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 30, 2017~~March 31, 2020



~~[ ]~~☐	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 31, 2017~~May 1, 2020 was ~~30,707,103~~29,816,595 shares.

NAUTILUS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2020



	PART I
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1718
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2627
Item 4.	Controls and Procedures	27

	PART II
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	28
~~Item~~ 6.	Exhibits	29
Signatures		2930

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
	March 31, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	23,024		$	11,070
Restricted cash	3,432			—
Trade receivables, net of allowances of $415 and $45	34,260			54,600
Inventories	34,927			54,768
Prepaids and other current assets	7,281			8,283
Income taxes receivable	10,149			472
Total current assets	113,073			129,193
Property, plant and equipment, net	23,143			22,755
Operating lease right-of-use assets	19,882			20,778
Other intangible assets, net	42,449			43,243
Other assets	5,823			4,510
Total assets	$	204,370		$	220,479
Liabilities and Shareholders' Equity
Trade payables	$	34,210		$	74,255
Accrued liabilities	9,445			7,633
Operating lease liabilities, current portion	3,782			3,720
Warranty obligations, current portion	3,366			3,100
Debt payable, current portion, net of unamortized debt issuance costs of $70 and $0	1,555			—
Total current liabilities	52,358			88,708
Operating lease liabilities, non-current	18,026			18,982
Warranty obligations, non-current	2,884			2,617
Income taxes payable, non-current	3,852			3,676
Deferred income tax liabilities, non-current	7,788			1,783
Other non-current liabilities	17			46
Debt payable, non-current, net of unamortized debt issuance costs of $270 and $230	26,520			14,071
Total liabilities	111,445			129,883
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 29,817 and 29,781 shares issued and outstanding	1,781			1,261
Retained earnings	92,456			90,272
Accumulated other comprehensive loss	(1,312		)	(937		)
Total shareholders' equity	92,925			90,596
Total liabilities and shareholders' equity	$	204,370		$	220,479

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 March 31,
	2020			2019
Net sales	$	93,722		$	84,400
Cost of sales	58,125			48,558
Gross profit	35,597			35,842
Operating expenses:
Selling and marketing	24,686			34,043
General and administrative	7,656			7,655
Research and development	3,815			4,311
Total operating expenses	36,157			46,009
Operating loss	(560		)	(10,167		)
Other expense:
Interest income	2			165
Interest expense	(627		)	(205		)
Other, net	41			(393		)
Total other expense, net	(584		)	(433		)
Loss from continuing operations before income taxes	(1,144		)	(10,600		)
Income tax benefit	(3,446		)	(2,116		)
Income (loss) from continuing operations	2,302			(8,484		)
Discontinued operations:
Loss from discontinued operations before income taxes	(34		)	(14		)
Income tax expense of discontinued operations	84			77
Loss from discontinued operations	(118		)	(91		)
Net income (loss)	$	2,184		$	(8,575	)

Basic income (loss) per share from continuing operations	$	0.08		$	(0.29	)
Basic loss per share from discontinued operations	—			—
Basic net income (loss) per share⁽¹⁾	$	0.07		$	(0.29	)

Diluted income (loss) per share from continuing operations	$	0.08		$	(0.29	)
Diluted loss per share from discontinued operations	—			—
Diluted net income (loss) per share⁽¹⁾	$	0.07		$	(0.29	)
Shares used in per share calculations:
Basic	29,796			29,573
Diluted	30,584			29,573

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 INCOME (LOSS)

(Unaudited and in thousands)



	Three Months Ended March 31,
	2020			2019
Net income (loss)	$	2,184		$	(8,575	)
Other comprehensive (loss) income:
Unrealized gain on available-for-sale securities, net of income tax expense of $0 and $5	—			15
Loss on derivative securities, effective portion, net of income tax benefit of $0 and $33	—			(100		)
Foreign currency translation, net of income tax benefit of $32 and $55	(375		)	128
Other comprehensive (loss) income	(375		)	43
Comprehensive income (loss)	$	1,809		$	(8,532	)

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 Loss			Total Shareholders' Equity
	Shares	Amount			Retained Earnings		Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balances at December 31, 2019	29,781	$	1,261		$	90,272	$	(937	)	$	90,596
Net income	—	—			2,184		—			2,184
Foreign currency translation adjustment, net of income tax benefit of $32	—	—			—		(375		)	(375		)
Stock-based compensation expense	—	564			—		—			564
Common stock issued under equity compensation plan, net of shares withheld for tax payments	36	(44		)	—		—			(44		)
Balances at March 31, 2020	29,817	$	1,781		$	92,456	$	(1,312	)	$	92,925



	Common Stock				Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Shareholders' Equity
	Shares	Amount			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			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 benefit	—	(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

See accompanying Notes to Condensed Consolidated Financial Statements.

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Income (loss) from continuing operations	$	2,302		$	(8,484	)
Loss from discontinued operations	(118		)	(91		)
Net income (loss)	2,184			(8,575		)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization	2,810			2,485
Provision for allowance for doubtful accounts	374			61
Inventory lower-of-cost-or-market/NRV adjustments	982			224
Stock-based compensation expense (benefit)	564			(365		)
Loss on asset dispositions	—			424
Loss on debt extinguishment	230			—
Deferred income taxes, net of valuation allowance	6,029			(2,439		)
Other	329			(31		)
Changes in operating assets and liabilities:
Trade receivables	20,265			23,880
Inventories	18,945			7,617
Prepaids and other assets	1,934			1,771
Income taxes receivable	(9,678		)	(108		)
Trade payables	(40,271		)	(47,158		)
Accrued liabilities and other liabilities, including warranty obligations	1,629			(2,277		)
Net cash provided by (used in) operating activities	6,326			(24,491		)
Cash flows from investing activities:
Proceeds from sales and maturities of available-for-sale securities	—			12,790
Purchases of property, plant and equipment	(1,694		)	(1,551		)
Purchases of other investments in non-controlled affiliates	—			(2,250		)
Net cash (used in) provided by investing activities	(1,694		)	8,989
Cash flows from financing activities:
Proceeds from long-term debt	44,142			236
Payments on long-term debt	(30,286		)	(11,667		)
Payments of debt issuance costs	(1,823		)	—
Proceeds from exercise of stock options	—			39
Tax payments related to stock award issuances	(44		)	(107		)
Net cash provided by (used in) financing activities	11,989			(11,499		)
Effect of exchange rate changes on cash and cash equivalents	(1,235		)	(64		)
Increase (decrease) in cash, cash equivalents and restricted cash	15,386			(27,065		)
Cash and cash equivalents at beginning of period	11,070			38,125
Cash, cash equivalents and restricted cash at end of period	$	26,456		$	11,060

Supplemental disclosure of cash flow information:
Cash paid for interest	$	238		$	272
Cash paid for income taxes, net	43			62
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid	$	577		$	611

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above:
	Three Months Ended March 31,
	2020			2019
Cash and cash equivalents	$	23,024		$	11,060
Restricted cash	3,432			—
Total cash, cash equivalents and restricted cash	$	26,456		$	11,060

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~~2019 (the ~~“2016~~“2019 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~~2019 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 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, and our results of operations, ~~and~~ comprehensive income (loss) and shareholders' equity for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~,2019 and our cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019. 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~~Updates to Significant Accounting Policies

Restricted Cash

The Company is required by its banking partner to maintain a restricted bank account to cover for exposures on corporate credit cards, foreign exchange and letters of credits. The Company's use of these funds is restricted until its exposure with the banking partner is closed. The restricted cash total was $3.4 million as of March 31, 2020.

Recent Accounting Pronouncements

~~ASU 2017-12~~

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities". ASU 2017-12 provides better alignment of an entity's risk management activities and financial reporting of hedges through changes to both the designation and measurement guidance for qualifying hedging relationships. In addition, the 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 adoption of ASU 2017-12 to have a 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 Adopted Pronouncements

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 do not expect the~~with early application permitted. Our adoption of ASU ~~2017-04 to have a~~2019-01 as of January 1, 2020 had no material ~~effect~~impact on our financial position, results of operations or cash flows.

ASU ~~2016-15~~2018-13

In August ~~2016,~~2018, the FASB issued ASU ~~2016-15, "Statement of Cash Flows~~2018-13, "Fair Value Measurement (Topic ~~230)~~820): Disclosure Framework - ~~Classification of Certain Cash Receipts and Cash Payments.~~Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in ASU ~~2016-15 are intended to add or clarify guidance~~2018-13 modify the disclosure requirements on fair value measurements in Topic 820 based on the ~~classification of certain cash receipts and payments~~concepts in the ~~statement~~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. Our adoption of ASU 2018-13 as of January 1, 2020 had no material impact on our financial position, results of operations or cash ~~flows,~~flows.

Recently Issued Pronouncements Not Yet Adopted

ASU 2020-04

In March 2020, the FASB issued optional guidance related to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the ~~intent~~transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use London Inter-bank Offered Rate ("LIBOR") as a reference rate, and is effective immediately, but is only available through December 31, 2022. We are currently assessing the impact of adopting this standard but do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash flows.

ASU 2020-01

In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We are currently assessing the ~~eight (8) types~~impact of adopting this standard but do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash ~~flows identified.~~ flows.

ASU ~~2016-15~~2019-12

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments in ASU 2019-12 introduce the following new guidance: (1) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax; and (2) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The amendments in ASU 2019-12 make changes to the following current guidance: (1) making an intraperiod allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim periods; and (4) determining how to apply the income tax guidance to franchise taxes that are partially based on income. ASU 2019-12 is effective for public ~~companies'~~business entities' fiscal years, including interim periods within those fiscal years, beginning after December 15, ~~2017. Early~~2020 with early adoption is permitted. ~~Entities must apply~~We are currently assessing the ~~guidance retrospectively to all periods presented,~~impact of adopting this standard but ~~may apply it prospectively if retrospective application would be impracticable. We~~ do not expect the adoption of ~~ASU 2016-15~~this guidance to have a material ~~effect~~impact 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. In November 2019, the FASB issued ASU ~~2016-13 is~~2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for ~~public companies' annual periods,~~the Company, as a smaller reporting company, until fiscal years beginning after December 15, 2022, 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~~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(2) REVENUES

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



	Three Months Ended March 31,
	2020		2019
Product sales	$	89,882	$	80,132
Extended warranties and services	1,935		2,469
Other⁽¹⁾	1,905		1,799
Net sales	$	93,722	$	84,400

⁽¹⁾ Other revenue is primarily freight and ~~other organizations~~delivery, royalty income and subscription revenue.

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



	Three Months Ended March 31,
	2020		2019
United States	$	79,950	$	70,188
Canada	6,249		7,929
All other	7,523		6,283
Net sales	$	93,722	$	84,400

As of March 31, 2020, estimated revenue expected 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 resultbe recognized in the ~~lessee recognizing a right-of-use ("ROU") asset~~future totaled $13.8 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. Direct orders of $8.0 million and ~~a corresponding lease liability. For finance leases the lessee would recognize interest expense~~Retail orders of $5.8 million comprised our backlog as of March 31, 2020. The estimated future revenues are net of contractual rebates and ~~amortization~~consideration payable for applicable Retail customers, and net of ~~the ROU asset,~~current promotional programs and sales discounts 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.Direct customers.

~~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~~The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue 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~~which advance consideration 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~~received prior to ~~recognize revenue based upon~~ the transfer of ~~promised goods and/or services to customers~~control. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in ~~an amount that reflects the consideration to which the entity expects to be entitled~~nature. Significant changes in ~~exchange for those goods and/or services. In addition, the new guidance requires enhanced disclosures,~~contract liabilities balances, including revenue ~~recognition policies to identify performance obligations to customers and significant judgments~~recognized in ~~measurement and recognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017, applied retrospectively to each prior~~the reporting period presented or retrospectively with a cumulative effect adjustment recognized as of the adoption date. We do not plan to early adopt this new standard, and accordingly, will adopt the new standard on January 1, 2018. Wethat was included in opening contract liabilities, are ~~planning to adopt using the full retrospective method.~~shown below (in thousands):



	Three Months Ended March 31,
	2020			2019
Balance, beginning of period	$	1,225		$	816
Cash additions	2,099			161
Revenue recognition	(1,274		)	(498		)
Balance, end of period	$	2,050		$	479

We have identified and made substantial progress in analyzing our principal revenue streams by channel, including potential impacts on the timing of recognition of variable consideration and contract costs, primarily sales commissions, and on presentation of our installation and services revenue. In addition, we are nearing completion of our review of significant contracts and evaluation of the potential changes to our business processes, controls, systems 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 disclosures 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.

(3) 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 )



	March 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Derivatives
Foreign currency forward contracts	$	—	$	7	$	—	$	7
Total assets measured at fair value	$	—	$	7	$	—	$	7

Liabilities:
Derivatives
Foreign currency forward contracts	$	—	$	124	$	—	$	124
Total liabilities measured at fair value	$	—	$	124	$	—	$	124

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, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Derivatives
Foreign currency forward contracts	$	—	$	295	$	—	$	295
Total assets measured at fair value	$	—	$	295	$	—	$	295

Liabilities:
Derivatives
Foreign currency forward contracts	$	—	$	9	$	—	$	9
Total liabilities measured at fair value	$	—	$	9	$	—	$	9

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

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~~three months ended ~~September 30, 2017,~~March 31, 2020, nor for the year ended December 31, ~~2016.~~2019.

We did not have any changes to our valuation techniques during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, nor for the year ended December 31, ~~2016.~~

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.2019.

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. ~~We did not perform any valuations on~~

As of March 31, 2020 and December 31, 2019, there were no assets or liabilities that are valued at fair value on a nonrecurring basis during the first nine months of 2017. During the fourth quarter of 2016, we performed our annual goodwill and indefinite-lived trade names impairment analyses effective as of October 1, 2016. During the nine months ended September 30, 2017 and the year ended December 31, 2016, we did not record any other-than-temporary impairments on our financial assets required to be measuredwere recorded at fair value on a nonrecurring basis.

The carrying values of cash, ~~and~~ cash equivalents and restricted cash, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fair value due to their short maturities. The carrying value of our ~~term loan~~debt 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) 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 30, 2017, we had a $52.0 million interest rate swap outstanding with JPMorgan Chase Bank, N.A. This interest rate swap matures on December 31, 2020 and has a fixed rate 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%.

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 months ended September 30, 2017 and 2016, 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 30, 2017,~~March 31, 2020, total outstanding contract notional amounts were ~~$18.3~~$7.8 million. At ~~September 30, 2017,~~March 31, 2020, these outstanding balance sheet hedging derivatives had maturities of 9079 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
		September 30, 2017				December 31, 2016
Derivative instruments designated as cash flow hedges:
Interest rate swap contract		Prepaids and other current assets		$	170			$	—
	Accrued liabilities		—				38
			$	170			$	38		Balance Sheet Classification		As of
											March 31, 2020				December 31, 2019
Derivative instruments not designated as cash flow hedges:
Foreign currency forward contracts	Accrued liabilities		$	65			$	—			Prepaids and other current assets		$	7			$	295
										Accrued liabilities		124				9

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



	Statement of Operations Classification	Three Months Ended March 31,
	Statement of Operations Classification	2020			2019
Derivative instruments designated as cash flow hedges:
Gain recognized in other comprehensive loss before reclassifications	---	$	—		$	(35	)
Gain reclassified from accumulated other comprehensive loss to earnings for the effective portion	Interest expense	—			81
Income tax expense	Income tax benefit	—			(16		)

Derivative instruments not designated as cash flow hedges:
(Gain) loss recognized in earnings	Other, net	$	(13	)	$	505
Income tax expense (benefit)	Income tax benefit	3			(101		)

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.~~11.

(5) 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		March 31, 2020		December 31, 2019
Finished goods	$	53,271	$	43,130	$	30,596	$	49,853
Parts and components	4,375		3,900		4,331		4,915
Total inventories	$	57,646	$	47,030	$	34,927	$	54,768

(6) 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)			March 31, 2020			December 31, 2019
Automobiles	5	to	6	$	23		$	139		5			$	23		$	23
Leasehold improvements	4	to	20	3,426			3,388			4	to	20	3,867			3,830
Computer software and equipment	3	to	7	26,138			25,899			2	to	7	26,816			26,816
Machinery and equipment	3	to	5	14,732			13,085			3	to	5	18,571			18,551
Furniture and fixtures	5	to	20	2,230			2,238			5	to	20	2,808			2,808
Work in progress⁽¹⁾	N/A			1,647			768			N/A			4,959			2,747
Total cost				48,196			45,517						57,044			54,775
Accumulated depreciation				(32,030		)	(28,049		)				(33,901		)	(32,020		)
Total property, plant and equipment, net				$	16,166		$	17,468					$	23,143		$	22,755

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

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

~~Goodwill~~

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



	Three Months Ended March 31,
	2020		2019
Depreciation expense	$	2,007	$	1,675

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

~~Other Intangible Assets~~

(7) 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)			March 31, 2020			December 31, 2019
Indefinite-lived trademarks	N/A			$	32,052		$	32,052		N/A			$	14,752		$	14,752
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			56,545
Accumulated amortization - definite-lived intangible assets				(7,185		)	(21,039		)				(14,096		)	(13,302		)
Other intangible assets, net				$	67,354		$	69,800					$	42,449		$	43,243

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 March 31,
	2020		2019
Amortization expense	$	801	$	810

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

Remainder of 2017 $ 810
2018 3,164
2019 3,134
2020 3,108
2021 3,078
Thereafter 22,008
$ 35,302



Remainder of 2020	$	2,395
2021	3,168
2022	3,168
2023	3,168
2024	3,118
Thereafter	12,680
	$	27,697

(8) 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 1 lease term of five years. For leases that we are reasonably certain we will exercise the lease renewal options, the options were considered in determining the lease term, and associated potential option payments are included in the lease payments. The payments used in the renewal term were estimated using the percentage rate increase of historical rent payments for each location where the renewal will be exercised.

Payments due under the lease contracts include annual fixed payments for office space. Variable payments including payments for our proportionate share of the building’s property taxes, insurance, and common area maintenance are treated as non-lease components and are recognized in the period for which the costs occur.

Operating lease expense was as follows (in thousands):



	Three Months Ended March 31,
	2020		2019
Operating lease expense	$	1,135	$	1,118

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 as of March 31, 2019 was $0.2 million.

Other information related to leases was as follows:



			As of
			March 31, 2020
Supplemental cash flow information:
Weighted average remaining operating lease term			4.0 years
Weighted average discount rate on operating leases			4.49%

We determined the discount rate for leases using a portfolio approach to determine an incremental borrowing rate to calculate the right-of-use assets and lease liabilities.

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



	As of
	March 31, 2020
2020 - remaining	$	3,517
2021	4,711
2022	4,566
2023	3,812
2024	3,899
Thereafter	4,187
Total undiscounted lease payments	24,692
Less imputed interest	(2,884		)
Total lease liabilities	$	21,808

~~(8)~~(9) ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):


	As of				As of
	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
Payroll and related liabilities	$	2,199	$	4,579	$	4,219	$	2,929
Other	5,857		8,313		5,226		4,704
Total accrued liabilities	$	8,056	$	12,892	$	9,445	$	7,633

~~(9)~~(10) 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,						Three Months Ended March 31,
	2017			2016			2020			2019
Balance, beginning of period	$	7,450		$	8,545		$	5,717		$	5,575
Accruals	2,163			2,132			1,912			1,348
Payments	(3,312		)	(2,857		)	(1,379		)	(1,500		)
Balance, end of period	$	6,301		$	7,820		$	6,250		$	5,423

~~(10)~~(11) ACCUMULATED OTHER COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

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



	Unrealized Gain (Loss) on Available-for-Sale Securities		Gain (Loss) on Derivative Securities		Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Loss
Balance, January 1, 2020	$	—	$	—	$	(937	)	$	(937	)
Current period other comprehensive loss before reclassifications	—		—		(375		)	(375		)
Net other comprehensive loss income during period	—		—		(375		)	(375		)
Balance, March 31, 2020	$	—	$	—	$	(1,312	)	$	(1,312	)

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 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 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) Gain on Available-for-Sale Securities			Gain (Loss) on Derivative Securities			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive (Loss) Income
Balance, January 1, 2019	$	(6	)	$	223		$	(1,126	)	$	(909	)
Current period other comprehensive income (loss) before reclassifications	15			(35		)	128			108
Amounts reclassified from accumulated other comprehensive loss	—			(65		)	—			(65		)
Net other comprehensive income (loss) during period	15			(100		)	128			43
Balance, March 31, 2019	$	9		$	123		$	(998	)	$	(866	)

~~(11)~~(12) 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~~and repurchases under ~~existing programs to $25.0~~this program totaled $1.0 million. Under the new program, shares of our common stock may be repurchased from time to time through April 25, 2019. Repurchases may be made in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cash balances, and repurchased shares will be retired and returned to unissued authorized shares.

As of ~~September 30, 2017, there was $18.2 million remaining available for repurchases under~~February 21, 2020, the share repurchase ~~programs.~~program expired.

~~Cumulative repurchases pursuant to the programs 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

~~(12)~~(13) 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 March 31,
	2020	2019
Shares used to calculate basic income (loss) per share	29,796	29,573
Dilutive effect of outstanding stock options, performance stock units and restricted stock units	788	—
Shares used to calculate diluted income (loss) per share	30,584	29,573

The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted per share due to loss from continuing operations, as such, the exercise or conversion of any potential shares would increase the number of shares in the denominator and results in a lower loss per share (in thousands):



	Three Months Ended March 31,
	2020	2019
Restricted stock units	—	39
Stock options	—	30

The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income (loss) per share. 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). In the case of stock options, this is because the average market price did not exceed the exercise 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 March 31,
	2020	2019
Restricted stock units	160	341
Stock options	48	91

~~(13)~~(14) SEGMENT AND ENTERPRISE-WIDE INFORMATION

~~In accordance with FASB ASC 280,~~ ~~Segment Reporting, we determined that we~~We have ~~two~~2 operating segments, - Direct and Retail. There ~~have been~~were no changes in our operating segments during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2020.

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,~~and restricted cash, 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 March 31,
	2017			2016			2017			2016			2020			2019
Net sales:
Direct	$	33,986		$	33,710		$	147,800		$	159,884		$	47,141		$	46,714
Retail	53,505			46,223			128,393			117,939			45,613			36,821
Royalty	641			885			2,220			2,452			968			865
Consolidated net sales	$	88,132		$	80,818		$	278,413		$	280,275		$	93,722		$	84,400
Contribution:
Direct	$	5,289		$	2,584		$	23,141		$	31,253		$	1,809		$	(4,542	)
Retail	12,118			9,164			20,427			17,225			2,389			(722		)
Royalty	638			871			2,206			2,419			968			865
Consolidated contribution	$	18,045		$	12,619		$	45,774		$	50,897		$	5,166		$	(4,399	)

Reconciliation of consolidated contribution to income from continuing operations:
Reconciliation of consolidated contribution to income (loss) from continuing operations:
Consolidated contribution	$	18,045		$	12,619		$	45,774		$	50,897		$	5,166		$	(4,399	)
Amounts not directly related to segments:
Operating expenses	(4,680		)	(4,408		)	(15,877		)	(16,813		)	(5,725		)	(5,768		)
Other expense, net	(161		)	(218		)	(648		)	(1,336		)	(585		)	(433		)
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													3,446			2,116
Income (loss) from continuing operations													$	2,302		$	(8,484	)

													As of
													March 31,			December 31,
Assets:													2020			2019
Direct													$	36,849		$	47,377
Retail													114,700			148,965
Unallocated corporate													52,821			24,137
Total assets													$	204,370		$	220,479

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

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



	Three Months Ended March 31,
	2020	2019
Amazon.com	13.3%	*
*Less than 10% of total net sales.

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 % *
*
*

^*~~Less than 10%~~

~~(14)~~(15) BORROWINGS

On January 31, 2020, we entered into a Credit Agreement with Wells Fargo Bank, National Association ("Wells Fargo") and lenders from time to time party thereto (collectively with Wells Fargo the "Lenders"), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility" and together with the ABL Revolving Facility, the "Wells Fargo Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The Wells Fargo Financing expires and all outstanding amounts become due on January 31, 2025 unless the maturity is accelerated subject to the terms set forth in the Credit Agreement. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.

We used the proceeds from the Wells Fargo Financing to extinguish our existing $40.0 million revolver with Chase Bank ("2019 Chase Credit Agreement"), pay transaction expenses, and for general corporate purposes. Our previously existing credit facilities and agreements with Chase Bank and all guarantees and liens existing in connection with those facilities and agreements were

terminated upon the closing of the Wells Fargo Financing. In connection with the termination of the 2019 Chase Credit Agreement we recorded a loss on debt extinguishment of $0.2 million as interest expense in our consolidated statement of income.

Interest on the ABL Revolving Facility will accrue at the LIBOR plus a margin of 1.75% to 2.25% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBOR plus 5.00%. As of March 31, 2020, our interest rate was 4.50% for the ABL Revolving Facility and 6.61% for the Term Loan Facility.

As of March 31, 2020, outstanding borrowings totaled $28.4 million, with $14.8 million and $13.6 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of March 31, 2020, we were in compliance with the financial covenants of the Wells Fargo Financing and $18.0 million was available for borrowing under the ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.

The Credit Agreement contains customary affirmative and negative covenants for financings of this type, including, among other terms and conditions, delivery of financial statements, reports and maintenance of existence, revolving availability subject to a calculated borrowing base, as well as limitations and conditions on our ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of its property; make investments; or pay dividends or make distributions, in each case subject to certain exceptions. The financial covenants set forth in the Credit Agreement include a minimum liquidity covenant of $7.5 million. Beginning February 1, 2022, the minimum liquidity covenant will decrease to $5.0 million and only a minimum EBITDA covenant will apply. In addition, the Credit Agreement includes customary events of default, including but not limited to, the 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).

(16) INCOME TAXES

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted and signed into law in response to coronavirus disease 2019 ("COVID-19"). The CARES Act, among other things, includes several significant provisions that could impact corporate taxpayers’ accounting for income taxes.

Prior to the enactment of CARES Act, the 2017 Tax Cuts and Jobs Act generally eliminated the ability to carryback net operating losses ("NOL"), and permitted the NOL arising in tax years beginning after December 31, 2017 to be carried forward indefinitely, limited to 80% of the taxpayer’s income. The CARES Act amended the NOL rules suspending the 80% limitation on the utilization of NOLs generated after December 31, 2017 and before January 1, 2021. Additionally the CARES Act allows corporate NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five taxable years preceding the taxable year of the loss.

Accordingly, during the first quarter 2020, we performed various analyses and evaluated the potential impact to the company’s financial statements as a result of the CARES Act enactment. Based on our assessment, we determined that the modifications to the NOL carryback provision of the CARES Act would result in a tax benefit and cash flow to the company. The company expects that taxable losses incurred in 2019 and anticipate to incur in 2020 may fully be carried back and utilized against the taxable income generated in the previous tax years which were measured at 35%.

As a result of the CARES Act, after our detailed analysis and calculations, we recorded $3.2 million income tax benefit associated with the remeasurement of the 14% tax rate differential attributable to the NOL carryback to 35% tax years discretely in the first quarter of 2020. Furthermore, corresponding income tax receivable from the NOL carryback was recorded in the first quarter of 2020.

(17) COMMITMENTS AND CONTINGENCIES

Guarantees, Commitments and Off-Balance Sheet Arrangements

As of ~~September 30, 2017~~March 31, 2020, we had no 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 30, 2017~~March 31, 2020, we had approximately ~~$37.5~~$34.6 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 30, 2017.~~March 31, 2020.

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, 0 liability is recorded as of March 31, 2020.

~~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~~2019 (the ~~“2016~~“2019 Form 10-K”). All references to the ~~third~~first quarter and first ~~nine~~three months of ~~2017~~2020 and ~~2016~~2019 mean the ~~three and nine-month~~three-month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, 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.

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, financial 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 and anticipated results from such expenditures and other investments in our capabilities and resources; anticipated losses from discontinued operations; 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, 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, tariffs, risks associated with current and potential delays, work stoppages, or supply chain disruptions caused by the coronavirus pandemic, 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 2019 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, related accessories and digital platform for consumer use, primarily in the U.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus^®, Bowflex^®, Octane Fitness^®and Schwinn^®.

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, our websites, social media channels, and 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 first quarter were primarily impacted by higher sales, driven by stronger demand for home-fitness products and the appropriate improvements being implemented into our overall business to address long-term profitability. The primary actions taken include extensive, in-depth consumer insights research, which has identified an effective new positioning for the Bowflex^® brand, and which is now underway through a new advertising campaign and updates to our websites, television commercials, social media, and other digital platforms. Additionally, we expect to launch targeted new products across all our channels over the next few quarters. In parallel, we plan to continue our digital transformation with the inclusion of updated digital experience platforms on key new products, moving toward our goal of having the majority of our products equipped with subscription-based digital experience offerings.

Net sales for the first three months of 2020 were $93.7 million, reflecting a 11.0% increase as compared to net sales of $84.4 million for the first three months of 2019. The increase was driven primarily by strong demand for strength and cardio products, particularly the Bowflex^®SelectTech^® weights and the new connected-fitness bikes. Additionally, the Company was able to capture the accelerated demand for home fitness resulting from COVID-19 stay-at-home orders in the last few weeks of March through strong omni-channel execution.

Net sales of our Direct segment increased by $0.4 million, or 0.9%, for the first three months of 2020, compared to the first three months of 2019. Increased sales were driven primarily by strength products which grew 58.5% versus last year. Strength product sales were driven by Bowflex^® SelectTech^® weights and Bowflex^® Home Gyms. Cardio product sales declined by 9.4% as strong demand for our connected-fitness bikes, the Bowflex^® C6 and Schwinn^® IC4, were not enough to fully offset declines in our Max Trainer^® sales.

Net sales of our Retail segment increased by $8.8 million, or 23.9%, for the first three months of 2020, compared to the first three months of 2019, with strong growth coming from both strength and cardio product sales. Strength sales were up 54.6%, driven primarily by strong demand for Bowflex^® SelectTech^® weights and Bowflex^® Home Gyms. Cardio sales were up 17.7%, driven by the Schwinn^® IC4 connected-fitness bikes and partially offset by declines in Octane Fitness^® products as gym closures have begun to affect sales of commercial-grade equipment. Although numerous retailers have temporarily closed store locations due to COVID-19, Bowflex^® and Schwinn^® experienced strong year-over-year sales increases through retail partners' e-commerce and curbside pick-up platforms.

Royalty income increased by $0.1 million, or 11.9%, for the first three months of 2020, compared to the first three months of 2019, primarily due to a royalty settlement.

Gross profit decreased by $0.2 million, or 0.7%, for the first three months of 2020 to $35.6 million, or 38.0% of net sales, compared to gross profit of $35.8 million, or 42.5% of net sales, for the first three months of 2019. The decrease in gross profit dollars was primarily due to lower gross margin percentages in both the Direct and Retail segments. Gross margin percentage points decreased by 4.5% for the first three months of 2020 compared to the first three months of 2019 primarily due to unfavorable sales mix and higher landed product costs.

Operating expenses decreased by $9.9 million or 21.4%, for the first three months of 2020 to $36.2 million, compared to operating expenses of $46.0 million for the first three months of 2019. The decrease in operating expenses was primarily due to increased expense discipline, particularly in advertising expenses which delivered strong return on investment in the first quarter of 2020.

Operating loss decreased by $9.6 million, or 94.5%, for the first three months of 2020 to $0.6 million, compared to operating loss of $10.2 million for the first three months of 2019. The decrease in operating loss for the first three months of 2020 compared to the first three months of 2019 was primarily driven by lower operating expenses partially offset by lower gross margins.

Income from continuing operations was $2.3 million for the first three months of 2020, or $0.08 per diluted share, compared to loss from continuing operations of $8.5 million, or $0.29 per diluted share, for the first three months of 2019. The increase in income from continuing operations was driven by higher revenue, expense discipline, and aided by the tax benefit related to the CARES Act.

The effective tax rates for the first three months of 2020 and 2019 were 301.2% and 20.0%, respectively. The 281.2% year-over-year percentage rate differential was primarily due to changes in the tax treatment of net operating loses as a result of the CARES Act. The Company anticipates carrying back 2019 and 2020 losses to the 2016 and 2017 tax years and recognized $3.2 million of tax benefit, representing the 14 point tax rate differential between 2019 and 2020 and carry back tax periods, as income in the first quarter of 2020.

Net income was $2.2 million for the first three months of 2020, compared to net loss of $8.6 million for the first three months of 2019. Net income per diluted share was $0.07 for the first three months of 2020, compared to net loss per diluted share of $0.29 for the first three months of 2019.

Factors Affecting Our Performance

Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising

programs and our ability to attract new customers and maintain existing sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the U.S. and Canada. The COVID-19 pandemic has created a heightened need for home-fitness products at an unplanned rate partially offset by declines in Octane Fitness^® equipment as gym closures have begun to affect sales of commercial-grade equipment. Short-term increases in demand for many of our home-fitness products continue to outpace supply and we are accelerating the manufacturing and delivery of key products. We are uncertain and cannot predict with confidence the longer-term impacts of COVID-19 on our company's results of operations. 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, tariffs, expedited shipping and transportation costs, 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. 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. 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~~2019 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; 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; anticipated losses from discontinued operations; results of media investment in the Direct segment; plans for new product introductions 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, the effectiveness, availability and price of media time consistent with our cost and audience profile parameters, greater than anticipated costs associated with launch of new products, our ability to successfully integrate acquired businesses, a decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace, 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 increased shipping costs, 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 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 and Europe. 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 and the Internet. 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.

~~Net sales for the~~ ~~first nine months~~ of 2017 were $278.4 million, a decrease of $1.9 million, or 0.7%, as compared to net sales of $280.3 million for the first nine months of 2016. Net sales of our Direct segment decreased $12.1 million, or 7.6%, in the first nine months of 2017, compared to the first nine months of 2016, primarily due to a decline in TreadClimber^® sales. Net sales of our Retail segment increased by $10.5 million, or 8.9%, in the first nine months of 2017, compared to the first nine months of 2016, reflecting increases for both traditional and e-commerce customers across multiple product categories.

Gross profit for the first nine months of 2017 was $141.4 million, or 50.8% of net sales, a decrease of $6.0 million, or 4.1%, as compared to gross profit of $147.4 million, or 52.6% of net sales, for the first nine months of 2016. The decrease in gross profit dollars was primarily due to the decrease in net sales. Gross margin percentage points decreased 1.8%, due to a shift in segment mix, reflecting an increased percentage of Retail sales, and a decline in the Direct channel margin.

Operating expenses for the first nine months of 2017 were $111.5 million, a decrease of $1.8 million, or 1.6%, as compared to operating expenses of $113.3 million for the first nine months of 2016. The decrease in operating expenses was primarily related to decreased sales and marketing 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 for the first nine months of 2017 was $29.9 million, a decrease of $4.2 million, or 12.3%, as compared to operating income of $34.1 million for the first nine months of 2016. The decrease in operating income for the first nine months of 2017 compared to the first nine months of 2016 was driven primarily by the lower net sales and gross margin dollars.

Income from continuing operations was $19.1 million for the first nine months of 2017, or $0.61 per diluted share, compared to income from continuing operations of $23.1 million, or $0.74 per diluted share, for the first nine months of 2016. The effective tax rates for the first nine months of 2017 and 2016 were 34.7% and 29.4%, respectively. The 5.3% year-over-year percentage rate increase was due to the release of previously unrecognized tax benefits associated with certain non-U.S. filing positions during the third quarter of 2016.

Net income for the first nine months of 2017 was $17.8 million, compared to net income of $22.6 million for the first nine months of 2016. Net income per diluted share was $0.57 for the first nine months of 2017, compared to $0.72 for the first nine months of 2016.

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~~2020 or ~~2016~~2019 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
2017 2016 $ %
Net sales $ 88,132
$ 80,818
$ 7,314
9.0 %
Cost of sales 46,817
41,601
5,216
12.5 %
Gross profit 41,315
39,217
2,098
5.3 %
Operating expenses:
Selling and marketing 18,028
21,394
(3,366 ) (15.7 )%
General and administrative 6,305
6,177
128
2.1 %
Research and development 3,617
3,435
182
5.3 %
Total operating expenses 27,950
31,006
(3,056 ) (9.9 )%
Operating income 13,365
8,211
5,154
62.8 %
Other income (expense):
Interest income 170
60
110

Interest expense (377 ) (489 ) 112

Other, net 46
211
(165 )
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

Loss from discontinued operations, net of taxes (101 ) (251 ) 150

Net income $ 8,241
$ 7,594
$ 647


	Nine Months Ended September 30,						Change					Three Months Ended March 31,						Change
	2017			2016			$			%		2020			2019			$			%
Net sales	$	278,413		$	280,275		$	(1,862	)	(0.7	)%	$	93,722		$	84,400		$	9,322		11.0	%
Cost of sales	136,975			132,852			4,123			3.1	%	58,125			48,558			9,567			19.7	%
Gross profit	141,438			147,423			(5,985		)	(4.1	)%	35,597			35,842			(245		)	(0.7	)%
Operating expenses:
Selling and marketing	79,321			81,284			(1,963		)	(2.4	)%	24,686			34,043			(9,357		)	(27.5	)%
General and administrative	21,106			21,611			(505		)	(2.3	)%	7,656			7,655			1			—	%
Research and development	11,114			10,444			670			6.4	%	3,815			4,311			(496		)	(11.5	)%
Total operating expenses	111,541			113,339			(1,798		)	(1.6	)%	36,157			46,009			(9,852		)	(21.4	)%
Operating income	29,897			34,084			(4,187		)	(12.3	)%
Other income (expense):
Operating loss												(560		)	(10,167		)	9,607			(94.5	)%
Other expense:
Interest income	476			182			294					2			165			(163		)
Interest expense	(1,233		)	(1,469		)	236					(627		)	(205		)	(422		)
Other, net	109			(49		)	158					41			(393		)	434
Total other expense, net	(648		)	(1,336		)	688					(584		)	(433		)	(151		)
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		)
Loss from discontinued operations, net of taxes	(1,270		)	(559		)	(711		)
Net income	$	17,823		$	22,568		$	(4,745	)
Loss from continuing operations before income taxes												(1,144		)	(10,600		)	9,456
Income tax benefit												(3,446		)	(2,116		)	(1,330		)
Income (loss) from continuing operations												2,302			(8,484		)	10,786
Loss from discontinued operations, net of income taxes												(118		)	(91		)	(27		)
Net income (loss)												$	2,184		$	(8,575	)	$	10,759

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

Three Months Ended September 30, Change
2017 2016 $ %
Net sales:
Direct $ 33,986
$ 33,710
$ 276
0.8 %
Retail 53,505
46,223
7,282
15.8 %
Royalty 641
885
(244 ) (27.6 )%
$ 88,132
$ 80,818
$ 7,314
9.0 %
Cost of sales:
Direct $ 12,401
$ 11,579
$ 822
7.1 %
Retail 34,413
30,008
4,405
14.7 %
Royalty 3
14
(11 ) (78.6 )%
$ 46,817
$ 41,601
$ 5,216
12.5 %
Gross profit:
Direct $ 21,585
$ 22,131
$ (546 ) (2.5 )%
Retail 19,092
16,215
2,877
17.7 %
Royalty 638
871
(233 ) (26.8 )%
$ 41,315
$ 39,217
$ 2,098
5.3 %
Gross margin:
Direct 63.5 % 65.7 % (220 ) basis points
Retail 35.7 % 35.1 % 60
basis points


	Nine Months Ended September 30,						Change						Three Months Ended March 31,						Change
	2017			2016			$				%		2020			2019			$				%
Net sales:
Direct	$	147,800		$	159,884		$	(12,084	)		(7.6	)%	$	47,141		$	46,714		$	427			0.9	%
Retail	128,393			117,939			10,454				8.9	%	45,613			36,821			8,792				23.9	%
Royalty	2,220			2,452			(232		)		(9.5	)%	968			865			103				11.9	%
	$	278,413		$	280,275		$	(1,862	)		(0.7	)%	$	93,722		$	84,400		$	9,322			11.0	%
Cost of sales:
Direct	$	52,525		$	53,732		$	(1,207	)		(2.2	)%	$	22,842		$	20,318		$	2,524			12.4	%
Retail	84,436			79,087			5,349				6.8	%	35,283			28,240			7,043				24.9	%
Royalty	14			33			(19		)		(57.6	)%
	$	136,975		$	132,852		$	4,123			3.1	%	$	58,125		$	48,558		$	9,567			19.7	%
Gross profit:
Direct	$	95,275		$	106,152		$	(10,877	)		(10.2	)%	$	24,299		$	26,396		$	(2,097	)		(7.9	)%
Retail	43,957			38,852			5,105				13.1	%	10,330			8,581			1,749				20.4	%
Royalty	2,206			2,419			(213		)		(8.8	)%	968			865			103				11.9	%
	$	141,438		$	147,423		$	(5,985	)		(4.1	)%	$	35,597		$	35,842		$	(245	)		(0.7	)%
Gross margin:
Direct	64.5		%	66.4		%	(190		)	basis points			51.5		%	56.5		%	(500		)	basis points
Retail	34.2		%	32.9		%	130			basis points			22.6		%	23.3		%	(70		)	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
2017 2016 $ %
Direct net sales:
Cardio products⁽¹⁾
$ 30,087
$ 30,548
$ (461 ) (1.5 )%
Strength products⁽²⁾
3,899
3,162
737
23.3 %
33,986
33,710
276
0.8 %
Retail net sales:
Cardio products⁽¹⁾
39,389
33,280
6,109
18.4 %
Strength products⁽²⁾
14,116
12,943
1,173
9.1 %
53,505
46,223
7,282
15.8 %

Royalty 641
885
(244 ) (27.6 )%
$ 88,132
$ 80,818
$ 7,314
9.0 %


	Nine Months Ended September 30,				Change					Three Months Ended March 31,				Change
	2017		2016		$			%		2020		2019		$			%
Direct net sales:
Cardio products⁽¹⁾	$	133,421	$	149,074	$	(15,653	)	(10.5	)%	$	35,876	$	39,607	$	(3,731	)	(9.4	)%
Strength products⁽²⁾	14,379		10,810		3,569			33.0	%	11,265		7,107		4,158			58.5	%
	147,800		159,884		(12,084		)	(7.6	)%	47,141		46,714		427			0.9	%
Retail net sales:
Cardio products⁽¹⁾	96,249		86,739		9,510			11.0	%	36,143		30,696		5,447			17.7	%
Strength products⁽²⁾	32,144		31,200		944			3.0	%	9,470		6,125		3,345			54.6	%
	128,393		117,939		10,454			8.9	%	45,613		36,821		8,792			23.9	%

Royalty	2,220		2,452		(232		)	(9.5	)%	968		865		103			11.9	%
	$	278,413	$	280,275	$	(1,862	)	(0.7	)%	$	93,722	$	84,400	$	9,322		11.0	%

⁽¹⁾ Cardio products include: Max Trainer^®,TreadClimber^®, HVT™, Zero Runner^®, treadmills, exercise bikes and ellipticals.
⁽²⁾ Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.
⁽¹⁾ Cardio products include: connected-fitness bikes like the Bowflex^® C6 and Schwinn^®IC4, Max Trainer^®,TreadClimber^®, Zero Runner^®, LateralX^®,treadmills, other exercise bikes, ellipticals and subscription services.										⁽¹⁾ Cardio products include: connected-fitness bikes like the Bowflex^® C6 and Schwinn^®IC4, Max Trainer^®,TreadClimber^®, Zero Runner^®, LateralX^®,treadmills, other exercise bikes, ellipticals and subscription services.
⁽²⁾ Strength products include: home gyms and Bowflex^® SelectTech^® dumbbells, kettlebell weights, and accessories.										⁽²⁾ Strength products include: home gyms and Bowflex^® SelectTech^® dumbbells, kettlebell weights, and accessories.

Direct

~~Direct net~~Net sales ~~increased 0.8%~~were $47.1 million, up 0.9%, from $46.7 million. Increased sales were driven primarily by strength products which grew 58.5% versus last year. Strength product sales were driven by Bowflex^® SelectTech^® weights and Bowflex^® Home Gyms. Cardio product sales declined by 9.4% as strong demand for ~~the three month period ended September 30, 2017 compared to the same period of 2016 as new products, including~~our connected-fitness bikes, the Bowflex ~~HVT~~^TM®, C6 and Schwinn^® IC4, were not enough to fully offset ~~a decline~~declines in ~~TreadClimber~~our Max Trainer^® sales. ~~For~~

Gross margin rate was 51.5%, down from 56.5%, primarily driven by unfavorable product mix and higher landed product costs. Sales declines in the ~~nine months ended September 30, 2017, Direct net sales decreased 7.6%~~higher margin Max Trainers line continue to pressure margins, while landed product costs were driven higher by tariffs and expediting shipments from our factories in Asia.

Segment contribution income was $1.8 million, up 139.8%, compared to ~~the same period~~segment contribution loss of ~~2016 due~~$4.5 million. The improvement in segment contribution was primarily driven by $6.5 million reduction in media spend, as gross profit was below last year. Advertising expenses were $13.2 million in first quarter of 2020 compared to ~~a decline in TreadClimber~~^® ~~sales, partially offset by a 33.0% increase in strength product sales.~~$19.7 million first quarter of 2019.

Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the ~~third~~first quarter of ~~2017~~2020 were ~~53.7%~~52.9%, compared to ~~47.9%~~54.3% in the same period of ~~2016. We continue to experience improved credit~~2019. The decrease in approval rates ~~due to our media strategy, which focuses on generation of responses from consumers with relatively high~~reflects lower 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 cost of sales of our Direct business for the three month period ended September 30, 2017 compared to the same period of 2016 was 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 month periods ended September 30, 2017, Direct gross margins decreased 220 and 190 basis points, respectively, as compared to the same periods of 2016 primarily due to unfavorable product mix and higher discounting for older products.

Retail

Net sales were $45.6 million, up 23.9%, from $36.8 million with strong growth coming from both strength and cardio product sales. Strength sales up were up 54.6%, driven primarily by strong demand for Bowflex^® SelectTech^® weights and Bowflex^®Home Gyms. Cardio sales were up 17.7%, driven by the Schwinn^® IC4 connected-fitness bikes and partially offset by declines in Octane Fitness^® products as gym closures have begun to affect sales of commercial-grade equipment. Although numerous retailers have temporarily closed store locations due to COVID-19, Bowflex^® and Schwinn^® experienced strong year-over-year sales increases through retail partners' e-commerce and curbside pick-up platforms.

~~Retail~~Gross margin rate was 22.6%, down from 23.3%, driven primarily by unfavorable sales mix and higher landed product costs. Landed product costs were driven higher by tariffs and expediting shipments from our factories in Asia.

Segment contribution income was $2.4 million, up 430.9%, compared to segment contribution loss of $0.7 million. The improvement in segment contribution was primarily driven by higher net sales ~~increased 15.8%~~ and ~~8.9% for the three and nine month periods ended September 30, 2017 compared to the same periods of 2016. The increases~~reductions in ~~both periods reflected growth in traditional and e-commerce customers across multiple product categories.~~operating expenses, partially offset by lower gross margin rates.

The increases in cost of sales of our Retail business for the three and nine month periods ended September 30, 2017 compared to the same periods of 2016 were primarily related to the increases in Retail net sales as discussed above.

For the three and nine month periods ended September 30, 2017, Retail gross margin increased by 60 and 130 basis points, respectively, compared to the same periods of 2016 due to favorable absorption of fixed costs over the increased sales volume and the one-time settlement of an indemnification claim.

Selling and Marketing

Dollars in thousands Three Months Ended September 30, Change
2017 2016 $ %
Selling and marketing $18,028 $21,394 $(3,366) (15.7)%
As % of net sales 20.5% 26.5%
Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, and other programs.

Dollars in thousands Nine Months Ended September 30, Change
2017 2016 $ %
Selling and marketing $79,321 $81,284 $(1,963) (2.4)%
As % of net sales 28.5% 29.0%



Dollars in thousands	Three Months Ended March 31,		Change
	2020	2019	$	%
Selling and marketing	$24,686	$34,043	$(9,357)	(27.5)%
As % of net sales	26.3%	40.3%

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

~~The $2.0 million decrease in selling and marketing expense in the nine month period ended September 30, 2017~~March 31, 2020 as compared to the same period of ~~2016~~2019 was primarily related to a ~~$4.7~~$6.5 million decrease ~~in variable selling costs, including the factors noted above, and lower marketing program costs of $1.0 million, offset by increases of $2.9 million~~ in media advertising and ~~$0.8~~a $0.5 million decrease in ~~photo and video production costs.~~financing fees.

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
2017 2016 $ %
Media advertising $11,114 $10,790 $324 3.0%


Dollars in thousands	Nine Months Ended September 30,		Change		Three Months Ended March 31,		Change
	2017	2016	$	%	2020	2019	$	%
Media advertising	$43,704	$40,804	$2,900	7.1%	$13,185	$19,702	$(6,517)	(33.1)%

The ~~increases~~decrease in media advertising ~~in the three and nine month periods ended September 30, 2017 compared to the same periods of 2016 reflected lower response rates that drove the increased investments in advertising.~~

~~General and Administrative~~

Dollars in thousands Three Months Ended September 30, Change
2017 2016 $ %
General and administrative $6,305 $6,177 $128 2.1%
As % of net sales 7.2% 7.6%

Dollars in thousands Nine Months Ended September 30, Change
2017 2016 $ %
General and administrative $21,106 $21,611 $(505) (2.3)%
As % of net sales 7.6% 7.7%

~~The increase in general and administrative~~ for the three ~~months~~month period ended ~~September 30, 2017~~March 31, 2020 compared to the same period of ~~2016 was primarily due to higher legal expenses~~2019 reflected the increased focus on return on investment that began in the fourth quarter of ~~$0.4 million, offset by $0.4 million lower integration costs~~2019.

General and Administrative

General and administrative ~~cost savings related to Octane incurred in the same comparative period.~~expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, and other administrative fees.



Dollars in thousands	Three Months Ended March 31,		Change
	2020	2019	$	%
General and administrative	$7,656	$7,655	$1	—%
As % of net sales	8.2%	9.1%

~~The decrease in general~~General and administrative expenses were flat for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 compared to the same period of ~~2016 was primarily~~2019 due to ~~$0.8 million savings related to lower integration~~increases for incentive costs ~~and administrative cost savings related to Octane, and lower employee incentives and compensation costs of $0.9 million. These costs were partially offset by higher litigation-related expenses~~ of $1.3 million ~~for the same comparative period.~~and consulting costs of $0.6 million offset by a decrease in litigation costs of $1.9 million.

Research and Development

Dollars in thousands Three Months Ended September 30, Change
2017 2016 $ %
Research and development $3,617 $3,435 $182 5.3%
As % of net sales 4.1% 4.3%
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.


Dollars in thousands	Nine Months Ended September 30,		Change		Three Months Ended March 31,		Change
	2017	2016	$	%	2020	2019	$	%
Research and development	$11,114	$10,444	$670	6.4%	$3,815	$4,311	$(496)	(11.5)%
As % of net sales	4.0%	3.7%			4.1%	5.1%

The ~~increases~~decrease in research and development inexpenses for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2020 compared to the same ~~periods~~period of ~~2016 were~~2019 was driven primarily ~~due~~by lower maintenance expenses related to ~~our investment in additional engineering and product development headcount as we continue to supplement our new product development resources required to innovate and broaden our product portfolio.~~digital platforms.

Interest Expense

Interest expense ofincreased $0.4 million ~~and $1.2~~to $0.6 million for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017 decreased $0.1 million and $0.2 million, respectively,~~March 31, 2020, compared to the same ~~periods~~period of ~~2016.~~2019. The ~~decreases were~~increase was primarily due to ~~reductions~~loss on debt extinguishment of $0.2 million reported as interest expense in ~~principal balance on~~ our ~~term loan.~~consolidated statement of income incurred in connection with the termination of our prior credit agreement with Chase Bank. See Note 15 of Notes to Condensed Consolidated Financial Statements for additional information.

Other, Net

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

Income Tax ~~Expense~~

Benefit

Dollars in thousands Three Months Ended September 30, Change
2017 2016 $ %
Income tax expense $4,862 $148 $4,714 *
Effective tax rate 36.8% 1.9%
Income tax provision includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.


Dollars in thousands	Nine Months Ended September 30,		Change		Three Months Ended March 31,		Change
	2017	2016	$	%	2020	2019	$	%
Income tax expense	$10,156	$9,621	$535	5.6%
Income tax benefit					$(3,446)	$(2,116)	$(1,330)	62.9%
Effective tax rate	34.7%	29.4%			301.2%	20.0%

* Not meaningful.

~~Income~~The income tax ~~expense~~benefit and effective tax ~~rates~~rate from continuing operations for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2020 was primarily ~~related~~due to ~~our profitable U.S and foreign operations.~~the 14% rate benefit of net operating loss carry-back from the 2019 tax year to the 2016 tax year as a result of CARES Act enactment, which is discretely recognized in the first quarter of 2020. The ~~reduced~~ effective tax ~~rates~~rate and income tax benefit from continuing operations for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2016 were~~March 31, 2019 was primarily due to our losses generated in the release of, on a non-recurring basis, previously unrecognized 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, 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.U.S.

LIQUIDITY AND CAPITAL RESOURCES

As of ~~September 30, 2017~~March 31, 2020, we had ~~$77.8~~$26.5 million of cash, cash equivalents and restricted cash, and $18.0 million was available for borrowing under the ABL Revolving Facility, compared to $11.1 million of cash and ~~investments compared to $79.6 million~~cash equivalents 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.~~2019. We expect our cash and cash equivalents and ~~available-for-sale securities~~amounts available under our Wells Fargo Financing at ~~September 30, 2017,~~March 31, 2020, 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 30, 2017.~~March 31, 2020. 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 provided by operating activities was $6.3 million for the three months ended March 31, 2020, compared to cash used in operating activities of $24.5 million for the three months ended March 31, 2019. The increase in cash flows from operating activities for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 as compared to the same period of ~~2016~~2019 was primarily due to the increase in operating income, 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 $20.3 million to $~~38.5~~34.3 million as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$45.5~~$54.6 million as of December 31, ~~2016,~~2019, primarily due to ~~seasonally lower net sales to specialty retail and commercial customers.~~the seasonality of the business. Trade receivables as of ~~September 30, 2017~~March 31, 2020 compared to ~~September 30, 2016~~March 31, 2019 increased ~~$7.3~~by $12.3 million due to the ~~increase~~higher net sales in ~~Retail net sales.~~the first quarter of 2020. Allowance for doubtful accounts increased $0.4 million primarily due to requested payment delays for commercial accounts impacted by COVID-19.

Inventories ~~increased $10.6~~decreased by $19.8 million to ~~$57.6~~$34.9 million as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$47.0~~$54.8 million as of December 31, ~~2016~~2019, primarily due to ~~seasonal preparations for~~ the ~~fourth quarter.~~seasonality of the business and to the surge in demand. Inventories as of ~~September 30, 2017~~March 31, 2020 compared to ~~September 30, 2016 increased~~March 31, 2019 decreased by ~~$8.4~~$26.0 million, primarily due to ~~increased in-transit inventory.~~our efforts to align inventory more closely to sales trends and to the surge in demand.

Prepaid and other current assets decreased by $1.0 million to $7.3 million as of March 31, 2020, compared to $8.3 million as of December 31, 2019, primarily due to lower prepaid marketing expenses. This decrease was partially offset by increases to prepaid insurance and information technology expenses.

Trade payables decreased ~~$3.9~~by $40.0 million to $~~62.1~~34.2 million as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$66.0~~$74.3 million as of December 31, ~~2016,~~2019, primarily due to seasonality of the ~~business.~~business and inventory related payments. Trade payables as of ~~September 30, 2017~~March 31, 2020 compared to ~~September 30, 2016 increased $17.4 million. The higher amount outstanding as of September 30, 2017 was~~March 31, 2019 decreased by $6.4 million, primarily due to ~~the increased inventory.~~our aligning inventory more closely to sales trends.

Accrued liabilities ~~decreased $4.8~~increased by $1.8 million to ~~$8.1~~$9.4 million as of ~~September 30, 2017,~~March 31, 2020, compared to ~~$12.9~~$7.6 million as of December 31, ~~2016,~~2019, primarily due to ~~payout of accrued incentive compensation during the first quarter of 2017~~payroll related liabilities and ~~settlement of a royalty dispute in the second quarter of 2017.~~other accruals.

Cash used inby investing activities of ~~$18.2~~$1.7 million for the first ~~nine~~three months of ~~2017~~2020 was due to capital expenditures for implementation of new software systems, production tooling and equipment. We anticipate spending between $8.0 million and $10.0 million in 2020 for digital platform enhancements, systems integration, and production tooling.

Cash provided by financing activities of $12.0 million for the first three months of 2020 was primarily related to ~~net purchases~~proceeds from Wells Fargo Financing agreements of ~~marketable securities of $15.4 million. In addition, $2.7~~$44.1 million, was used for capital expenditures primarily related to production equipment tooling and implementation of new software systems. We anticipate spending between $4.5 million and $5.5 million in 2017 for product tooling, computer equipment and software, and production equipment.

~~Cash used in financing activities of $17.0 million for the first nine months of 2017 was primarily related to~~partially offset by loan principal repayments ~~on our term loan~~ of ~~$12.0 million and share repurchases of $4.8~~$30.3 million.

Financing Arrangements

~~We have~~On January 31, 2020, we entered into a Credit Agreement with ~~JPMorgan Chase~~Wells Fargo Bank, ~~N.A.~~National Association (“~~Chase Bank”~~Wells Fargo”) ~~that provides for~~and lenders from time to time party thereto (collectively with Wells Fargo, the "Lenders"), pursuant to which the Lenders have agreed, among other things, to make available to us an ~~$80.0~~asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility” and ~~a $20.0 million revolving line of credit. The term~~together with the ABL Revolving Facility, the "Wells Fargo Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit ~~Agreement~~Agreement. The Wells Fargo Financing expires and all outstanding amounts become due on ~~December~~January 31, ~~2020 and~~2025 unless the maturity is accelerated subject to the terms set forth in the Credit Agreement. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.

~~The~~We used the proceeds from the Wells Fargo Financing to extinguish our existing $40.0 million revolver with Chase Bank ("2019 Chase Credit Agreement"), pay transaction expenses, and for general corporate purposes. Our previously existing credit facilities and agreements with Chase Bank and all guarantees and liens existing in connection with those facilities and agreements were terminated upon the closing of the Wells Fargo Financing. In connection with the termination of the 2019 Chase Credit Agreement we recorded a loss on debt extinguishment of $0.2 million as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also contains customary eventsinterest expense in our consolidated statement 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 subject to our compliance with certain financial and operating covenants at the time borrowings are requested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.

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 30, 2017, our borrowing rate for both the term loan and line of credit advances was 2.49%.income.

As of ~~September 30, 2017, the balance on our term loan was $52.0~~March 31, 2020, outstanding borrowings totaled $28.4 million with $14.8 million and ~~we had no outstanding borrowings~~$13.6 million under ~~the line of credit.~~our Wells Fargo Financing Term Loan Facility and ABL Revolving Facility, respectively. As of ~~September 30, 2017,~~March 31, 2020, we were in compliance with the financial covenants of the ~~Credit Agreement~~Wells Fargo Financing and ~~$20.0~~$18.0 million was available for borrowing under the ~~line of credit.~~ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025, unless the maturity is accelerated subject to the terms set forth in the Credit Agreement.

AsThe Credit Agreement contains customary affirmative and negative covenants for financings of ~~September 30, 2017, we had~~this type, including, among other terms and conditions, delivery of financial statements, reports and maintenance of existence, revolving availability subject to 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~~calculated borrowing base, as well as limitations and conditions on our ~~term loan~~ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of its property; make investments; or pay dividends or make distributions, in each case subject to certain exceptions. The financial covenants set forth in the Credit Agreement include a minimum liquidity covenant of $7.5 million. Beginning February 1, 2022, the minimum liquidity covenant will decrease to $5.0 million and ~~is classified as~~only a ~~cash flow hedge. The swap matures~~minimum EBITDA covenant will apply. In addition, the Credit Agreement includes customary events of default, including but not limited to, the nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on ~~December 31, 2020~~indebtedness held by third parties (subject to certain limitations and ~~has a fixed rate 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%~~cure periods).

~~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.~~

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 30, 2017.~~March 31, 2020.

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.~~

For the ~~nine~~three months ended ~~September 30, 2017, we had repurchased a total of 305,371~~March 31, 2020 no shares ~~for $4.8 million.~~were repurchased. As of ~~September 30, 2017, there was $18.2 million remaining available for repurchases under~~February 21, 2020, the share repurchase ~~programs.~~program expired.

SEASONALITY

We expect our ~~sales~~revenue 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 critical accounting policies have not changed from those discussed in our ~~2016~~2019 Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 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 30, 2017,~~March 31, 2020, the outstanding balances on our credit facilities totaled ~~$52.0~~$28.4 million.

As of September 30, 2017, we had a $52.0 million receive-variable, pay-fixed interest rate swap outstanding with Chase Bank, which amortizes monthly in line with 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 30, 2017~~March 31, 2020 were ~~$18.3~~$7.8 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 30, 2017,~~March 31, 2020, 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 described below update the risk factors in Part I, Item 1A. Risk Factors in our 2019 Form 10-K. The risks and uncertainties described below and in our ~~2016~~2019 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 below or in our ~~2016~~2019 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 Form 10-K.~~

~~Item 2. Unregistered Sales of Equity Securities~~Health epidemics, including the recent COVID-19 pandemic, have had, and ~~Use of Proceeds~~could in the future have, an adverse impact on our operations, supply chains and distribution systems.

~~Issuer Purchases~~Our business and operations could be adversely affected by health epidemics, including the recent COVID-19 pandemic, impacting the markets and communities in which we and our partners, advertisers, and customers operate. The global spread of ~~Equity Securities~~

~~The following table provides information about~~COVID-19 has created significant worldwide operational and economic volatility, uncertainty and disruption, and the extent towhich COVID-19 will adversely impact our ~~repurchases~~business is highly uncertain, rapidly changing, and cannot be accurately predicted. A continued slowdown or downturn in the economy has begun to have, and we expect will continue to have, a negative impact on many 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.
customers.

Public health officials worldwide have recommended and mandated precautions to mitigate the spread of COVID-19, including prohibitions on congregating in heavily populated areas and shelter-in-place orders or similar measures. As a result, we have temporarily closed our offices and retailers have temporarily closed store locations with some allowing for on-line order pick-up. Our results could be adversely impacted by these retail store closures and other actions taken to contain or treat the impact of COVID-19, and the extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services.

As a result of COVID-19, we have been unable to satisfy certain customer orders for our products. As a result, our customers have experienced delays in receiving our products. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as general economic uncertainty and macroeconomic conditions, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time.

In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital, which could negatively affect our liquidity in the future. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.

Item 6. Exhibits

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



Exhibit No.		Description

10.1		Credit Agreement dated January 31, 2020 between Nautilus, Inc. and Wells Fargo Bank.

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 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 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

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~~May 7, 2020	By:	/S/ ~~Bruce M. Cazenave~~James Barr IV
Date		~~Bruce M. Cazenave~~James Barr IV
		Chief Executive Officer ~~(Principal Executive Officer)~~



	NAUTILUS, INC.
	(Registrant)

~~November 2, 2017~~May 7, 2020	By:	/S/ ~~Sidharth Nayar~~Aina E. Konold
Date		~~Sidharth Nayar~~Aina E. Konold
		Chief Financial Officer ~~(Principal Financial and Accounting Officer)~~

2930



Remainder of 2017	$	810
2018	3,164
2019	3,134
2020	3,108
2021	3,078
Thereafter	22,008
	$	35,302



	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	)



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



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.