 30, ~~2017~~2019 compared to the same period of ~~2016~~2018 was primarily ~~due to higher legal expenses of $0.4~~driven by a $2.0 million ~~offset by $0.4~~litigation settlement expense and $0.3 million ~~lower integration costs and administrative cost savings related to Octane incurred~~ in ~~the same comparative period.~~accelerated amortization expense.

The ~~decrease~~increase in general and administrative for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the same period of ~~2016~~2018 was primarily ~~due to $0.8 million savings~~ related to ~~lower integration costs~~a $2.0 million litigation settlement expense and ~~administrative cost savings related to Octane, and lower employee incentives and compensation costs of $0.9 million. These costs were~~a $2.0 million increase in legal expense partially offset by ~~higher litigation-related expenses of $1.3 million for the same comparative period.~~a reduction in stock compensation expense.

Research and Development


Dollars in thousands	Three Months Ended September 30,		Change		Three Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Research and development	$3,617	$3,435	$182	5.3%	$3,849	$4,035	$(186)	(4.6)%
As % of net sales	4.1%	4.3%			6.5%	5.3%


Dollars in thousands	Nine Months Ended September 30,		Change		Six Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Research and development	$11,114	$10,444	$670	6.4%	$8,160	$8,536	$(376)	(4.4)%
As % of net sales	4.0%	3.7%			5.7%	4.5%

The ~~increases~~decreases in research and development in the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2019 as compared to the same periods of ~~2016~~2018 were ~~primarily~~ due to ~~our investment~~decreases in ~~additional engineering and product~~third party application development ~~headcount as we continue to supplement our new product development resources required to innovate and broaden our product portfolio.~~expense.

~~Interest Expense~~Goodwill and Intangible Impairment Charge

~~Interest expense~~In accordance ASC 350 — Intangibles — Goodwill and Other, we perform a goodwill and indefinite-lived asset impairment evaluation during the fourth quarter of ~~$0.4~~each year. However, as a result of the decline in our market value relative to the market and our industry, identified as a triggering event, we performed an interim evaluation and a market capitalization reconciliation during the second quarter of 2019, which resulted in a non-cash goodwill and indefinite-lived intangible assets impairment charge of $72.0 million.

ASC 350 requires us to 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.

In accordance ASC 360 — Property, Plant, and Equipment and other long-lived assets, we performed a test for recoverability of our assets as the goodwill and indefinite-lived intangible asset impairment created a triggering event. The long-lived assets were recoverable and no impairment was needed.

For additional information related to our goodwill and intangible impairment charge, see Notes 4 and 8.

Operating Loss and Income

Operating loss for the first six months of 2019 was $95.6 million, ~~and $1.2~~a decrease of $107.5 million, or 903.3%, as compared to operating income of $11.9 million for the ~~three and nine month periods ended September 30, 2017 decreased $0.1 million and $0.2 million, respectively,~~first six months of 2018. The decrease in operating income for the first six months of 2019 compared to the ~~same periods~~first six months of ~~2016. The decreases were due to reductions in principal balance on~~2018 was driven by a goodwill and other intangible impairment charge and lower gross margins associated with our ~~term loan.~~sales during the period.

Other, Net

Other, net relates to the effect of exchange rate fluctuations ~~between~~with the U.S. and our foreign ~~subsidiaries, primarily Canada, China and Europe.~~subsidiaries.

Income Tax Expense


Dollars in thousands	Three Months Ended September 30,		Change		Three Months Ended June 30,		Change
	2017	2016	$	%	2019	2018	$	%
Income tax expense	$4,862	$148	$4,714	*
Income tax (benefit) expense					$(6,725)	$252	$(6,977)	*
Effective tax rate	36.8%	1.9%			7.9%	20.0%

Dollars in thousands Nine Months Ended September 30, Change
2017 2016 $ %
Income tax expense $10,156 $9,621 $535 5.6%
Effective tax rate 34.7% 29.4%



Dollars in thousands	Six Months Ended June 30,		Change
	2019	2018	$	%
Income tax (benefit) expense	$(8,841)	$2,775	$(11,616)	*
Effective tax rate	9.2%	23.3%

* Not meaningful.

Income tax ~~expense~~benefit and effective tax rates from continuing operations for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017 was~~2019 were primarily related to our ~~profitable U.S and foreign operations.~~losses generated in the U.S. The reduced ~~effective~~ tax rates from continuing operations for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016~~2019 compared to the same periods of 2018 were primarily due to the ~~release~~goodwill impairment in the second quarter of ~~on a non-recurring basis, previously unrecognized~~2019, for which no tax ~~benefits associated with certain non-U.S. filing positions. These resulted from completion of the deregistration process of a certain foreign entity. In addition,~~benefit was recognized consequently reducing the effective tax rate for the nine months ended September 30, 2017 included $0.7 million of excess tax benefits related to stock-based compensation recognized as a current period benefit through the statement of operations, resulting from the adoption of ASU 2016-09 in January 2017.periods.

LIQUIDITY AND CAPITAL RESOURCES

As of ~~September~~June 30, ~~2017~~2019, we had ~~$77.8~~$7.9 million of cash and investments compared to ~~$79.6~~$63.5 million as of December 31, ~~2016. Cash provided by operating activities was $16.7 million for the nine months ended~~ ~~September 30, 2017, compared to $14.9 million for the~~ ~~nine months ended~~ ~~September 30, 2016.~~2018. We expect our cash and cash equivalents and ~~available-for-sale securities~~amounts available under our line of credit at ~~September~~June 30, ~~2017,~~2019, along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from ~~September~~June 30, ~~2017.~~2019. 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 stockholders. 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.

Cash used in operating activities was $37.2 million for the six months ended June 30, 2019, compared to cash provided by operating activities of $16.6 million for the six months ended June 30, 2018.

The ~~increase~~decrease in cash flows from operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the same period of ~~2016~~2018 was primarily due to the decrease in operating performance, along with the changes in our operating assets and liabilities as discussed ~~below, partially offset by the decline in operating performance.~~below.

Trade receivables decreased ~~$6.9~~by $16.8 million to $~~38.5~~29.0 million as of ~~September~~June 30, ~~2017,~~2019, compared to ~~$45.5~~$45.8 million as of December 31, ~~2016,~~2018, primarily due to ~~seasonally lower net sales to specialty retail and commercial customers.~~the seasonality of the business. Trade receivables as of ~~September~~June 30, ~~2017~~2019 compared to ~~September~~June 30, ~~2016~~2018 increased ~~$7.3~~by $3.8 million due to the ~~increase~~timing of retail sales transactions in ~~Retail net sales.~~the current quarter.

Inventories ~~increased $10.6~~decreased by $16.5 million to ~~$57.6~~$52.0 million as of ~~September~~June 30, ~~2017,~~2019, compared to ~~$47.0~~$68.5 million as of December 31, ~~2016~~2018 due to ~~seasonal preparations for~~seasonality and our efforts to reduce the ~~fourth quarter.~~high level of ending inventory from the previous year. Inventories as of ~~September~~June 30, ~~2017~~2019 compared to ~~September~~June 30, ~~2016~~2018 increased by ~~$8.4~~$9.7 million, due to ~~increased in-transit inventory.~~a much higher ending inventory balance as of December 31, 2018 compared to the prior year end.

Prepaid and other current assets decreased by $0.8 million to $7.2 million as of June 30, 2019, compared to $8.0 million as of December 31, 2018, primarily due to lower prepaid marketing expenses. This was partially offset by prepaid insurance and information technology expenses.

Trade payables decreased ~~$3.9~~by $55.7 million to $~~62.1~~31.5 million as of ~~September~~June 30, ~~2017,~~2019, compared to ~~$66.0~~$87.3 million as of December 31, ~~2016,~~2018, due to seasonality of the ~~business.~~business and inventory related payments. Trade payables as of ~~September~~June 30, ~~2017~~2019, compared to ~~September~~June 30, ~~2016 increased $17.4~~2018, decreased by $15.1 million. ~~The higher amount outstanding as of September 30, 2017 was due to the increased inventory.~~

Accrued liabilities ~~decreased $4.8~~increased by $0.9 million to ~~$8.1~~$9.3 million as of ~~September~~June 30, ~~2017,~~2019, compared to ~~$12.9~~$8.4 million as of December 31, ~~2016,~~2018, primarily due to ~~payout of accrued incentive compensation during the first quarter of 2017~~payroll and ~~settlement of a royalty dispute in the second quarter of 2017.~~related liabilities and other accruals.

Cash ~~used in~~provided by investing activities of ~~$18.2~~$17.9 million for the first ~~nine~~six months of ~~2017~~2019 was primarily related to $25.3 million of net ~~purchases~~maturities of marketable securities, partially offset by an equity investment of ~~$15.4 million. In addition, $2.7~~$3.5 million ~~was used for~~and $3.9 million of capital expenditures ~~primarily related to production equipment tooling and~~for implementation of new software ~~systems.~~systems, and production tooling and equipment. We anticipate spending between ~~$4.5~~$8.0 million and ~~$5.5~~$10.0 million in ~~2017~~2019 for ~~product tooling, computer equipment and software,~~digital platform enhancements, systems integration, and production ~~equipment.~~tooling.

During the six months ended June 30, 2019, we invested $3.5 million in non-controlling equity securities without readily determinable fair values. The carrying amount of the investment was recorded at cost and will be adjusted for any impairments and observable price changes under the election of the measurement alternative, with such changes recognized in earnings.

Cash used in financing activities of ~~$17.0~~$11.0 million for the first ~~nine~~six months of ~~2017~~2019 was primarily related to loan principal repayments ~~on our term loan~~ of ~~$12.0 million and share repurchases of $4.8~~$11.7 million.

Financing Arrangements

We have a Credit Agreement with JPMorgan Chase Bank, N.A. (“Chase Bank”) that provides for ~~an $80.0 million term loan and~~ a ~~$20.0~~$40.0 million revolving line of credit. The term of the Credit Agreement expires on ~~December 31, 2020~~March 29, 2022 and is secured by substantially all of our assets.

The Credit Agreement ~~as amended,~~ contains customary covenants for financings of this type, including, among other terms and conditions, revolving availability subject to a calculated borrowing base, minimum cash reserves and minimum fixed charge ~~coverage~~cover ratio covenants, as well as limitations and ~~funded debt~~conditions on our ability to ~~EBITDA ratio, and limitations~~(i) create, incur, assume or be liable for indebtedness; (ii) dispose of assets outside the ordinary course of business; (iii) acquire, merge or consolidate with or into another person or entity; (iv) create, incur or allow any lien on ~~capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions,~~any of our property; (v) make investments; or (vi) pay dividends and investments. The Credit Agreement also contains customary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligations and exercise its remedies under the continuing security agreement.

~~Borrowing availability under the revolving line of credit is~~or make distributions, in each case subject to ~~our compliance with~~ certain ~~financial and operating covenants at the time borrowings are requested. Letters of credit under~~exceptions. In addition, the Credit Agreement ~~are treated~~provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods), as well as a ~~reduction of the available borrowing amount and are subject to covenant testing.~~subjective acceleration clause.

The interest rate applicable to ~~the term loan, as well as~~ each advance under the revolving line of credit is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an applicable margin. As of ~~September~~June 30, ~~2017,~~2019, our borrowing rate for ~~both the term loan and~~ line of credit advances was ~~2.49%~~4.44%.

As of ~~September~~June 30, ~~2017, the balance on our term loan was $52.0 million, and~~2019, we had no$20.6 million of outstanding borrowings under the line of credit. As of ~~September~~June 30, ~~2017,~~2019, we were in compliance with the financial covenants of the Credit Agreement and ~~$20.0~~$14.1 million was available for borrowing under the line of credit.

~~As of September 30, 2017,~~During the three months ended March 31, 2019, we ~~had a $52.0 million receive-variable, pay-fixed interest rate swap outstanding with Chase Bank. The interest rate swap amortizes monthly in line with the outstanding principal balance on~~paid down our existing term loan of $32.0 million and ~~is classified as a cash flow hedge. The swap matures on December 31, 2020 and has a fixed rate~~refinanced the remaining portion with borrowings under our new line of ~~1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark. At September 30, 2017, the one-month LIBOR rate was 1.24%.~~

~~Commitments and Contingencies~~

~~For a description of our commitments and contingencies, refer to Note 14 to our condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.~~credit.

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. Management does not

deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at ~~September~~June 30, ~~2017.~~2019.

Stock Repurchase Program

On ~~May 4, 2016,~~February 21, 2018 our Board of Directors authorized ~~the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4, 2018.~~

~~On April 25, 2017, our Board of Directors authorized an additional~~a $15.0 million share repurchase ~~program, bringing the total authorization under existing programs to $25.0 million.~~program. Under ~~the new~~this program, shares of our common stock may be repurchased from time to time through ~~April 25, 2019.~~ February 21, 2020. As of December 31, 2018 we had repurchased 75,813 shares under this program at a weighted average price of $13.30 per share for a total purchase price of $1.0 million.

For the six months ended June 30, 2019 no shares were repurchased. As of June 30, 2019, $14.0 million remained available for future repurchases under the share repurchase program.

Repurchases under the program 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 will be funded from existing cash balances, and repurchased shares will be retired and returned to unissued authorized shares.

For the nine months ended September 30, 2017, we had repurchased a total of 305,371 shares for $4.8 million. As of September 30, 2017, there was $18.2 million remaining available for repurchases under the share repurchase programs.

SEASONALITY

We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the third quarter, and are generally weakest in the second quarter. We believe that ~~during the spring and summer months,~~ 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

~~Our~~Effective January 1, 2019, we adopted ASC 842, Leases (Topic 842). For information on the adoption of Topic 842, see Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Other than the changes related to adoption of ASC 842, our critical accounting policies and estimates have not changed from those discussed in our ~~2016~~2018 Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

See ~~Note~~Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 for a discussion of new accounting pronouncements.


Item 3.	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 securities, derivative assets and variable-rate debt obligations. As of September 30, 2017, we had cash equivalents of $8.8 million held in a combination of money market funds and commercial paper, and marketable securities of $47.3 million, held in a combination of certificates of deposit, commercial paper, 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. 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 ~~September~~June 30, ~~2017,~~2019, the outstanding balances on our credit facilities totaled ~~$52.0~~$20.6 million.

As of ~~September~~June 30, ~~2017,~~2019, we ~~had~~terminated a ~~$52.0~~$20.0 million receive-variable, pay-fixed interest rate swap outstanding with Chase Bank ~~which amortizes monthly in line with~~and discontinued the ~~outstanding principal balance on our term loan. The swap is classified as a~~ cash flow hedge ~~and effectively fixes the interest rate~~ on our variable-rate term loan. The interest rate swap matures on December 31, 2020 and has a fixed interest rate of 1.42% per annum. The variable rate on the interest rate swap is the one-month LIBOR benchmark, which was 1.24% at September 30, 2017.

The fair value of our interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreement. The amounts related to our cash flow hedge are recorded as deferred gains or losses in our consolidated balance sheets with the offset recorded in accumulated other comprehensive income, net of tax. At September 30, 2017, the fair value of our interest rate swap agreement was an asset of $0.2 million. The estimated amount expected to be reclassified into earnings within the next twelve months was less than $0.1 million at September 30, 2017.

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 ~~September~~June 30, ~~2017~~2019 were ~~$18.3~~$9.3 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our ~~Chief~~Principal Executive Officer and our ~~Chief~~Principal Financial and Accounting Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, our management, including the ~~Chief~~Principal Executive Officer and ~~Chief~~Principal Financial and Accounting Officer, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

We are implementing an enterprise resource planning ("ERP") system and complementary systems that support our Retail operations related to Octane. During the third quarter of 2017, the technical design was completed and development of features of the ERP and complementary systems were in progress. We expect to continue developing and deploying these features during the fourth quarter of 2017 with full implementation planned to be completed in the second quarter of 2018. As each phase of the implementation occurs, we are taking steps to monitor and maintain appropriate internal control over financial reporting and will continue to evaluate these controls for effectiveness.

There were no ~~other~~ changes in our internal control over financial reporting that occurred during the three months ended ~~September~~June 30, ~~2017,~~2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.

Item 1A. Risk Factors

We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our ~~2016~~2018 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. If any of the risks described in our ~~2016~~2018 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There has not been a material change to the risk factors as set forth in our ~~2016~~2018 Form 10-K.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Issuer Purchases of Equity Securities~~

~~The following table provides information about our repurchases of our equity securities during the third quarter ended September 30, 2017:~~

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)
July 1 - July 31 — $— — $19,615,159
August 1 - August 31 86,856 16.36 86,856 18,194,225
September 1 - September 30 — — — 18,194,225
Total 86,856 $16.36 86,856 $18,194,225

⁽¹⁾  On May 4, 2016, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4, 2018.
⁽²⁾  On April 25, 2017, our Board of Directors authorized the repurchase of an additional $15.0 million of our outstanding common stock from time to time through April 25, 2019.

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:



Exhibit No.		Description

10.1*		Employment Agreement dated July 8, 2019, by and between Nautilus, Inc. and James Barr IV

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of ~~Chief Financial Officer~~Corporate Controller pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer and ~~Chief Financial Officer~~Corporate Controller pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

* Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	NAUTILUS, INC.
	(Registrant)

~~November 2, 2017~~August 8, 2019	By:	/S/ ~~Bruce~~ M. ~~Cazenave~~Carl Johnson, III
Date		~~Bruce~~ M. ~~Cazenave~~Carl Johnson, III
		~~Chief~~Principal Executive Officer ~~(Principal Executive Officer)~~



	NAUTILUS, INC.
	(Registrant)

~~November 2, 2017~~August 8, 2019	By:	/S/ ~~Sidharth Nayar~~Sarah A. Jones
Date		~~Sidharth Nayar~~Sarah A. Jones
		~~Chief Financial Officer~~ (Principal Financial and Accounting ~~Officer)~~Officer

2936



	Unrealized Gain (Loss) on Available-for-Sale Securities			Gain on Derivative Securities (Effective Portion)		Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Income (Loss)
Balance, July 1, 2017	$	(36	)	$	83	$	(784	)	$	(737	)
Current period other comprehensive income before reclassifications	22			8		371			401
Reclassification of amounts to earnings	—			15		—			15
Net other comprehensive income during period	22			23		371			416
Balance, September 30, 2017	$	(14	)	$	106	$	(413	)	$	(321	)



	Unrealized Loss on Available-for-Sale Securities			Gain (Loss) on Derivative Securities (Effective Portion)			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Income (Loss)
Balance, January 1, 2017	$	(8	)	$	(24	)	$	(1,185	)	$	(1,217	)
Current period other comprehensive income (loss) before reclassifications	(6		)	6			772			772
Reclassification of amounts to earnings	—			124			—			124
Net other comprehensive income (loss) during period	(6		)	130			772			896
Balance, September 30, 2017	$	(14	)	$	106		$	(413	)	$	(321	)



	Unrealized Gain (Loss) on Available-for-Sale Securities			Loss on Derivative Securities (Effective Portion)			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Loss
Balance, January 1, 2016	$	(16	)	$	—		$	(1,311	)	$	(1,327	)
Current period other comprehensive income (loss) before reclassifications	26			(896		)	397			(473		)
Reclassification of amounts to earnings	—			357			—			357
Net other comprehensive income (loss) during period	26			(539		)	397			(116		)
Balance, September 30, 2016	$	10		$	(539	)	$	(914	)	$	(1,443	)



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)
July 1 - July 31	—	$—	—	$19,615,159
August 1 - August 31	86,856	16.36	86,856	18,194,225
September 1 - September 30	—	—	—	18,194,225
Total	86,856	$16.36	86,856	$18,194,225

⁽¹⁾ On May 4, 2016, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4, 2018.
⁽²⁾ On April 25, 2017, our Board of Directors authorized the repurchase of an additional $15.0 million of our outstanding common stock from time to time through April 25, 2019.