UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x]FORM10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20172021
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                   

Commission file number: 001-31321
NAUTILUS, INC.
NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)
Washington94-3002667
Washington
94-3002667
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)

17750 S.E. 6th Way
Vancouver, Washington 98683
(Address of principal executive offices, including zip code)

(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 classTrading Symbol(s)Name of each exchange on which registered
 Common Stock, no par valueNLSNew 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“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer[ ]Accelerated FilerAccelerated 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, 2017August 6, 2021 was 30,707,103 30,930,700 shares.




NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172021
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.




Table of Contents

PART I.    FINANCIAL INFORMATION
    
Item 1.     Financial Statements

NAUTILUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
 As of
 June 30, 2021March 31, 2021
Assets
Cash and cash equivalents$25,218 $38,441 
Restricted cash1,339 1,339 
Available-for-sale securities56,264 73,448 
Trade receivables, net of allowances of $1,311 and $1,17798,160 88,657 
Inventories111,132 68,085 
Prepaids and other current assets15,650 25,840 
Income taxes receivable9,500 
Total current assets317,263 295,810 
Property, plant and equipment, net24,718 24,496 
Operating lease right-of-use assets25,662 19,108 
Other intangible assets, net9,350 9,365 
Deferred income tax assets, non-current3,068 2,144 
Other assets2,325 3,307 
Total assets$382,386 $354,230 
Liabilities and Shareholders' Equity
Trade payables$114,602 $98,878 
Accrued liabilities14,515 19,627 
Operating lease liabilities, current portion4,706 3,384 
Warranty obligations, current portion8,191 7,243 
Income taxes payable, current portion845 5,709 
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $833,125 3,000 
Total current liabilities145,984 137,841 
Operating lease liabilities, non-current23,221 17,875 
Warranty obligations, non-current1,593 1,408 
Income taxes payable, non-current3,805 3,657 
Other non-current liabilities606 607 
Debt payable, non-current, net of unamortized debt issuance costs of $215 and $23610,296 10,297 
Total liabilities185,505 171,685 
Commitments and contingencies (Note 15)00
Shareholders' equity:
Common stock - 0 par value, 75,000 shares authorized, 30,794 and 30,576 shares issued and outstanding2,411 2,176 
Retained earnings194,408 180,524 
Accumulated other comprehensive income (loss)62 (155)
Total shareholders' equity196,881 182,545 
Total liabilities and shareholders' equity$382,386 $354,230 
 As of
 September 30, 2017  December 31, 2016
Assets    
Cash and cash equivalents$30,481
  $47,874
Available-for-sale securities47,295
 31,743
Trade receivables, net of allowances of $472 and $17038,534
  45,458
Inventories57,646
  47,030
Prepaids and other current assets6,795
  8,020
Income taxes receivable61
  3,231
Total current assets180,812
 183,356
Property, plant and equipment, net16,166
  17,468
Goodwill62,045
  61,888
Other intangible assets, net67,354
  69,800
Deferred income tax assets, non-current
 11
Other assets456
  543
Total assets$326,833
 $333,066
Liabilities and Shareholders' Equity    
Trade payables$62,146
  $66,020
Accrued liabilities8,056
  12,892
Warranty obligations, current portion3,253
  3,500
Note payable, current portion, net of unamortized debt issuance costs
 of $7 and $7
15,993
 15,993
Total current liabilities89,448
 98,405
Warranty obligations, non-current3,048

3,950
Income taxes payable, non-current2,646
  2,403
Deferred income tax liabilities, non-current16,868
 16,991
Other non-current liabilities2,365
  2,481
Note payable, non-current, net of unamortized debt issuance costs
 of $16 and $21
35,984
 47,979
Total liabilities150,359
 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 earnings175,969
  161,496
Accumulated other comprehensive loss(321)  (1,217)
Total shareholders' equity176,474
  160,857
Total liabilities and shareholders' equity$326,833
  $333,066


See accompanying Notes to Condensed Consolidated Financial Statements.
1


NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,Three-Months Ended June 30,
2017
2016 2017 2016 20212020
Net sales$88,132

$80,818
 $278,413
 $280,275
Net sales$184,593 $114,188 
Cost of sales46,817

41,601
 136,975
 132,852
Cost of sales129,088 66,792 
Gross profit41,315

39,217
 141,438
 147,423
Gross profit55,505 47,396 
Operating expenses: 
     Operating expenses:
Selling and marketing18,028

21,394
 79,321
 81,284
Selling and marketing21,300 12,446 
General and administrative6,305

6,177
 21,106
 21,611
General and administrative11,523 9,315 
Research and development3,617

3,435
 11,114
 10,444
Research and development4,815 3,728 
Loss on disposal groupLoss on disposal group29,013 
Total operating expenses27,950

31,006
 111,541
 113,339
Total operating expenses37,638 54,502 
Operating income13,365

8,211
 29,897
 34,084
Other income (expense):       
Operating income (loss)Operating income (loss)17,867 (7,106)
Other expense:Other expense:
Interest income170
 60
 476
 182
Interest income21 
Interest expense(377) (489) (1,233) (1,469)Interest expense(314)(338)
Other, net46
 211
 109
 (49)Other, net(120)115 
Total other expense, net(161)
(218) (648) (1,336)Total other expense, net(413)(222)
Income from continuing operations before income taxes13,204

7,993
 29,249
 32,748
Income tax expense4,862

148
 10,156
 9,621
Income from continuing operations8,342

7,845
 19,093
 23,127
Income (loss) from continuing operations before income taxesIncome (loss) from continuing operations before income taxes17,454 (7,328)
Income tax expense (benefit)Income tax expense (benefit)3,438 (2,342)
Income (loss) from continuing operationsIncome (loss) from continuing operations14,016 (4,986)
Discontinued operations:       Discontinued operations:
Loss from discontinued operations before income taxes(40)
(308) (1,695) (612)Loss from discontinued operations before income taxes(126)(29)
Income tax expense (benefit) of discontinued operations61

(57) (425) (53)
Income tax expense of discontinued operationsIncome tax expense of discontinued operations95 
Loss from discontinued operations(101)
(251) (1,270) (559)Loss from discontinued operations(132)(124)
Net income$8,241

$7,594
 $17,823
 $22,568
Net income (loss)Net income (loss)$13,884 $(5,110)
       
Basic income per share from continuing operations$0.27

$0.25
 $0.62
 $0.74
Basic income (loss) per share from continuing operationsBasic income (loss) per share from continuing operations$0.46 $(0.17)
Basic loss per share from discontinued operations

(0.01) (0.04) (0.02)Basic loss per share from discontinued operations(0.01)
Basic net income per share(1)
$0.27

$0.24
 $0.58
 $0.73
Basic net income (loss) per shareBasic net income (loss) per share$0.45 $(0.17)
       
Diluted income per share from continuing operations$0.27
 $0.25
 $0.61
 $0.74
Diluted income (loss) per share from continuing operationsDiluted income (loss) per share from continuing operations$0.43 $(0.17)
Diluted loss per share from discontinued operations
 (0.01) (0.04) (0.02)Diluted loss per share from discontinued operations
Diluted net income per share$0.27
 $0.24
 $0.57
 $0.72
Diluted net income (loss) per shareDiluted net income (loss) per share$0.43 $(0.17)
Shares used in per share calculations:       Shares used in per share calculations:
Basic30,749

31,118
 30,739
 31,069
Basic30,697 29,909 
Diluted31,075
 31,385
 31,098
 31,340
Diluted32,508 29,909 
(1) May not add due to rounding.


See accompanying Notes to Condensed Consolidated Financial Statements.Statements.
2


Table of Contents
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)
 
Three-Months Ended June 30,
 20212020
Net income (loss)$13,884 $(5,110)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of income tax benefit of $7 and $0
Foreign currency translation, net of income tax benefit of $13 and $15217 353 
Other comprehensive income217 353 
Comprehensive income (loss)$14,101 $(4,757)

See accompanying Notes to Condensed Consolidated Financial Statements.
3
 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 $1622
 
 (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

Table of Contents

NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited and in thousands)
Common StockRetained EarningsAccumulated Other Comprehensive IncomeTotal Shareholders' Equity
SharesAmount
Balances at March 31, 202130,576 $2,176 $180,524 $(155)$182,545 
Net income— — 13,884 — 13,884 
Unrealized loss on marketable securities, net of income tax benefit of $7— — — 
Foreign currency translation adjustment,
  net of income tax benefit of $13
— — — 217 217 
Stock-based compensation expense— 1,225 — 1,225 
Common stock issued under equity
  compensation plan, net of shares withheld
  for tax payments
201 (1,259)— — (1,259)
Common stock issued under employee stock purchase plan17 269 — — 269 
Balances at June 30, 202130,794 $2,411 $194,408 $62 $196,881 

Common StockRetained EarningsAccumulated Other Comprehensive LossTotal Shareholders' Equity
SharesAmount
Balances at March 31, 202029,817 $1,781 $92,456 $(1,312)$92,925 
Net loss— — (5,110)— (5,110)
Foreign currency translation adjustment,
  net of income tax benefit of $15
— — — 353 353 
Stock-based compensation expense— 865 — 865 
Common stock issued under equity
  compensation plan, net of shares withheld
  for tax payments
87 — — 
Common stock issued under employee stock purchase plan63 83 — — 83 
Balances at June 30, 202029,967 $2,729 $87,346 $(959)$89,116 

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Three-Months Ended June 30,
2021 2020
Cash flows from operating activities:Cash flows from operating activities:
Income (loss) from continuing operationsIncome (loss) from continuing operations$14,016  $(4,986)
Loss from discontinued operationsLoss from discontinued operations(132) (124)
Net income (loss)Net income (loss)13,884  (5,110)
Adjustments to reconcile net income to cash provided by operating activities:Adjustments to reconcile net income to cash provided by operating activities: 
Depreciation and amortizationDepreciation and amortization2,054  2,646 
Provision for allowance for doubtful accountsProvision for allowance for doubtful accounts(156) 596 
Inventory lower of cost or net realizable valueInventory lower of cost or net realizable value(134)773 
Stock-based compensation expenseStock-based compensation expense1,225  865 
Loss on asset dispositionsLoss on asset dispositions184 
Loss on disposal group, goodwill and other intangible impairment chargeLoss on disposal group, goodwill and other intangible impairment charge29,013 
Deferred income taxes, net of valuation allowancesDeferred income taxes, net of valuation allowances(908) (7,523)
OtherOther1,125 (961)
Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Trade receivablesTrade receivables(9,638) (7,995)
InventoriesInventories(43,259) 1,506 
Prepaids and other assetsPrepaids and other assets3,706  (611)
Income taxes receivableIncome taxes receivable(9,512) 4,823 
Trade payablesTrade payables15,200  19,742 
Accrued liabilities and other liabilities, including warranty obligationsAccrued liabilities and other liabilities, including warranty obligations(1,743) 2,264 
Net cash (used in) provided by operating activitiesNet cash (used in) provided by operating activities(28,156) 40,212 
Cash flows from investing activities:Cash flows from investing activities: 
Proceeds from sales and maturities of available-for-sale securitiesProceeds from sales and maturities of available-for-sale securities17,185 
Purchases of property, plant and equipmentPurchases of property, plant and equipment(1,850) (2,965)
Net cash provided by (used in) investing activitiesNet cash provided by (used in) investing activities15,335  (2,965)
Cash flows from financing activities:Cash flows from financing activities: 
Proceeds from long-term debtProceeds from long-term debt1,185 575 
Payments on long-term debtPayments on long-term debt(1,337)(13,167)
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 income17,823
 22,568
Adjustments to reconcile net income to cash provided by operating activities:   
Depreciation and amortization6,386
 5,748
Provision for allowance for doubtful accounts375
 183
Inventory lower-of-cost-or-market/NRV adjustments294
 72
Stock-based compensation expense1,938
 2,045
Loss on asset dispositions58
 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 receivables6,532
 13,633
Inventories(11,056) (4,716)
Prepaids and other current assets1,644
 (413)
Income taxes receivable3,170
 (5,397)
Trade payables(4,275) (15,475)
Accrued liabilities, including warranty obligations(5,875) (7,286)
Net cash provided by operating activities16,720
 14,930
Cash flows from investing activities:   
Purchases of available-for-sale securities(57,054) (22,972)
Proceeds from maturities of available-for-sale securities41,620
 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 purchases548
 531
Proceeds from employee stock purchasesProceeds from employee stock purchases269 
Proceeds from exercise of stock optionsProceeds from exercise of stock options63 83 
Tax payments related to stock award issuances(741) (221)Tax payments related to stock award issuances(1,322)
Excess tax benefit related to stock-based awards
 1,852
Net cash used in financing activities(17,041) (9,838)Net cash used in financing activities(1,142) (12,509)
Effect of exchange rate changes on cash and cash equivalents1,088
 87
Effect of exchange rate changes on cash and cash equivalents740  644 
Increase (decrease) in cash and cash equivalents(17,393) 391
Cash and cash equivalents:   
Beginning of period47,874
 30,778
End of period$30,481
 $31,169
(Decrease) increase in cash, cash equivalents and restricted cash(Decrease) increase in cash, cash equivalents and restricted cash(13,223) 25,382 
Less: Net change in cash balances classified as assets held-for-saleLess: Net change in cash balances classified as assets held-for-sale(3,986)
Net change in cash, cash equivalents and restricted cashNet change in cash, cash equivalents and restricted cash(13,223)21,396 
Cash, cash equivalents and restricted cash:Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash at beginning of periodCash, cash equivalents and restricted cash at beginning of period39,780  26,456 
Cash, cash equivalents and restricted cash at end of periodCash, cash equivalents and restricted cash at end of period$26,557  $47,852 
Supplemental disclosure of cash flow information:   Supplemental disclosure of cash flow information: 
Cash paid for interest$1,228
 $1,462
Cash paid for interest$60 $212 
Cash paid for income taxes, net5,686
 11,331
Cash paid for income taxes, net18,562  447 
Supplemental disclosure of non-cash investing activities:   Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid$336
 $922
Capital expenditures incurred but not yet paid$786 $652 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same amounts shown above:The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same amounts shown above:
Three-Months Ended June 30,
2021 2020
Cash and cash equivalentsCash and cash equivalents$25,218 $45,656 
Restricted cashRestricted cash1,339 2,196 
Total cash, cash equivalents and restricted cashTotal cash, cash equivalents and restricted cash$26,557 $47,852 
See accompanying Notes to Condensed Consolidated Financial Statements.
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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.

On December 30, 2020, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. This document reflects our first quarter ending June 30, 2021 covering our fiscal year from April 1, 2021 through March 31, 2022.
 
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, 20162020 (the “2016“2020 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. ActualUncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results could differ from those estimates. These uncertainties will be heightened by the COVID-19 pandemic, as we may be unable to accurately predict the impact of COVID-19 going forward and as a result our estimates may change in the near term. Further information regarding significant estimates can be found in our 20162020 Form 10-K.
We have reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. On the consolidated balance sheets, we have reclassified from accrued liabilities to income taxes payable, current portion.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of SeptemberJune 30, 20172021 and DecemberMarch 31, 2016,2021, and our results of operations, and comprehensive income and shareholders' equity for the threethree-month periods ended June 30, 2021 and nine months ended September 30, 20172020 and 2016, andour cash flows for the nine monthsthree-month periods ended SeptemberJune 30, 20172021 and 2016.2020. 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.

NewRecent Accounting Pronouncements

Recently Adopted Pronouncements

ASU 2017-122019-12
In August 2017,December 2019, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and HedgingASU 2019-12, “Income Taxes (Topic 815) - Targeted Improvements to740): Simplifying the 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, theIncome Taxes.” The amendments in ASU 2017-12 also simplify2019-12 introduce the recognitionfollowing 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 presentation(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 effectsfollowing 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 hedging instrumentequity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim periods; and (4) determining how to apply the hedged item in the financial statementsincome tax guidance to increase the understandability of the results of an entity's intended hedging strategies.franchise taxes that are partially based on income. ASU 2017-122019-12 is effective for public companies'business entities' fiscal years,
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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,2020 with effect ofearly 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 thepermitted. Our adoption of ASU 2017-12 to have a2019-12 as of January 1, 2021 had no material effect on our business, we are evaluating any potential impact that adoption of ASU 2017-12 may have on our financial position, results of operations or cash flows.

Recently Issued Pronouncements Not Yet Adopted

ASU 2020-04 and ASU 2017-092021-01
In May 2017,March 2020, the FASB issued ASU 2017-09, "Compensation - Stock Compensation2020-04, “Reference Rate Reform (Topic 718) - Scope in Modification Accounting".848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the 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, which is effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2017-09 provides clarity and reduces diversity in practice and cost and complexity when applying the guidance2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 718848 to a change to the terms or conditionsderivative instruments modified because 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 all 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.discounting transition resulting from reference rate reform. We do not expect the adoption of ASU 2017-09this guidance to have a material effectimpact on our financial position, results of operations orand cash flows.

ASU 2017-042020-01
In January 2017,2020, the FASB issued ASU 2017-04, "Intangibles - Goodwill2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and OtherJoint Ventures (Topic 350) - Simplifying323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the Testguidance to account for Goodwill Impairment". ASU 2017-04 simplifiescertain equity securities under Topic 321, the subsequentguidance 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 goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual,forward contract or interim, goodwill impairment test by comparingexercise 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 a reporting unit with its carrying amount, and recognize an impairment chargethe accounting 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 allocated 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.these interactions. ASU 2017-042020-01 is effective for public companies' fiscal years beginning after December 15, 2021, 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.years. We do not expect the adoption of ASU 2017-04 tothis guidance would have a material effectimpact on our financial position, results of operations orand cash flows.

ASU 2016-15
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." The amendments in ASU 2016-15 are intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows, with the intent of reducing diversity in practice for the eight (8) types of cash flows identified. ASU 2016-15 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented, but may apply it prospectively if retrospective application would be impracticable. We do not expect the adoption of ASU 2016-15 to have a material effect on our financial position, results of operations or cash flows.

ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, "Financial“Financial Instruments - Credit Losses (Topic 326) -: Measurement of Credit Losses on Financial Instruments." The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP withrequires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November 2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. ASU 2016-13 is effective for public companies' annual periods, including interim periods within those fiscal years beginning after December 15, 2019, using a modified-retrospective approach, with certain exceptions. Early adoption is permitted. While we2022, including interim periods within those years. We do not expect the adoption of ASU 2016-13 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 thethis 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 notwould have a material impact on our financial position, results of operations orand cash flows.

ASU 2016-02
In February 2016,(2) REVENUES

Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
Three-Months Ended June 30,
20212020
Product sales$179,811 $110,595 
Extended warranties and services1,756 1,465 
Other(1)
3,026 2,128 
Net sales$184,593 $114,188 
(1) Other revenue is primarily freight and delivery, royalty income and subscription revenue.

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Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
Three-Months Ended June 30,
20212020
United States$147,149 $97,363 
Canada19,362 6,248 
Europe, the Middle East and Africa14,442 8,493 
All other3,640 2,084 
Net sales$184,593 $114,188 

As of June 30, 2021, estimated revenue expected to be recognized in the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 replacesfuture totaled $145.0 million, primarily related to customer order backlog, which includes firm orders for future shipment and unfulfilled orders to our Retail customers, as well as unfulfilled consumer orders within the existing guidance in Accounting Standards Codification ("ASC") 840, Leases. The new standard would require companies and other organizationsDirect channel. We have further refined our Retail backlog to include lease obligationsunfilled future orders. Direct orders of $3.1 million and Retail orders of $141.9 million, comprised our backlog as of June 30, 2021, compared to Direct orders of $20.6 million and Retail orders of $130.0 million as of June 30, 2020. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers, and net of current promotional programs and sales discounts for our Direct customers.

The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue for which advance consideration is received prior to the transfer of control. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature and were recorded on their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases.  Both finance leases and operating leases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases the lessee would recognize a straight-line total lease expense. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for public companies' annual periods, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently assessing the impact that ASU 2016-02 will have on our consolidated financial statements,

and expect that the primary impact upon adoption will be the recognition, on a discounted basis, of our minimum commitments under non-cancellable operating leases on ourcondensed consolidated balance sheets resultingas accrued liabilities. Significant changes in contract liabilities balances, including revenue recognized in the recording of right of use assets and lease liabilities.reporting period that was included in opening contract liabilities, are shown below (in thousands):

Three-Months Ended June 30,
20212020
Balance, beginning of period$5,551 $2,050 
Cash additions1,089 2,371 
Revenue recognition(4,883)(918)
Balance, end of period$1,757 $3,503 
ASU 2015-11
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. Our adoption of ASU 2015-11 in January 2017 did not have a material effect on our financial position, results of operations or cash flows.

ASU 2014-09
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 replaces most existing revenue recognition guidance, and requires companies to recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017, applied retrospectively to each prior 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. We are planning to adopt using the full retrospective method.

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.
 

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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):
June 30, 2021
Level 1Level 2Level 3Total
Assets:
Cash Equivalents
Money market funds$6,184 $$$6,184 
Total cash equivalents6,184 6,184 
Available-for-Sale Securities
Commercial paper7,998 7,998 
Corporate bonds8,153 8,153 
U.S. government bonds40,113 40,113 
Total available-for-sale securities56,264 56,264 
Total assets measured at fair value$6,184 $56,264 $$62,448 
Liabilities:
Derivatives
Foreign currency forward contracts$$510 $$510 
Total liabilities measured at fair value$$510 $$510 
 September 30, 2017March 31, 2021
 Level 1 Level 2 Level 3 TotalLevel 1Level 2Level 3Total
Assets:        Assets:
Cash Equivalents        Cash Equivalents
Money market funds $6,848
 $
 $
 $6,848
Money market funds$9,679 $$$9,679 
Commercial paper 
 1,998
 
 1,998
Total cash equivalents 6,848
 1,998
 
 8,846
Total cash equivalents9,679 9,679 
Available-for-Sale Securities        Available-for-Sale Securities
Certificates of deposit(1)
 
 14,974
 
 14,974
Commercial paper 
 1,998
 
 1,998
Commercial paper9,994 9,994 
Corporate bonds 
 25,313
 
 25,313
Corporate bonds8,227 8,227 
U.S. government bonds 
 5,010
 
 5,010
U.S. government bonds55,227 55,227 
Total available-for-sale securities 
 47,295
 
 47,295
Total available-for-sale securities73,448 73,448 
Derivatives        
Interest rate swap contract 
 170
 
 170
Total assets measured at fair value $6,848
 $49,463
 $
 $56,311
Total assets measured at fair value$9,679 $73,448 $$83,127 
        
Liabilities:        Liabilities:
Derivatives        Derivatives
Foreign currency forward contracts $
 $(65) $
 $(65)Foreign currency forward contracts$$672 $$672 
Total liabilities measured at fair value $
 $(65) $
 $(65)Total liabilities measured at fair value$$672 $$672 


  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)

(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 monthsthree-month period ended SeptemberJune 30, 2017,2021, nor for the yearperiod ended DecemberMarch 31, 2016.2021.

We did not have any changes to our valuation techniques during the nine months ended September 30, 2017, 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.

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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 did not have any changes to our valuation techniques during the three-month period ended June 30, 2021, nor for the year ended March 31, 2021.

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 June 30, 2021 and March 31, 2021, 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, 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 loandebt 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 SeptemberJune 30, 2017,2021, total outstanding contract notional amounts were $18.3 million. At September 30, 2017, these outstanding balance sheet hedging derivatives$66.0 million and 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 ClassificationAs of
June 30, 2021March 31, 2021
Derivative instruments not designated as cash flow hedges:
Accrued liabilities$510 $672 
  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
       
Derivative instruments not designated as cash flow hedges:      
   Foreign currency forward contracts Accrued liabilities $65
 $

The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
Statement of Operations ClassificationThree-Months Ended June 30,
20212020
Derivative instruments not designated as cash flow hedges:
Loss recognized in earningsOther, net$(17)$(141)
Income tax (benefit) expenseIncome tax expense (benefit)(4)35 

10
  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
 


Table of Contents
For additional information related to our derivatives, see Notes 3 and 10.

(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
June 30, 2021March 31, 2021
Finished goods$106,413 $63,918 
Parts and components4,719 4,167 
Total inventories$111,132 $68,085 
 As of
 September 30, 2017 December 31, 2016
Finished goods$53,271
  $43,130
Parts and components4,375
  3,900
Total inventories$57,646
  $47,030



(6) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):
 
Estimated
Useful Life
(in years)
 As of
  September 30, 2017 December 31, 2016
Automobiles5to6 $23
 $139
Leasehold improvements4to20 3,426
 3,388
Computer software and equipment3to7 26,138
 25,899
Machinery and equipment3to5 14,732
 13,085
Furniture and fixtures5to20 2,230
 2,238
Work in progress(1)
N/A 1,647
 768
Total cost    48,196
 45,517
Accumulated depreciation    (32,030) (28,049)
Total property, plant and equipment, net    $16,166
 $17,468

Estimated
Useful Life
(in years)
As of
June 30, 2021March 31, 2021
Automobiles5$23 $23 
Leasehold improvements4to203,060 3,059 
Computer software and equipment2to738,244 36,956 
Machinery and equipment3to515,790 15,699 
Furniture and fixtures5to202,587 2,586 
Work in progress(1)
N/A2,196 1,314 
Total cost61,900 59,637 
Accumulated depreciation(37,182)(35,141)
Total property, plant and equipment, net$24,718 $24,496 
(1) Work in progress includes computer softwareinformation technology assets and production tooling.

(7) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill
The rollforward of goodwillDepreciation expense was as follows (in thousands):
Three-Months Ended June 30,
20212020
Depreciation expense$2,039 $1,843 

(7) OTHER INTANGIBLE ASSETS
 Direct Retail Total
Balance, January 1, 2016$2,113
 $58,357
 $60,470
Currency exchange rate adjustment67
 3
 70
Business acquisition - measurement period adjustments
 1,348
 1,348
Balance, December 31, 20162,180
 59,708
 61,888
Currency exchange rate adjustment168
 (11) 157
Balance, September 30, 2017$2,348
 $59,697
 $62,045

Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
Estimated
Useful Life
(in years)
As of
June 30, 2021March 31, 2021
Indefinite-lived trademarksN/A$9,052 $9,052 
Patents7to241,443 1,443 
10,495 10,495 
Accumulated amortization - definite-lived intangible assets(1,145)(1,130)
Other intangible assets, net$9,350 $9,365 
 
Estimated
Useful Life
(in years)
 As of
  September 30, 2017 December 31, 2016
Indefinite-lived trademarksN/A $32,052
 $32,052
Definite-lived trademarks10to15 2,600
 2,600
Patents8to24 15,187
 31,487
Customer relationships10to15 24,700
 24,700
     74,539
 90,839
Accumulated amortization - definite-lived intangible assets    (7,185) (21,039)
Other intangible assets, net    $67,354
 $69,800


Amortization expense was as follows (in thousands):
Three-Months Ended June 30,
20212020
Amortization expense$15 $803 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Amortization expense$812
 $817
 $2,446
 $2,738
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Future amortization of definite-lived intangible assets is as follows (in thousands):
2022$46 
202361 
202461 
202561 
202647 
Thereafter22 
$298 
Remainder of 2017$810
20183,164
20193,134
20203,108
20213,078
Thereafter22,008
 $35,302


(8) LEASES

We have several non-cancellable operating leases, primarily for office space, that expire at various dates over the next nine 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 June 30,
20212020
Operating lease expense$1,466 $1,145 

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.

Other information related to leases was as follows (dollars in thousands):
As of
June 30, 2021March 31, 2021
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flow from operating leases$1,352 $1,076 
Additional operating lease information:
Reductions to ROU assets resulting from reductions to operating lease obligations$359 $268 
Weighted average remaining operating lease term (years)6.266.97
Weighted average discount rate on operating leases5.00%4.95%

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.








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Maturities of operating lease liabilities under non-cancellable leases were as follows (in thousands):
As of
June 30, 2021
2022$4,502 
20235,606 
20245,168 
20255,330 
20264,267 
Thereafter7,969 
Total undiscounted lease payments32,842 
Less imputed interest(4,915)
Total lease liabilities$27,927 

(9) ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):
As of
June 30, 2021March 31, 2021
Payroll and related liabilities$5,485 $6,616 
Reserves (1)
3,405 2,624 
Deferred revenue1,757 5,551 
Other3,868 4,836 
  Total accrued liabilities$14,515 $19,627 
 As of
 September 30, 2017 December 31, 2016
Payroll and related liabilities$2,199
 $4,579
Other5,857
 8,313
  Total accrued liabilities$8,056
 $12,892
(1) Reserves is primarily sales return, inventory, sales tax and product liability reserves.


(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):
Three-Months Ended June 30,
 20212020
Balance, beginning of period$8,651 $3,154 
Accruals3,226 276 
Payments(2,093)(879)
Balance, end of period$9,784 $2,551 
  Nine Months Ended September 30,
  2017 2016
Balance, beginning of period $7,450
 $8,545
Accruals 2,163
 2,132
Payments (3,312) (2,857)
Balance, end of period $6,301
 $7,820



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

The following tables set forth the changes in accumulated other comprehensive income (loss),loss, net of tax (in thousands) for the periods presented::
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 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 period22
 23
 371
 416
Balance, September 30, 2017$(14) $106
 $(413) $(321)
Unrealized Loss on Available-for-Sale SecuritiesGain (Loss) on Derivative SecuritiesForeign Currency Translation AdjustmentsAccumulated Other Comprehensive Income
Balance, March 31, 2021$(8)$$(147)$(155)
Current period other comprehensive loss before reclassifications217 217 
Net other comprehensive loss during period217 217 
Balance, June 30, 2021$(8)$$70 $62 
 Unrealized Loss on Available-for-Sale Securities Gain (Loss) on Derivative Securities (Effective Portion) Foreign Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss)
Balance, January 1, 2017$(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 (Loss) Gain on Available-for-Sale SecuritiesGain (Loss) on Derivative SecuritiesForeign Currency Translation AdjustmentsAccumulated Other Comprehensive Loss
Balance, March 31, 2020$$$(1,312)$(1,312)
Current period other comprehensive loss before reclassifications353 353 
Net other comprehensive loss during period353 353 
Balance, June 30, 2020$$$(959)$(959)
 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 reclassifications26
 (896) 397
 (473)
Reclassification of amounts to earnings
 357
 
 357
Net other comprehensive income (loss) during period26
 (539) 397
 (116)
Balance, September 30, 2016$10
 $(539) $(914) $(1,443)



(11) STOCK REPURCHASE PROGRAM

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.

On April 25, 2017, our Board of Directors authorized an additional $15.0 million share repurchase program, bringing the total authorization under existing programs to $25.0 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 the share repurchase programs.

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) 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. Basic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method.

The weighted average numbers of shares outstanding used to compute income per share were as follows (in thousands):
Three-Months Ended June 30,
20212020
Shares used to calculate basic income per share30,697 29,909 
Dilutive effect of outstanding stock options, performance stock units and restricted stock units1,811 
Shares used to calculate diluted income per share32,508 29,909 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Shares used to calculate basic income per share30,749
 31,118
 30,739
 31,069
Dilutive effect of outstanding stock options, performance stock units and restricted stock units326
 267
 359
 271
Shares used to calculate diluted income per share31,075
 31,385
 31,098
 31,340


The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income per share. In the case of 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 dilutiveanti-dilutive potential common shares in the future (in thousands):
Three-Months Ended June 30,
20212020
Restricted stock units220 580 
Stock options45 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Stock options7
 4
 8
 11


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(13) SEGMENT AND ENTERPRISE-WIDE INFORMATION

In accordance with FASB ASC 280, Segment Reporting, we determined that weWe have two2 operating segments, - Direct and Retail. There have beenwere no changes in our operating segments during the nine monthsthree-months ended SeptemberJune 30, 2017.2021.

We evaluate performance of the operating segments 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 June 30,
20212020
Net sales:
Direct$63,396 $50,433 
Retail120,484 62,948 
Royalty713 807 
Consolidated net sales$184,593 $114,188 
Contribution:
Direct$6,759 $16,995 
Retail22,090 11,613 
Royalty713 807 
Consolidated contribution$29,562 $29,415 
Reconciliation of consolidated contribution to income (loss) from continuing operations:
Consolidated contribution$29,562 $29,415 
Amounts not directly related to segments:
Operating expenses(11,695)(36,521)
Other expense, net(413)(222)
Income tax (expense) benefit(3,438)2,342 
Income (loss) from continuing operations$14,016 $(4,986)
As of
June 30,March 31,
Assets:20212021
Direct$45,176 $47,002 
Retail192,189 146,001 
Unallocated corporate145,021 161,227 
Total assets$382,386 $354,230 







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 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Net sales:       
Direct$33,986
 $33,710
 $147,800
 $159,884
Retail53,505
 46,223
 128,393
 117,939
Royalty641
 885
 2,220
 2,452
Consolidated net sales$88,132
 $80,818
 $278,413
 $280,275
Contribution:       
Direct$5,289
 $2,584
 $23,141
 $31,253
Retail12,118
 9,164
 20,427
 17,225
Royalty638
 871
 2,206
 2,419
Consolidated contribution$18,045
 $12,619
 $45,774
 $50,897
        
Reconciliation of consolidated contribution to income from continuing operations:       
Consolidated contribution$18,045
 $12,619
 $45,774
 $50,897
Amounts not directly related to segments:       
Operating expenses(4,680) (4,408) (15,877) (16,813)
Other expense, net(161) (218) (648) (1,336)
Income tax expense(4,862) (148) (10,156) (9,621)
Income from continuing operations$8,342
 $7,845
 $19,093
 $23,127

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.

CertainThe following customers individually representedaccounted for 10% or more of total net sales as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Customer:       
   Customer #118.5% 17.2% 13.5% 12.1%
   Customer #213.7% *
 *
 *
Three-Months Ended June 30,
20212020
Amazon.com17.9 %18.0 %
Best Buy17.1 %*
*Less than 10% of total net sales.
*Less than 10%

(14) BORROWINGS

Wells Fargo Bank Credit Agreement

On May 14, 2021, we amended the January 31, 2020 Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (“Credit Agreement”), 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. Several key features have been beneficially amended including permanently removing the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availability under the asset-based revolver. In addition to the above structural improvements, the interest rate on the term loan was reduced to LIBOR plus 4.50% versus 5.00%. The maturity date remains January 31, 2025 and the term loan continues to contain amortization as originally scheduled. 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.

Interest on the ABL Revolving Facility will accrue at 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 4.50%. As of June 30, 2021, our interest rate was 1.85% for the ABL Revolving Facility and 4.60% for the Term Loan Facility.

As of June 30, 2021,outstanding borrowings, net of debt issuance costs, totaled $13.4 million, with $11.9 million and $1.5 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of June 30, 2021, we were in compliance with the financial covenants of the Credit Agreement and $53.6 million was available for borrowing under the ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.

The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding.

(15) COMMITMENTS AND CONTINGENCIES

Guarantees, Commitments and Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2017,2021, we had no standby letters of credit.credit of $0.9 million.


We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of SeptemberJune 30, 2017,2021, we had approximately $37.5$174.9 million compared to $216.3 million as of March 31, 2021 in noncancelablenon-cancelable market-based purchase obligations, primarily to secured additional factory capacity for inventory purchases expected to be received withinin 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.

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 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,
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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 SeptemberJune 30, 2017.2021.

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, the 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 June 30, 2021.

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.

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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, 20162020 (the “2016“2020 Form 10-K”). All references to the thirdfirst quarter of 2021 and first nine months of 2017 and 20162020 mean the three and nine-monththree-month periods ended SeptemberJune 30, 20172021 and 2016,2020, 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. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. 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, the availability and timing of capital for financing our strategic initiatives, including being able to raise capital on favorable terms or at all; changes in the financial markets, including changes in credit markets and interest rates that affect our ability to access those markets on favorable terms, the impact of any future impairments, 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 2020 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 empower healthier living through individualized connected fitness experiences. We are committed to build a healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and digital platform for consumer use, primarily in the U.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Bowflex®, Schwinn®, JRNY® and Nautilus®.

We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers primarily through websites. Our Retail business offers our products through a network of independent retail companies to reach consumers in the home use markets in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
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As previously disclosed, we changed our fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31 in order to include the primary fitness season for exercise equipment, October to March, in the same fiscal year. In addition, the new fiscal year-end is better aligned with the fiscal year-end of our retail partners.

For the three-months ended June 30, 2021, our results were primarily impacted by strong demand driven by our North Star strategy and the at home fitness surge. The five strategic pillars of North Star are (1) Adopt a consumer first mindset; (2) Scale a differentiated digital offering; (3) Focus investments on core businesses; (4) Evolve supply chain to be strategic advantage; and (5) Build organizational capabilities to win by unleashing the power of our team. We will leverage our many strengths to transform into a company that empowers healthier living through individualized connected fitness experiences. Our transformation will properly leverage our leading brands, products, innovation, distribution and digital assets to build a healthier world, one person at a time.

Net sales for the three-months ended June 30, 2021 were $184.6 million, reflecting a 61.7% increase as compared to net sales of $114.2 million for the three-months ended June 30, 2020. Sales were up 74.4%, excluding sales related to the Octane brand, which was sold in October 2020.Sales growth was driven primarily by continued demand for connected fitness bikes and treadmills, like the Bowflex® VeloCore® bike and Bowflex® T22 Treadmill, and robust sales of SelectTech® weights.

Net sales of our Direct segment increased by $13.0 million, or 25.7%, for the three-months ended June 30, 2021, compared to the three-months ended June 30, 2020.

Net sales of our Retail segment increased by $57.5 million, or 91.4%, for the three-months ended June 30, 2021, compared to the three-months ended June 30, 2020. Excluding Octane, net sales grew 120.7%.

Royalty income for the three-months ended June 30, 2021 decreased by $0.1 million compared to the three-months ended June 30, 2020.

Gross profit for the three-months ended June 30, 2021 was $55.5 million, reflecting a 17.1% increase as compared to gross profit of $47.4 million for the three-months ended June 30, 2020.Gross margin rate for the three-months ended June 30, 2021 was 30.1% compared to 41.5% for the three-months ended June 30, 2020. This margin pressure is the result of current macro events affecting not just the Company but many others as well. The 11.4 ppt decrease in gross margins was primarily due to: higher landed product costs driven by inflationary price increases in commodities and components, foreign exchange, and elevated transportation costs, partially offset by sales price increases (-6 ppts), channel mix as Direct segment sales were 34% versus 44% last year (-3 ppts), outbound freight (-1 ppt), and a strategic decision to end production of select SKUs (-1 ppt).

Operating expenses for the three-months ended June 30, 2021 were $37.6 million, a decrease of $16.9 million, or 30.9%, as compared to operating expenses of $54.5 million for the three-months ended June 30, 2020, primarily due to the $29.0 million loss on disposal group for the same period last year partially offset by increased selling and marketing expenses, as the Direct business returned to more normalized levels of advertising and the company invested in incremental brand marketing. Total advertising expenses were $11.6 million this year versus $2.8 million last year. General and administrative expenses and product development expenses also increased versus last year primarily driven by investments in JRNY®.

Operating income for the three-months ended June 30, 2021 was $17.9 million or 9.7% operating margin, a $25.0 million improvement compared to an operating loss of $7.1 million for the three-months ended June 30, 2020. JRNY® investments were $4.6 million this year versus $1 million last year and brand marketing was $3.4 million this year versus $0 last year. Excluding these investments, our Q1 2022 operating margins have been improved by 4 percentage points.

Income from continuing operations was $14.0 million for the three-months ended June 30, 2021, or $0.43 per diluted share, compared to a loss from continuing operations of $5.0 million, or $0.17 per diluted share, for the three-months ended June 30, 2020.
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Net income was $13.9 million for the three-months ended June 30, 2021, compared to net loss of $5.1 million for the three-months ended June 30, 2020.

The effective tax rates for the three-months ended June 30, 2021 and for the three-months ended June 30, 2020 were 19.7% and 32.0%, respectively.

JRNY® update

Nautilus Inc. continues to enhance the JRNY® platform, creating differentiated connected fitness experiences for their members. In the past quarter, the Company enhanced its content library, adding 200+ trainer-led videos and commissioning additional Explore the World content. They introduced the JRNY® app for use with its popular IC4 and C6 bikes further expanding its diverse lineup of connected products.

Today, Nautilus also announced a strategic partnership with digital fitness provider, FitOn. Under the agreement, JRNY® members will have access to hundreds of off-product workouts through the JRNY® digital fitness platform and app to keep members engaged and reaching their fitness goals.

Forward Looking Guidance

Second Quarter Fiscal 2022

The Company’s revenue for the next few quarters will be compared to record results due to the pandemic’s effect on net sales last year. To gauge continued progress against the expanded addressable market, the Company will be measuring business versus last year and versus the same period two years ago for the next few quarters.

Demand curves for the Direct segment in Q1 and in the first month of Q2 have started to revert to more typical seasonality patterns. Now that Direct’s backlog has returned to more normal levels, the Company expects Direct sales in Q2 to be lower than Q1.

The Company expects total company net sales for the 2nd quarter of fiscal 2022 to be between $145 million and $155 million, a 2-year revenue CAGR of 53% to 59%.

Similar to many other companies, the Company expects external gross margin challenges to continue in Q2 and anticipates increased price pressure due to the ongoing chip shortage.

The Company was pleased with the results of North Star investment in Q1 and plans to continue investing in Q2. Brand marketing expenditures will be between $5 million and $6 million versus $3 million last quarter and zero last year. JRNY® investment will be between $5.5 million and $6.5 million versus $5 million last quarter and $1 million last year. JRNY® investments will further enhance platform functionality via improved adaptive workouts, the addition of a member portal, and additional fresh content, like the ones provided by their new partner FitOn. The Company expects these investments to dilute operating margins by 7 to 8 percentage points.

Given these investments and the external macro pressure on gross margin, the Company expects operating margins to be in the low single digits.

Back Half of Fiscal 2022

The Company expects to continue investing in North Star on a “pay as we go” basis.

The Company assumes that the external macro factors negatively affecting gross margins will continue in Q3 and Q4. Although it’s unclear when the pressure will ease, the Company expects that over time, prices will stabilize and eventually return closer to pre-pandemic levels.

Until the macro environment improves, the Company expects operating margins to be in the low to mid-single digits for the back half of the year.

The Company continues to expect full year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY® investments.

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The Company reiterates their expectation of reaching 250,000 JRNY® members by the end of FY22

Longer term view, beyond Fiscal 2022

The Company’s conviction in their North Star strategy has never been stronger. Growth in JRNY® members and their increased engagement confirm the Company’s expectations that their North Star investments will ultimately yield higher quality recurring revenue and long-term profitable growth.

The Company believes the near-term external gross margin pressures are temporary and are not delaying the Company’s expectations of achieving sustainable operating margins upwards of 15% by FYE 2026, as they realize the long-term benefits of their transformational investments.


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. We are unable to estimate the length of time that the short-term increases in demand for many of our home-fitness products will outpace supply and we are accelerating the manufacturing and delivery of key products. We cannot predict the longer-term impacts of COVID-19 and the impact on our results of operations is uncertain. Our profitgross margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affectedare being impacted by fluctuations in the costs or availability of materials used to manufacture our products, tariffs, expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations in cost 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 Internetwebsites and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.

As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2016 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 20162020 Form 10-K as supplemented or modified inby 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 atas of December 31, 2012. Although there was no revenue related to the former Commercial business in either the 20172021 or 20162020 periods, we continue to haveincur product liability and other legal expenses associated with product previously sold into the Commercial channel.

21

Table of Contents

RESULTS OF OPERATIONS

Results of operations information was as follows (dollars in thousands):
 Three-Months Ended June 30, Change
2021 2020 $ %
Net sales$184,593  $114,188  $70,405  61.7 %
Cost of sales129,088  66,792  62,296  93.3 %
Gross profit55,505 47,396  8,109  17.1 %
Operating expenses:   
Selling and marketing21,300  12,446  8,854  71.1 %
General and administrative11,523  9,315  2,208  23.7 %
Research and development4,815  3,728  1,087  29.2 %
Loss on disposal group— 29,013 (29,013) (100.0)%
Total operating expenses37,638 54,502 (16,864) (30.9)%
Operating income (loss)17,867  (7,106) 24,973  (351.4)%
Other expense:   
Interest income21   20  2,000.0 %
Interest expense(314) (338) 24  (7.1)%
Other, net(120) 115  (235) *
Total other expense, net(413) (222) (191) 86.0 %
Income (loss) from continuing operations before income taxes17,454  (7,328) 24,782  
Income tax expense (benefit)3,438  (2,342) 5,780  
Income (loss) from continuing operations14,016  (4,986) 19,002  
Loss from discontinued operations, net of income taxes(132) (124) (8) 
Net income (loss)$13,884  $(5,110) $18,994  
 Three Months Ended September 30, Change
 2017 2016 $ %
Net sales$88,132
 $80,818
 $7,314
 9.0 %
Cost of sales46,817
 41,601
 5,216
 12.5 %
Gross profit41,315
 39,217
 2,098
 5.3 %
Operating expenses:       
Selling and marketing18,028
 21,394
 (3,366) (15.7)%
General and administrative6,305
 6,177
 128
 2.1 %
Research and development3,617
 3,435
 182
 5.3 %
Total operating expenses27,950
 31,006
 (3,056) (9.9)%
Operating income13,365
 8,211
 5,154
 62.8 %
Other income (expense):       
Interest income170
 60
 110
  
Interest expense(377) (489) 112
  
Other, net46
 211
 (165)  
Total other expense, net(161) (218) 57
  
Income from continuing operations before income taxes13,204
 7,993
 5,211
  
Income tax expense4,862
 148
 4,714
  
Income from continuing operations8,342
 7,845
 497
  
Loss from discontinued operations, net of taxes(101) (251) 150
  
Net income$8,241
 $7,594
 $647
  
*Not meaningful

























22

 Nine Months Ended September 30, Change
 2017 2016 $ %
Net sales$278,413
 $280,275
 $(1,862) (0.7)%
Cost of sales136,975
 132,852
 4,123
 3.1 %
Gross profit141,438
 147,423
 (5,985) (4.1)%
Operating expenses:       
Selling and marketing79,321
 81,284
 (1,963) (2.4)%
General and administrative21,106
 21,611
 (505) (2.3)%
Research and development11,114
 10,444
 670
 6.4 %
Total operating expenses111,541
 113,339
 (1,798) (1.6)%
Operating income29,897
 34,084
 (4,187) (12.3)%
Other income (expense):       
Interest income476
 182
 294
  
Interest expense(1,233) (1,469) 236
  
Other, net109
 (49) 158
  
Total other expense, net(648) (1,336) 688
  
Income from continuing operations before income taxes29,249
 32,748
 (3,499)  
Income tax expense10,156
 9,621
 535
  
Income from continuing operations19,093
 23,127
 (4,034)  
Loss from discontinued operations, net of taxes(1,270) (559) (711)  
Net income$17,823
 $22,568
 $(4,745)  
Table of Contents


Results of operations information by segment and major product lines was as follows (dollars in thousands):
 Three-Months Ended June 30, Change
2021 2020 $ %
Net sales:   
Direct net sales:
 Cardio products(1)
$31,430 $45,585 $(14,155)(31.1)%
 Strength products(2)
31,966 4,848 27,118 559.4 %
Direct63,396 50,433 12,963 25.7 %
  Retail net sales:
Cardio products(1)
89,924 49,011 40,913 83.5 %
Strength products(2)
30,560 13,937 16,623 119.3 %
Retail120,484 62,948 57,536 91.4 %
Royalty713  807  (94) (11.6)%
$184,593 $114,188 $70,405  61.7 %
Cost of sales:
Direct$38,882  $22,910  $15,972  69.7 %
Retail90,206  43,882  46,324  105.6 %
$129,088  $66,792  $62,296  93.3 %
Gross profit:   
Direct$24,514  $27,523  $(3,009) (10.9)%
Retail30,278  19,066  11,212  58.8 %
Royalty713  807  (94) (11.6)%
$55,505 $47,396  $8,109  17.1 %
Gross margin:   
Direct38.7 % 54.6 % (1,590)basis points
Retail25.1 % 30.3 % (520)basis points
Contribution:
Direct$6,759 $16,995 (10,236)(60.2)%
Retail22,090 11,613 10,477 90.2 %
Contribution rate:
Direct10.7 %33.7 %(2,300)basis points
Retail18.3 %18.4 %(10)basis points
(1) Cardio products include: connected-fitness bikes, the Bowflex® C6, Bowflex® VeloCore®, Schwinn® IC4, Max Trainer®, connected-fitness treadmills, other exercise bikes, ellipticals and subscription services.
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories.
 Three Months Ended September 30, Change
 2017 2016 $ %
Net sales:       
Direct$33,986
 $33,710
 $276
 0.8 %
Retail53,505
 46,223
 7,282
 15.8 %
Royalty641
 885
 (244) (27.6)%
 $88,132
 $80,818
 $7,314
 9.0 %
Cost of sales:       
Direct$12,401
 $11,579
 $822
 7.1 %
Retail34,413
 30,008
 4,405
 14.7 %
Royalty3
 14
 (11) (78.6)%
 $46,817
 $41,601
 $5,216
 12.5 %
Gross profit:       
Direct$21,585
 $22,131
 $(546) (2.5)%
Retail19,092
 16,215
 2,877
 17.7 %
Royalty638
 871
 (233) (26.8)%
 $41,315
 $39,217
 $2,098
 5.3 %
Gross margin:       
Direct63.5% 65.7% (220)basis points
Retail35.7% 35.1% 60
basis points

 Nine Months Ended September 30, Change
 2017 2016 $ %
Net sales:       
Direct$147,800
 $159,884
 $(12,084) (7.6)%
Retail128,393
 117,939
 10,454
 8.9 %
Royalty2,220
 2,452
 (232) (9.5)%
 $278,413
 $280,275
 $(1,862) (0.7)%
Cost of sales:       
Direct$52,525
 $53,732
 $(1,207) (2.2)%
Retail84,436
 79,087
 5,349
 6.8 %
Royalty14
 33
 (19) (57.6)%
 $136,975
 $132,852
 $4,123
 3.1 %
Gross profit:       
Direct$95,275
 $106,152
 $(10,877) (10.2)%
Retail43,957
 38,852
 5,105
 13.1 %
Royalty2,206
 2,419
 (213) (8.8)%
 $141,438
 $147,423
 $(5,985) (4.1)%
Gross margin:       
Direct64.5% 66.4% (190)basis points
Retail34.2% 32.9% 130
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 %
        
Royalty641
 885
 (244) (27.6)%
 $88,132
 $80,818
 $7,314
 9.0 %
 Nine Months Ended September 30, Change
 2017 2016 $ %
Direct net sales:       
Cardio products(1)
$133,421
 $149,074
 $(15,653) (10.5)%
Strength products(2)
14,379
 10,810
 3,569
 33.0 %
 147,800
 159,884
 (12,084) (7.6)%
Retail net sales:       
Cardio products(1)
96,249
 86,739
 9,510
 11.0 %
Strength products(2)
32,144
 31,200
 944
 3.0 %
 128,393
 117,939
 10,454
 8.9 %
        
Royalty2,220
 2,452
 (232) (9.5)%
 $278,413
 $280,275
 $(1,862) (0.7)%
        
(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.

Direct     

Direct netNet sales increased 0.8% for the three month periodthree-months ended SeptemberJune 30, 2017 compared to2021 were $63.4 million, up 25.7%, from $50.4 million in the same period of 2016 as newlast year.

Strength product sales grew 559.4% to a historical record, led by the popular SelectTech® weights and Bowflex® Home Gyms. Cardio sales declined 31.1%, primarily due to end-of-life products including the Bowflex HVTTM, offsetthat are no longer available for sale this year and a decline in TreadClimbersales of the Schwinn® IC4 Bowflex® C6 bikes that was partially offset by VeloCore® sales. For

Gross margin rate for the nine monthsthree-months ended SeptemberJune 30, 2017, Direct net sales decreased 7.6% compared to2021 was 38.7%, down 15.9%, from 54.6% in the same period last year. The 15.9 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6
23

ppts), higher outbound freight costs (-6 ppts), deleveraging of fixed costs as direct sales grew slower than retail’s (-2 ppts), a strategic decision to a declineend production of select SKUs (-1 ppt), and increased investments in TreadClimberJRNY® sales, partially offset by a 33.0% increase in strength product sales.(-1 ppt). Gross profit was $24.5 million, down 10.9% versus last year. Gross profit for the three-months ended June 30, 2021 was $24.5 million, down 10.9% compared to gross profit of $27.5 million same period last year.

Segment contribution income for the three-months ended June 30, 2021 was $6.8 million or 10.7%, down 60.2%, compared to segment contribution income of $17.0 million or 33.7% for the same period last year. The $10.2 million decline was primarily driven by lower gross profit and the return to normalized levels of media spend. Advertising expenses were $8.0 million for the three-months ended June 30, 2021 compared to $2.4 million last year.

Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the third quarter of 2017three-months ended June 30, 2021 were 53.7%53.0%, compared to 47.9%48.4% in the same period of 2016. We continue to experience improved credit2020. The increase in approval rates due to our media strategy, which focuses on generation of responses from consumers with relatively highreflects higher 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

Retail netsegment sales increased 15.8% and 8.9%of $120.5 million for the three and nine month periodsthree-months ended SeptemberJune 30, 2017 compared to2021, the best quarterly sales in segment history.

Net sales for the three-months ended June 30, 2021 were up 91.4%, from $62.9 million for the same periods of 2016. The increases in both periods reflected growth in traditional and e-commerce customers across multiple product categories.

The increases in cost ofperiod last year, or 120.7% excluding 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 increasesOctane brand. Retail segment sales outside the United States and Canada grew 70%, or 102% excluding Octane.

Strength product sales grew by 119.3%, led by our popular SelectTech® weights and benches and Bowflex® Home Gyms. Cardio sales increased by 83.5%, to a historical record, driven by connected-fitness bikes and treadmills.

Gross margin rate for the three-months ended June 30, 2021 was 25.1%, down from 30.3% in Retail net sales as discussed above.

For the three and nine month periods ended September 30, 2017, Retailsame period last year. The 5.2 ppt decrease in gross margin increasedwas primarily driven by: higher landed product costs (-6 ppts), a strategic decision to end production of select SKUs (-1 ppt), offset by 60 and 130 basis points, respectively,leverage on fixed costs as retail segment sales grew faster than direct segment sales (+2 ppts).Gross profit for the three-months ended June 30, 2021 was $30.3 million, an increase of 58.8% compared to gross profit of $19.1 million same period last year.

Segment contribution income for the three-months ended June 30, 2021 was $22.1 million or 18.3%, compared to $11.6 million or 18.4% for the same periods of 2016 due to favorable absorption of fixed costs over the increased sales volumeperiod last year, primarily driven by higher gross profit and the one-time settlement of an indemnification claim.expense leverage.

Selling and Marketing
Dollars in thousandsThree Months Ended September 30, Change
 2017 2016 $ %
Selling and marketing$18,028 $21,394 $(3,366) (15.7)%
As % of net sales20.5% 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 thousandsNine Months Ended September 30, Change
 2017 2016 $ %
Selling and marketing$79,321 $81,284 $(1,963) (2.4)%
As % of net sales28.5% 29.0%    

Selling and marketing information was as follows (dollars in thousands):
Three-Months Ended June 30, Change
2021 2020 $ %
Selling and marketing$21,300$12,446$8,85471.1%
As % of net sales11.5%10.9%

The $3.4 million decreaseincrease in selling and marketing expense in the three monththree-month period ended SeptemberJune 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, 20172021 as compared to the same period of 20162020 was primarily related to a $4.7$5.6 million decreaseincrease 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 inDirect media advertising and $0.8a $3.1 million in photo and video production costs.increase for brand marketing.







Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:follows (dollars in thousands):
24

Three-Months Ended June 30, Change
Dollars in thousandsThree Months Ended September 30, Change
2017 2016 $ %2021 2020 $ %
Media advertising$11,114 $10,790 $324 3.0%Media advertising$8,016$2,385$5,631236.1%
As % of net salesAs % of net sales4.3%2.1%
Dollars in thousandsNine Months Ended September 30, Change
 2017 2016 $ %
Media advertising$43,704 $40,804 $2,900 7.1%

The increases 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 thousandsThree Months Ended September 30, Change
 2017 2016 $ %
General and administrative$6,305 $6,177 $128 2.1%
As % of net sales7.2% 7.6%    
Dollars in thousandsNine Months Ended September 30, Change
 2017 2016 $ %
General and administrative$21,106 $21,611 $(505) (2.3)%
As % of net sales7.6% 7.7%    

The increase in general and administrativemedia advertising for the three monthsthree-month period ended SeptemberJune 30, 20172021 compared to the same period of 20162020 was primarily due the return to higher legal expensesnormalized levels of $0.4 million, offset by $0.4 million lower integration costsmedia spend.

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

The decrease in generalGeneral and administrative expenses was as follows (dollars in thousands):
Three-Months Ended June 30, Change
2021 2020 $ %
General and administrative$11,523$9,315$2,20823.7%
As % of net sales6.2%8.2%

General and administrative expenses were higher for the nine monthsthree-months ended SeptemberJune 30, 20172021 compared to the same period of 2016 was2020 primarily due to $0.8 million savings related to lower integration costsdriven by increases in IT, and administrative cost savings related to Octane,for short-term incentive 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.personnel costs.

Research and Development
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.
Dollars in thousandsThree Months Ended September 30, Change
 2017 2016 $ %
Research and development$3,617 $3,435 $182 5.3%
As % of net sales4.1% 4.3%    

Research and development expenses were as follows (dollars in thousands):
Three-Months Ended June 30, Change
Dollars in thousandsNine Months Ended September 30, Change
2017 2016 $ %2021 2020 $ %
Research and development$11,114 $10,444 $670 6.4%Research and development$4,815$3,728$1,08729.2%
As % of net sales4.0% 3.7% As % of net sales2.6%3.3%

The increasesincrease in research and development inexpenses for the three and nine month periodsthree-month period ended SeptemberJune 30, 20172021 compared to the same periodsperiod of 2016 were2020 was primarily duedriven by an increase in investment for our digital platform JRNY®, which more than offset savings associated with the divestiture of Octane.

Loss on Disposal Group
In the quarter ended June 30, 2020, we recorded a $29.0 million non-cash charge related to the fair value of the held-for-sale of assets of our investmentOctane Fitness brand name which was sold 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.October 2020.

Interest Expense
Interest expense of $0.4 million and $1.2was nearly flat at $0.3 million for the threethree-month period ended June 30, 2021 and nine month periods ended SeptemberJune 30, 2017 decreased $0.1 million and $0.2 million, respectively, compared to the same periods of 2016. The decreases were due to reductions in principal balance on our term loan.2020.

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.


foreign exchange derivative contracts.

Income Tax Expense
(Benefit)
Dollars in thousandsThree Months Ended September 30, Change
 2017 2016 $ %
Income tax expense$4,862 $148 $4,714 *
Effective tax rate36.8% 1.9%    
Income tax provision includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.

Dollars in thousandsNine Months Ended September 30, Change
 2017 2016 $ %
Income tax expense$10,156 $9,621 $535 5.6%
Effective tax rate34.7% 29.4%    


* Not meaningful.

Income tax expense and effective(benefit) was as follows (dollars in thousands):
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Three-Months Ended June 30, Change
2021 2020 $ %
Income tax expense (benefit)$3,438$(2,342)$5,780(246.8)%
Effective tax rate19.7%32.0%

The income tax ratesexpense from continuing operations for the three and nine month periodsthree-months period ended SeptemberJune 30, 20172021 was primarily related to our profitable U.S and foreign operations. The reduced effective tax rates from continuing operations for the three and nine month periods ended September 30, 2016 were primarily due to the release of, on a non-recurring basis, previously unrecognized tax benefits associated with certain non-U.S. filing positions. These resulted from completionresult of the deregistration process of a certain foreign entity. In addition,profit generated in the U.S. The reduced effective tax rate for the nine months ended September 30, 2017 included $0.7 million ofsame period was primarily due to the excess tax benefitsbenefit related to stock-based compensation recognized as a current period benefit through the statementCondensed Consolidated Statements of Operations.

The income tax benefit and effective tax rate from continuing operations resulting fromfor the adoptionsame period of ASU 2016-09the prior year were primarily due to the loss recorded as a result of the held-for-sale valuation of our Octane Fitness disposal group in January 2017.the quarter.

LIQUIDITY AND CAPITAL RESOURCES
 
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

As of SeptemberJune 30, 2017,2021, we had $77.8$82.8 million of cash, cash equivalents, restricted cash and investmentsavailable-for-sale securities, and $53.6 million was available for borrowing under the ABL Revolving Facility, compared to $79.6$113.2 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $54.4 million was available for borrowing under the ABL Revolving Facility as of DecemberMarch 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, 2016.2021. We expect our cash, cash equivalents, restricted cash and available-for-sale securities at Septemberinvestments and amounts available under our Wells Fargo Financing as of June 30, 2017,2021, 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 SeptemberJune 30, 2017.2021.


Cash used in operating activities was $28.2 million for the three-month period ended June 30, 2021, compared to cash provided in operating activities of $40.2 million for the three-month period ended June 30, 2020. The increasedecrease in cash flows from operating activities for the nine monthsthree-month period ended SeptemberJune 30, 20172021 as compared to the same period of 20162020 was primarily due to the changes in our operating assets and liabilities as discussed below, partially offset by the declineincrease in operating performance.

net income.

Trade receivables decreased $6.9increased by $9.5 million to $38.5 million as of September 30, 2017, compared to $45.5$98.2 million as of DecemberJune 30, 2021, compared to $88.7 million as of March 31, 2016,2021, primarily due to seasonally lower net sales to specialty retail and commercial customers.timing of customer payments on increased sales. Trade receivables as of SeptemberJune 30, 20172021 compared to SeptemberJune 30, 20162020 increased $7.3by $64.4 million due to the increase in Retail nettiming of customer payments on increased sales.


Inventories increased $10.6Inventory was $111.1 million, compared to $57.6$68.1 million as of SeptemberMarch 31, 2021. The increase in inventory is driven by the strategic decision to increase on-hand inventory levels ahead of the fitness season given continued disruption in global logistics. More than 60% of inventory as of June 30, 2017,2021 was in-transit. Inventories as of June 30, 2021 compared to $47.0June 30, 2020, increased by $89.8 million, primarily due to the surge in demand for home-fitness products.

Prepaid and other current assets decreased by $10.2 million to $15.7 million, compared to $25.8 million as of DecemberMarch 31, 2016 due2021, primarily related to seasonal preparationsother short-term deposits for the fourth quarter. Inventories as of September 30, 2017 compared to September 30, 2016inventory.

Trade payables increased by $8.4 million due to increased in-transit inventory.

Trade payables decreased $3.9$15.7 million to $62.1 million as of September 30, 2017, compared to $66.0$114.6 million as of DecemberJune 30, 2021, compared to $98.9 million as of March 31, 2016,2021, primarily due to seasonalitytiming of the business. Trade payables as of September 30, 2017 compared to September 30, 2016 increased $17.4 million. The higher amount outstanding as of September 30, 2017 was due to the increasedpayments for inventory.

Accrued liabilities decreased $4.8by $5.1 million to $8.1$14.5 million as of SeptemberJune 30, 2017,2021, compared to $12.9$19.6 million as of DecemberMarch 31, 2016,2021, primarily due to payoutdeferred revenue liabilities.
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Table of accrued incentive compensation during the first quarter of 2017 and settlement of a royalty dispute in the second quarter of 2017.Contents

Cash used inprovided by investing activities of $18.2$15.3 million for the first nine months of 2017three-month period ended June 30, 2021 was primarily relateddue to net purchasesproceeds from sales and maturities of marketable securities of $15.4 million. In addition, $2.7 million was used for capital expenditures primarily related to production equipment tooling and implementation of new software systems.available-for-sale securities. We anticipate spending between $4.5$12.0 million and $5.5$14.0 million in 20172022 for product tooling, computer equipment and software,digital platform enhancements, systems integration, and production equipment.tooling.

Cash used in financing activities of $17.0$1.1 million for the first nine months of 2017three-month period ended June 30, 2021 was primarily related to principal repayments on our term loan of $12.0 million and share repurchases of $4.8 million.tax payments related to stock award issuances.


Financing Arrangements
We have aOn May 14, 2021, we amended the January 31, 2020 Credit Agreement with JPMorgan ChaseWells Fargo Bank, N.A.National Association (“Chase Bank”Wells Fargo”) that provides forand lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (“Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an $80.0asset-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 termtogether 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 expiresAgreement. Several key features have been beneficially amended including permanently removing the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availability under the asset-based revolver. In addition to the above structural improvements, the interest rate on Decemberthe term loan was reduced to LIBOR plus 4.50% versus 5.00%. The maturity date remains January 31, 20202025 and the term loan continues to contain amortization as originally scheduled. 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 Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratioInterest on the ABL Revolving Facility will accrue at LIBOR plus a margin of 1.75% to 2.25% (based on average quarterly availability) and funded debt to EBITDA ratio, and limitationsinterest on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also contains customary eventsthe Term Loan Facility will accrue at LIBOR plus 4.50%. As 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 toJune 30, 2021, 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 towas 1.85% for the term loan, as well as each advance underABL Revolving Facility and 4.60% for 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%.Term Loan Facility.

As of SeptemberJune 30, 2017, the balance on our term loan was $52.02021, outstanding borrowings, net of debt issuance costs, totaled $13.4 million, with $11.9 million and we had no outstanding borrowings$1.5 million under the line of credit.our Term Loan Facility and ABL Revolving Facility, respectively. As of SeptemberJune 30, 2017,2021, we were in compliance with the financial covenants of the Credit Agreement and $20.0$53.6 million was available for borrowing under the lineABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.

The balance sheet classification of credit.

As of September 30, 2017, we hadthe borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a $52.0 million receive-variable, pay-fixed interest rate swap outstanding with Chase Bank. The interest rate swap amortizes monthly in line with the outstanding principal balance on our term loanrevolving credit agreement that includes both a subjective acceleration clause and isa requirement to maintain a springing lock-box arrangement are classified as a cash flow hedge. The swap matures on December 31, 2020 and has a fixed rate of 1.42% per annum. The variable ratebased on the interest rate swap isprovisions of ASC 470 because the one-month LIBOR benchmark. At September 30, 2017,lock-box remittances do not automatically reduce the one-month LIBOR rate was 1.24%.debt outstanding.

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
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of June 30, 2021, we had approximately $174.9 million, compared to $216.3 million as of March 31, 2021 in non-cancelable market-based purchase obligations, primarily to secure additional factory capacity for inventory purchases in 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.

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.
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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 SeptemberJune 30, 2017.2021.

Stock Repurchase Program
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.

On April 25, 2017, our Board of Directors authorized an additional $15.0 million share repurchase program, bringing the total authorization under existing programs to $25.0 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.

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

SEASONALITY

We expectPrior to the COVID-19 pandemic, our salesrevenue from fitness equipment products to varyvaried seasonally. Sales arewere typically strongest in the first and fourth quarters, followed by the thirdcalendar quarter and are generally weakestlowest in the second quarter. Wecalendar quarter as 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. Thisequipment this seasonality can havehad a significant effect on our inventory levels, working capital needs and resource utilization. Since 2020, due to stay-at-home orders related to the COVID-19 pandemic, we did not experience the typical seasonality.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies have not changed from those discussed in our 20162020 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.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk
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 monthsthree-months or less from the date of purchase. Marketable securities with original maturities of greater than three monthsthree-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 SeptemberJune 30, 2017,2021, the outstanding balances on our credit facilities totaled $52.0$13.7 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 Septemberas of June 30, 2017 were $18.32021 were $66.0 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, as amended (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 ChiefPrincipal Executive Officer and our ChiefPrincipal 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 ChiefPrincipal Executive Officer and ChiefPrincipal 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.report, our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable Securities and Exchange Commission rules and forms, and that it is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

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 monthsthree-months ended SeptemberJune 30, 2017,2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.











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PART II.    OTHER INFORMATION

Item 1.Legal Proceedings
Item 1.Legal Proceedings

From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur.

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

Item 1A.    Risk Factors

We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 20162020 Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. If any of the risks described in our 20162020 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 20162020 Form 10-K.

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

Issuer Purchases of Equity Securities
The following table provides information about our repurchases of our equity securities during the third quarter ended September 30, 2017:
Period 
(a)


                 
Total Number of Shares
Purchased
 
(b)



Average
Price Paid
per Share
 
(c)

Total Number of Shares Purchased
as Part of Publicly Announced Plans or Programs (1),(2)
 
(d)

Approximate Dollar
Value of Shares that May Yet Be Purchased Under the Plans or Programs (1),(2)
July 1 - July 31  $—  $19,615,159
August 1 - August 31 86,856 16.36 86,856 18,194,225
September 1 - September 30    18,194,225
Total 86,856 $16.36 86,856 $18,194,225
         
(1)  On May 4, 2016, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding common stock from time to time through May 4, 2018.
(2)  On April 25, 2017, our Board of Directors authorized the repurchase of an additional $15.0 million of our outstanding common stock from time to time through April 25, 2019.


Item 6.    Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
Exhibit No.Description
Exhibit No.Description
Second Amendment to Credit Agreement dated May 13, 2021, by and between Nautilus, Inc. and Wells Fargo Bank, National Association
Employment Agreement dated August 2, 2021, by and between Nautilus, Inc. and Alan L. Chan.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
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.INSXBRL 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.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
* Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NAUTILUS, INC.
(Registrant)
August 9, 2021NAUTILUS, INC.
(Registrant)
November 2, 2017By:
/S/    Bruce M. CazenaveJames Barr IV
DateBruce M. CazenaveJames Barr IV
Chief Executive Officer
(Principal Executive Officer)


NAUTILUS, INC.
(Registrant)
August 9, 2021NAUTILUS, INC.
(Registrant)
November 2, 2017By:
/S/    Sidharth NayarAina E. Konold
DateSidharth NayarAina E. Konold
Chief Financial Officer
(Principal Financial and Accounting Officer)



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