UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20212022
or
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☐ | 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
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NAUTILUS, INC. |
(Exact name of Registrant as specified in its charter) |
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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:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | NLS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | [ ] | Accelerated Filer | [x] | Non-accelerated filer | [ ] | Smaller reporting company | ☐ | Emerging growth 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 August 6, 20215, 2022 was 30,930,700 31,610,130 shshares.ares.
NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 20212022
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Item 1. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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Item 1. | | | |
Item 1A. | | | |
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Item 6. | | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NAUTILUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
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| As of |
| June 30, 2021 | | March 31, 2021 | | |
Assets | | | | | |
Cash and cash equivalents | $ | 25,218 | | | $ | 38,441 | | | |
Restricted cash | 1,339 | | | 1,339 | | | |
Available-for-sale securities | 56,264 | | | 73,448 | | | |
Trade receivables, net of allowances of $1,311 and $1,177 | 98,160 | | | 88,657 | | | |
Inventories | 111,132 | | | 68,085 | | | |
Prepaids and other current assets | 15,650 | | | 25,840 | | | |
Income taxes receivable | 9,500 | | | 0 | | | |
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Total current assets | 317,263 | | | 295,810 | | | |
Property, plant and equipment, net | 24,718 | | | 24,496 | | | |
Operating lease right-of-use assets | 25,662 | | | 19,108 | | | |
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Other intangible assets, net | 9,350 | | | 9,365 | | | |
Deferred income tax assets, non-current | 3,068 | | | 2,144 | | | |
Other assets | 2,325 | | | 3,307 | | | |
Total assets | $ | 382,386 | | | $ | 354,230 | | | |
Liabilities and Shareholders' Equity | | | | | |
Trade payables | $ | 114,602 | | | $ | 98,878 | | | |
Accrued liabilities | 14,515 | | | 19,627 | | | |
Operating lease liabilities, current portion | 4,706 | | | 3,384 | | | |
Warranty obligations, current portion | 8,191 | | | 7,243 | | | |
Income taxes payable, current portion | 845 | | | 5,709 | | | |
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $83 | 3,125 | | | 3,000 | | | |
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Total current liabilities | 145,984 | | | 137,841 | | | |
Operating lease liabilities, non-current | 23,221 | | | 17,875 | | | |
Warranty obligations, non-current | 1,593 | | | 1,408 | | | |
Income taxes payable, non-current | 3,805 | | | 3,657 | | | |
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Other non-current liabilities | 606 | | | 607 | | | |
Debt payable, non-current, net of unamortized debt issuance costs of $215 and $236 | 10,296 | | | 10,297 | | | |
Total liabilities | 185,505 | | | 171,685 | | | |
Commitments and contingencies (Note 15) | 0 | | 0 | | |
Shareholders' equity: | | | | | |
Common stock - 0 par value, 75,000 shares authorized, 30,794 and 30,576 shares issued and outstanding | 2,411 | | | 2,176 | | | |
Retained earnings | 194,408 | | | 180,524 | | | |
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Accumulated other comprehensive income (loss) | 62 | | | (155) | | | |
Total shareholders' equity | 196,881 | | | 182,545 | | | |
Total liabilities and shareholders' equity | $ | 382,386 | | | $ | 354,230 | | | |
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| As of |
| June 30, 2022 | | March 31, 2022 | | |
| (unaudited) | | | | |
Assets | | | | | |
Cash and cash equivalents | $ | 7,311 | | | $ | 12,872 | | | |
Restricted cash | 1,339 | | | 1,339 | | | |
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Trade receivables, net of allowances of $912 and $598 | 27,450 | | | 61,454 | | | |
Inventories | 103,932 | | | 111,190 | | | |
Prepaids and other current assets | 11,979 | | | 14,546 | | | |
Other current assets - restricted, current | 3,887 | | | 3,887 | | | |
Income taxes receivable | 1,721 | | | 1,998 | | | |
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Total current assets | 157,619 | | | 207,286 | | | |
Property, plant and equipment, net | 33,185 | | | 32,129 | | | |
Operating lease right-of-use assets | 22,353 | | | 23,620 | | | |
Goodwill | — | | | 24,510 | | | |
Other intangible assets, net | 6,833 | | | 9,304 | | | |
Deferred income tax assets, non-current | 809 | | | 8,760 | | | |
Income taxes receivable, non-current | 5,673 | | | 5,673 | | | |
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Other assets | 2,666 | | | 2,763 | | | |
Total assets | $ | 229,138 | | | $ | 314,045 | | | |
Liabilities and Shareholders' Equity | | | | | |
Trade payables | $ | 26,764 | | | $ | 53,165 | | | |
Accrued liabilities | 24,420 | | | 29,386 | | | |
Operating lease liabilities, current portion | 4,316 | | | 4,494 | | | |
Financing lease liabilities, current portion | 120 | | | 119 | | | |
Warranty obligations, current portion | 3,955 | | | 4,968 | | | |
Income taxes payable, current portion | 720 | | | 839 | | | |
Debt payable, current portion, net of unamortized debt issuance costs of $57 and $57 | 2,243 | | | 2,243 | | | |
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Total current liabilities | 62,538 | | | 95,214 | | | |
Operating lease liabilities, non-current | 19,778 | | | 20,926 | | | |
Financing lease liabilities, non-current | 367 | | | 395 | | | |
Warranty obligations, non-current | 1,041 | | | 1,248 | | | |
Income taxes payable, non-current | 4,054 | | | 4,029 | | | |
Deferred income tax liabilities, non-current | 500 | | | — | | | |
Other non-current liabilities | 1,270 | | | 1,071 | | | |
Debt payable, non-current, net of unamortized debt issuance costs of $190 and $204 | 34,743 | | | 27,113 | | | |
Total liabilities | 124,291 | | | 149,996 | | | |
Commitments and contingencies (Note 16) | 0 | | 0 | | |
Shareholders' equity: | | | | | |
Common stock - no par value, 75,000 shares authorized, 31,473 and 31,268 shares issued and outstanding | 8,317 | | | 6,483 | | | |
Retained earnings | 97,916 | | | 158,093 | | | |
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Accumulated other comprehensive loss | (1,386) | | | (527) | | | |
Total shareholders' equity | 104,847 | | | 164,049 | | | |
Total liabilities and shareholders' equity | $ | 229,138 | | | $ | 314,045 | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
| | | Three-Months Ended June 30, | | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 |
Net sales | Net sales | $ | 184,593 | | | $ | 114,188 | | | Net sales | $ | 54,817 | | | $ | 184,593 | |
Cost of sales | Cost of sales | 129,088 | | | 66,792 | | | Cost of sales | 47,860 | | | 129,088 | |
Gross profit | Gross profit | 55,505 | | | 47,396 | | | Gross profit | 6,957 | | | 55,505 | |
Operating expenses: | Operating expenses: | | | Operating expenses: | |
Selling and marketing | Selling and marketing | 21,300 | | | 12,446 | | | Selling and marketing | 12,891 | | | 21,300 | |
General and administrative | General and administrative | 11,523 | | | 9,315 | | | General and administrative | 12,463 | | | 11,523 | |
Research and development | Research and development | 4,815 | | | 3,728 | | | Research and development | 5,823 | | | 4,815 | |
Loss on disposal group | 0 | | | 29,013 | | | |
Goodwill and intangible impairment charge | | Goodwill and intangible impairment charge | 26,965 | | | — | |
| | Total operating expenses | Total operating expenses | 37,638 | | | 54,502 | | | Total operating expenses | 58,142 | | | 37,638 | |
Operating income (loss) | 17,867 | | | (7,106) | | | |
Operating (loss) income | | Operating (loss) income | (51,185) | | | 17,867 | |
Other expense: | Other expense: | | | Other expense: | |
Interest income | Interest income | 21 | | | 1 | | | Interest income | 1 | | | 21 | |
Interest expense | Interest expense | (314) | | | (338) | | | Interest expense | (376) | | | (314) | |
Other, net | Other, net | (120) | | | 115 | | | Other, net | (514) | | | (120) | |
Total other expense, net | Total other expense, net | (413) | | | (222) | | | Total other expense, net | (889) | | | (413) | |
Income (loss) from continuing operations before income taxes | 17,454 | | | (7,328) | | | |
Income tax expense (benefit) | 3,438 | | | (2,342) | | | |
Income (loss) from continuing operations | 14,016 | | | (4,986) | | | |
(Loss) income from continuing operations before income taxes | | (Loss) income from continuing operations before income taxes | (52,074) | | | 17,454 | |
Income tax expense | | Income tax expense | 8,096 | | | 3,438 | |
(Loss) income from continuing operations | | (Loss) income from continuing operations | (60,170) | | | 14,016 | |
Discontinued operations: | Discontinued operations: | | | Discontinued operations: | |
Loss from discontinued operations before income taxes | Loss from discontinued operations before income taxes | (126) | | | (29) | | | Loss from discontinued operations before income taxes | — | | | (126) | |
Income tax expense of discontinued operations | Income tax expense of discontinued operations | 6 | | | 95 | | | Income tax expense of discontinued operations | 7 | | | 6 | |
Loss from discontinued operations | Loss from discontinued operations | (132) | | | (124) | | | Loss from discontinued operations | (7) | | | (132) | |
Net income (loss) | $ | 13,884 | | | $ | (5,110) | | | |
Net (loss) income | | Net (loss) income | $ | (60,177) | | | $ | 13,884 | |
| Basic income (loss) per share from continuing operations | $ | 0.46 | | | $ | (0.17) | | | |
Basic (loss) income per share from continuing operations | | Basic (loss) income per share from continuing operations | $ | (1.92) | | | $ | 0.46 | |
Basic loss per share from discontinued operations | Basic loss per share from discontinued operations | (0.01) | | | 0 | | | Basic loss per share from discontinued operations | — | | | (0.01) | |
Basic net income (loss) per share | $ | 0.45 | | | $ | (0.17) | | | |
Basic net (loss) income per share | | Basic net (loss) income per share | $ | (1.92) | | | $ | 0.45 | |
| Diluted income (loss) per share from continuing operations | $ | 0.43 | | | $ | (0.17) | | | |
Diluted (loss) income per share from continuing operations | | Diluted (loss) income per share from continuing operations | $ | (1.92) | | | $ | 0.43 | |
Diluted loss per share from discontinued operations | Diluted loss per share from discontinued operations | 0 | | | 0 | | | Diluted loss per share from discontinued operations | — | | | — | |
Diluted net income (loss) per share | $ | 0.43 | | | $ | (0.17) | | | |
Diluted net (loss) income per share | | Diluted net (loss) income per share | $ | (1.92) | | | $ | 0.43 | |
| Shares used in per share calculations: | Shares used in per share calculations: | | | Shares used in per share calculations: | |
Basic | Basic | 30,697 | | | 29,909 | | | Basic | 31,405 | | | 30,697 | |
Diluted | Diluted | 32,508 | | | 29,909 | | | Diluted | 31,405 | | | 32,508 | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
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| Three-Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
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 | 0 | | | 0 | | | | | |
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Foreign currency translation, net of income tax benefit of $13 and $15 | 217 | | | 353 | | | | | |
Other comprehensive income | 217 | | | 353 | | | | | |
Comprehensive income (loss) | $ | 14,101 | | | $ | (4,757) | | | | | |
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| Three-Months Ended June 30, |
| 2022 | | 2021 |
Net (loss) income | $ | (60,177) | | | $ | 13,884 | |
Other comprehensive (loss) income: | | | |
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Foreign currency translation, net of income tax (expense) benefit of $(29) and $13 | (859) | | | 217 | |
Other comprehensive (loss) income | (859) | | | 217 | |
Comprehensive (loss) income | $ | (61,036) | | | $ | 14,101 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited and in thousands)
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| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Shareholders' Equity |
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Balances at March 31, 2021 | 30,576 | | | $ | 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 | — | | | — | | | — | | | 0 | | | 0 | |
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Foreign currency translation adjustment, net of income tax benefit of $13 | — | | | — | | | — | | | 217 | | | 217 | |
Stock-based compensation expense | — | | | 1,225 | | | 0 | | | — | | | 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 plan | 17 | | | 269 | | | — | | | — | | | 269 | |
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Balances at June 30, 2021 | 30,794 | | | $ | 2,411 | | | $ | 194,408 | | | $ | 62 | | | $ | 196,881 | |
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| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| Shares | | Amount | | | |
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Balance, March 31, 2022 | 31,268 | | | $ | 6,483 | | | $ | 158,093 | | | $ | (527) | | | $ | 164,049 | |
Net loss | — | | | — | | | (60,177) | | | — | | | (60,177) | |
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Foreign currency translation adjustment, net of income tax expense of $29 | — | | | — | | | — | | | (859) | | | (859) | |
Stock-based compensation expense | — | | | 1,979 | | | — | | | — | | | 1,979 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 205 | | | (270) | | | — | | | — | | | (270) | |
Common stock issued under employee stock purchase plan | — | | | 125 | | | — | | | — | | | 125 | |
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Balance, June 30, 2022 | 31,473 | | | $ | 8,317 | | | $ | 97,916 | | | $ | (1,386) | | | $ | 104,847 | |
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| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
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Balances at March 31, 2020 | 29,817 | | | $ | 1,781 | | | $ | 92,456 | | | $ | (1,312) | | | $ | 92,925 | |
Net loss | — | | | — | | | (5,110) | | | — | | | (5,110) | |
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Foreign currency translation adjustment, net of income tax benefit of $15 | — | | | — | | | — | | | 353 | | | 353 | |
Stock-based compensation expense | — | | | 865 | | | 0 | | | — | | | 865 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 87 | | | 0 | | | — | | | — | | | 0 | |
Common stock issued under employee stock purchase plan | 63 | | | 83 | | | — | | | — | | | 83 | |
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Balances at June 30, 2020 | 29,967 | | | $ | 2,729 | | | $ | 87,346 | | | $ | (959) | | | $ | 89,116 | |
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| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Shareholders' Equity |
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Balance, March 31, 2021 | 30,576 | | | $ | 2,176 | | | $ | 180,524 | | | $ | (155) | | | $ | 182,545 | |
Net income | — | | | — | | | 13,884 | | | — | | | 13,884 | |
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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 plan | 17 | | | 269 | | | — | | | — | | | 269 | |
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Balance, June 30, 2021 | 30,794 | | | $ | 2,411 | | | $ | 194,408 | | | $ | 62 | | | $ | 196,881 | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
| | | Three-Months Ended June 30, | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Income (loss) from continuing operations | $ | 14,016 | | | $ | (4,986) | | |
(Loss) income from continuing operations | | (Loss) income from continuing operations | $ | (60,170) | | | $ | 14,016 | |
Loss from discontinued operations | Loss from discontinued operations | (132) | | | (124) | | Loss from discontinued operations | (7) | | | (132) | |
Net income (loss) | 13,884 | | | (5,110) | | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | |
Net (loss) income | | Net (loss) income | (60,177) | | | 13,884 | |
Adjustments to reconcile net (loss) income to cash used in operating activities: | | Adjustments to reconcile net (loss) income to cash used in operating activities: |
Depreciation and amortization | Depreciation and amortization | 2,054 | | | 2,646 | | Depreciation and amortization | 2,306 | | | 2,054 | |
Provision for allowance for doubtful accounts | (156) | | | 596 | | |
Recovery (provision) for allowance for doubtful accounts | | Recovery (provision) for allowance for doubtful accounts | 430 | | | (156) | |
Inventory lower of cost or net realizable value | Inventory lower of cost or net realizable value | (134) | | | 773 | | Inventory lower of cost or net realizable value | 644 | | | (134) | |
Stock-based compensation expense | Stock-based compensation expense | 1,225 | | | 865 | | Stock-based compensation expense | 1,979 | | | 1,225 | |
Loss on asset dispositions | 0 | | | 184 | | |
Deferred income taxes, net of valuation allowances | | Deferred income taxes, net of valuation allowances | 8,354 | | | (908) | |
Goodwill and intangible impairment change | | Goodwill and intangible impairment change | 26,965 | | | — | |
Other | | Other | (666) | | | 1,125 | |
| Loss on disposal group, goodwill and other intangible impairment charge | 0 | | | 29,013 | | |
Deferred income taxes, net of valuation allowances | (908) | | | (7,523) | | |
| Other | 1,125 | | | (961) | | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Trade receivables | Trade receivables | (9,638) | | | (7,995) | | Trade receivables | 33,966 | | | (9,638) | |
Inventories | Inventories | (43,259) | | | 1,506 | | Inventories | 8,320 | | | (43,259) | |
Prepaids and other assets | Prepaids and other assets | 3,706 | | | (611) | | Prepaids and other assets | 4,012 | | | 3,706 | |
Income taxes receivable | Income taxes receivable | (9,512) | | | 4,823 | | Income taxes receivable | 282 | | | (9,512) | |
Trade payables | Trade payables | 15,200 | | | 19,742 | | Trade payables | (25,368) | | | 15,200 | |
Accrued liabilities and other liabilities, including warranty obligations | Accrued liabilities and other liabilities, including warranty obligations | (1,743) | | | 2,264 | | Accrued liabilities and other liabilities, including warranty obligations | (7,027) | | | (1,743) | |
| Net cash (used in) provided by operating activities | (28,156) | | | 40,212 | | |
Net cash used in operating activities | | Net cash used in operating activities | (5,980) | | | (28,156) | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Proceeds from sales and maturities of available-for-sale securities | Proceeds from sales and maturities of available-for-sale securities | 17,185 | | | 0 | | Proceeds from sales and maturities of available-for-sale securities | — | | | 17,185 | |
| Purchases of property, plant and equipment | | Purchases of property, plant and equipment | (3,381) | | | (1,850) | |
| Purchases of property, plant and equipment | (1,850) | | | (2,965) | | |
| | Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | 15,335 | | | (2,965) | | Net cash provided by (used in) investing activities | (3,381) | | | 15,335 | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Proceeds from long-term debt | Proceeds from long-term debt | 1,185 | | | 575 | | Proceeds from long-term debt | 17,751 | | | 1,185 | |
Payments on long-term debt | Payments on long-term debt | (1,337) | | | (13,167) | | Payments on long-term debt | (10,446) | | | (1,337) | |
| Payments on finance lease liabilities | | Payments on finance lease liabilities | (30) | | | — | |
Proceeds from employee stock purchases | Proceeds from employee stock purchases | 269 | | | 0 | | Proceeds from employee stock purchases | 125 | | | 269 | |
Proceeds from exercise of stock options | Proceeds from exercise of stock options | 63 | | | 83 | | Proceeds from exercise of stock options | — | | | 63 | |
Tax payments related to stock award issuances | Tax payments related to stock award issuances | (1,322) | | | 0 | | Tax payments related to stock award issuances | (270) | | | (1,322) | |
| Net cash used in financing activities | (1,142) | | | (12,509) | | |
Effect of exchange rate changes on cash and cash equivalents | 740 | | | 644 | | |
(Decrease) increase in cash, cash equivalents and restricted cash | (13,223) | | | 25,382 | | |
Less: Net change in cash balances classified as assets held-for-sale | 0 | | | (3,986) | | |
Net change in cash, cash equivalents and restricted cash | (13,223) | | | 21,396 | | |
Cash, cash equivalents and restricted cash: | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 7,130 | | | (1,142) | |
Effect of exchange rate changes | | Effect of exchange rate changes | (3,330) | | | 740 | |
| Net decrease in cash, cash equivalents and restricted cash | | Net decrease in cash, cash equivalents and restricted cash | (5,561) | | | (13,223) | |
| Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 39,780 | | | 26,456 | | Cash, cash equivalents and restricted cash at beginning of period | 18,098 | | | 39,780 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 26,557 | | | $ | 47,852 | | Cash, cash equivalents and restricted cash at end of period | $ | 12,537 | | | $ | 26,557 | |
| Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | | | |
Cash paid for interest | Cash paid for interest | $ | 60 | | | $ | 212 | | Cash paid for interest | $ | 176 | | | $ | 60 | |
Cash paid for income taxes, net | 18,562 | | | 447 | | |
Cash (received from) paid for income taxes, net | | Cash (received from) paid for income taxes, net | (514) | | | 18,562 | |
Supplemental disclosure of non-cash investing activities: | Supplemental disclosure of non-cash investing activities: | | Supplemental disclosure of non-cash investing activities: | |
Capital expenditures incurred but not yet paid | Capital expenditures incurred but not yet paid | $ | 786 | | | $ | 652 | | Capital expenditures incurred but not yet paid | $ | 1,335 | | | $ | 786 | |
| 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: | 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, | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Cash and cash equivalents | Cash and cash equivalents | $ | 25,218 | | | $ | 45,656 | | Cash and cash equivalents | $ | 7,311 | | | $ | 25,218 | |
Restricted cash | Restricted cash | 1,339 | | | 2,196 | | Restricted cash | 1,339 | | | 1,339 | |
Other current assets - restricted, current | | Other current assets - restricted, current | 3,887 | | | — | |
Total cash, cash equivalents and restricted cash | Total cash, cash equivalents and restricted cash | $ | 26,557 | | | $ | 47,852 | | Total cash, cash equivalents and restricted cash | $ | 12,537 | | | $ | 26,557 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL INFORMATION
Basis of Consolidation and Presentation
The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Nautilus, Inc. and its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
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 fiscal year ended DecemberMarch 31, 20202022 (the “2020“2022 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. Uncertainties 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 20202022 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 June 30, 20212022 and March 31, 2021,2022, and our results of operations, comprehensive (loss) income and shareholders' equity for the three-month periodsperiod ended June 30, 20212022 and 20202021 and our cash flows for the three-month periodsperiod ended June 30, 20212022 and 2020.2021. 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.
Recent Accounting Pronouncements
Recently Adopted Pronouncements
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in ASU 2019-12 introduce the following new guidance: (1) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax; and (2) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The amendments in ASU 2019-12 make changes to the following current guidance: (1) making an intraperiod allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim periods; and (4) determining how to apply the income tax guidance to franchise taxes that are partially based on income. ASU 2019-12 is effective for public business entities' fiscal years,
including interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. Our adoption of ASU 2019-12 as of January 1, 2021 had no material impact on our financial position, results of operations or cash flows.
Recently Issued Pronouncements Not Yet Adopted
ASU 2020-04 and ASU 2021-01
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the 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 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash flows.
ASU 2020-01
In January 2020, the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We doThe adoption of ASU 2020-01 in the first quarter of the fiscal year ending March 31, 2023 ('fiscal 2023') did not expecthave any effect on our financial position, results of operations or cash flows.
ASU 2020-04 and ASU 2021-01
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the 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 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. The adoption of this guidance would have ahad no material impact on our financial position, results of operations andor cash flows.
Recently Issued Pronouncements Not Yet Adopted
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In 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 fiscal years beginning after December 15, 2022, including interim periods within those years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
(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, | | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 |
Product sales | Product sales | $ | 179,811 | | | $ | 110,595 | | | Product sales | $ | 49,596 | | | $ | 179,811 | |
Extended warranties and services | Extended warranties and services | 1,756 | | | 1,465 | | | Extended warranties and services | 1,042 | | | 1,756 | |
Other(1) | Other(1) | 3,026 | | | 2,128 | | | Other(1) | 4,179 | | | 3,026 | |
Net sales | Net sales | $ | 184,593 | | | $ | 114,188 | | | Net sales | $ | 54,817 | | | $ | 184,593 | |
(1) Other revenue is primarily subscription revenue, freight and delivery and royalty incomeincome.
Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription revenue.term as the performance obligation is satisfied. Revenue generated from subscriptions is recorded in our Direct segment.
We also offer free trials of subscriptions that are bundled with product offerings (e.g., subscription for premium content). For these types of transactions that involve multiple performance obligations, the transaction price requires allocations to the distinct performance obligation because the free trial provides a material right. The transaction price is then allocated to each performance obligation based on stand-alone selling price. We determine stand-alone selling price based on prices charged to customers. Breakage is factored into the determination of the stand-alone selling price of a subscription. Breakage or activation rate, is defined as a percentage of those purchases that never activate a free-trial offering.
Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
| | | Three-Months Ended June 30, | | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 |
United States | United States | $ | 147,149 | | | $ | 97,363 | | | United States | $ | 46,081 | | | $ | 147,149 | |
Canada | Canada | 19,362 | | | 6,248 | | | Canada | 5,807 | | | 19,362 | |
Europe, the Middle East and Africa | Europe, the Middle East and Africa | 14,442 | | | 8,493 | | | Europe, the Middle East and Africa | 1,839 | | | 14,442 | |
All other | All other | 3,640 | | | 2,084 | | | All other | 1,090 | | | 3,640 | |
Net sales | Net sales | $ | 184,593 | | | $ | 114,188 | | | Net sales | $ | 54,817 | | | $ | 184,593 | |
As of June 30, 2021,2022, estimated revenue expected to be recognized in the future totaled $145.0$48.4 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 Direct channel. We have further refined our Retail backlog to include unfilled future orders. Direct orders of $3.1 million and Retail orders of $141.9 million, comprised our backlog asAs of June 30, 2021, compared to2022, Retail orders were $48.0 million and Direct orders of $20.6 million and Retail orders of $130.0 million as of June 30, 2020.were $0.4 million. 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.control or the performance obligation is not satisfied. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature, and were recorded onrecognized over the condensed consolidated balance sheets as accrued liabilities.next twelve months. Significant changes in contract liabilities balances, including revenue recognized in the reporting period that was included in opening contract liabilities, are shown below (in thousands):
| | | | | | | | | | | | | | | |
| Three-Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
Balance, beginning of period | $ | 5,551 | | | $ | 2,050 | | | | | |
Cash additions | 1,089 | | | 2,371 | | | | | |
Revenue recognition | (4,883) | | | (918) | | | | | |
Balance, end of period | $ | 1,757 | | | $ | 3,503 | | | | | |
| | | | | | | | | | | | | | |
| | Three-Months Ended June 30, |
| | 2022 | | 2021 |
Balance, beginning of period | | $ | 6,285 | | | $ | 5,551 | |
Cash additions | | 2,531 | | | 1,089 | |
Revenue recognition | | (2,234) | | | (4,883) | |
Balance, end of period | | $ | 6,582 | | | $ | 1,757 | |
(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;risk, or observable market prices in markets with insufficient volume and/or infrequent transactions; and
•Level 3 - significant inputs that are generally unobservable inputs for which there is little or no market data available, including our own assumptions in determining fair value.
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Cash Equivalents | | | | | | | | |
Money market funds | | $ | 6,184 | | | $ | 0 | | | $ | 0 | | | $ | 6,184 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total cash equivalents | | 6,184 | | | 0 | | | 0 | | | 6,184 | |
Available-for-Sale Securities | | | | | | | | |
| | | | | | | | |
Commercial paper | | 0 | | | 7,998 | | | 0 | | | 7,998 | |
Corporate bonds | | 0 | | | 8,153 | | | 0 | | | 8,153 | |
U.S. government bonds | | 0 | | | 40,113 | | | 0 | | | 40,113 | |
Total available-for-sale securities | | 0 | | | 56,264 | | | 0 | | | 56,264 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets measured at fair value | | $ | 6,184 | | | $ | 56,264 | | | $ | 0 | | | $ | 62,448 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivatives | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | 0 | | | $ | 510 | | | $ | 0 | | | $ | 510 | |
Total liabilities measured at fair value | | $ | 0 | | | $ | 510 | | | $ | 0 | | | $ | 510 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Derivatives | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 5 | | | $ | — | | | $ | 5 | |
| | | | | | | | |
Total assets measured at fair value | | $ | — | | | $ | 5 | | | $ | — | | | $ | 5 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivatives | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 34 | | | $ | — | | | $ | 34 | |
Total liabilities measured at fair value | | $ | — | | | $ | 34 | | | $ | — | | | $ | 34 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Cash Equivalents | | | | | | | | |
Money market funds | | $ | 9,679 | | | $ | 0 | | | $ | 0 | | | $ | 9,679 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total cash equivalents | | 9,679 | | | 0 | | | 0 | | | 9,679 | |
Available-for-Sale Securities | | | | | | | | |
| | | | | | | | |
Commercial paper | | 0 | | | 9,994 | | | 0 | | | 9,994 | |
Corporate bonds | | 0 | | | 8,227 | | | 0 | | | 8,227 | |
U.S. government bonds | | 0 | | | 55,227 | | | 0 | | | 55,227 | |
Total available-for-sale securities | | 0 | | | 73,448 | | | 0 | | | 73,448 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets measured at fair value | | $ | 9,679 | | | $ | 73,448 | | | $ | 0 | | | $ | 83,127 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivatives | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | 0 | | | $ | 672 | | | $ | 0 | | | $ | 672 | |
Total liabilities measured at fair value | | $ | 0 | | | $ | 672 | | | $ | 0 | | | $ | 672 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Liabilities: | | | | | | | | |
Derivatives | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 128 | | | $ | — | | | $ | 128 | |
Total liabilities measured at fair value | | $ | — | | | $ | 128 | | | $ | — | | | $ | 128 | |
| | | | | | | | |
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 three-month period ended June 30, 2021,2022, nor for the periodfiscal year ended March 31, 2021.2022 ("fiscal 2022"). Additionally, we did not have any changes to our valuation techniques during either of these periods.
We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from inputs, other than quoted market prices in active markets for identical assets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in comprehensive income until realized.
The fair values of our 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.
As of June 30, 2021 and March 31, 2021, there were no assets or liabilities that were 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 debt approximates its fair value and falls under Level 2 of the fair value hierarchy, as the interest rate is variable and based on current market rates.
During the quarter ended June 30, 2022, we evaluated the fair value of our goodwill and intangible assets because triggering events were identified. See Note 7 for additional information.
(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.
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 June 30, 2021,2022, total outstanding contract notional amounts were $66.0$14.7 million and had maturities of 7978 days or less.
The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Classification | | As of | | |
| | | June 30, 2021 | | March 31, 2021 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Derivative instruments not designated as cash flow hedges: | | | | | | | | |
| | | | | | | | |
| | Accrued liabilities | | $ | 510 | | | $ | 672 | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Classification | | As of | | |
| | | June 30, 2022 | | March 31, 2022 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Derivative instruments not designated as cash flow hedges: | | | | | | | | |
Foreign currency forward contracts | | Prepaids and other current assets | | $ | 5 | | | $ | — | | | |
Foreign currency forward contracts | | Accrued liabilities | | 34 | | | 128 | | | |
| | | | | | | | |
The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
| | | Statement of Operations Classification | | Three-Months Ended June 30, | | | Statement of Operations Classification | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | | Statement of Operations Classification | | 2022 | | 2021 |
| | Derivative instruments not designated as cash flow hedges: | Derivative instruments not designated as cash flow hedges: | | | | | | | | Derivative instruments not designated as cash flow hedges: | | | | | | |
Loss recognized in earnings | Loss recognized in earnings | | Other, net | | $ | (17) | | | $ | (141) | | | Loss recognized in earnings | | Other, net | | $ | (96) | | | $ | (17) | |
Income tax (benefit) expense | | Income tax expense (benefit) | | (4) | | | 35 | | | |
Income tax expense | | Income tax expense | | Income tax expense | | (24) | | | (4) | |
(5) INVENTORIES
Inventories are stated at the lower of cost and net realizable value, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):
| | | As of | | | As of | |
| | June 30, 2021 | | March 31, 2021 | | | June 30, 2022 | | March 31, 2022 | |
Finished goods | Finished goods | $ | 106,413 | | | $ | 63,918 | | | Finished goods | $ | 98,521 | | | $ | 104,988 | | |
Parts and components | Parts and components | 4,719 | | | 4,167 | | | Parts and components | 5,411 | | | 6,202 | | |
Total inventories | Total inventories | $ | 111,132 | | | $ | 68,085 | | | Total inventories | $ | 103,932 | | | $ | 111,190 | | |
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| | | Estimated Useful Life (in years) | | As of | | Estimated Useful Life (in years) | | As of |
| | June 30, 2021 | | March 31, 2021 | | Estimated Useful Life (in years) | | June 30, 2022 | | March 31, 2022 | |
Automobiles | Automobiles | 5 | | $ | 23 | | | $ | 23 | | | Automobiles | 5 | | $ | 23 | | | $ | 23 | | |
Leasehold improvements | Leasehold improvements | 4 | to | 20 | | 3,060 | | | 3,059 | | | Leasehold improvements | 4 | to | 20 | | 3,646 | | | 3,150 | | |
Computer software and equipment | Computer software and equipment | 2 | to | 7 | | 38,244 | | | 36,956 | | | Computer software and equipment | 2 | to | 7 | | 44,682 | | | 44,852 | | |
Machinery and equipment | Machinery and equipment | 3 | to | 5 | | 15,790 | | | 15,699 | | | Machinery and equipment | 3 | to | 5 | | 16,017 | | | 16,447 | | |
Furniture and fixtures | Furniture and fixtures | 5 | to | 20 | | 2,587 | | | 2,586 | | | Furniture and fixtures | 5 | to | 20 | | 2,632 | | | 2,634 | | |
Work in progress(1) | Work in progress(1) | N/A | | 2,196 | | | 1,314 | | | Work in progress(1) | N/A | | 10,034 | | | 6,678 | | |
Total cost | Total cost | | 61,900 | | | 59,637 | | | Total cost | | 77,034 | | | 73,784 | | |
Accumulated depreciation | Accumulated depreciation | | (37,182) | | | (35,141) | | | Accumulated depreciation | | (43,849) | | | (41,655) | | |
Total property, plant and equipment, net | Total property, plant and equipment, net | | $ | 24,718 | | | $ | 24,496 | | | Total property, plant and equipment, net | | $ | 33,185 | | | $ | 32,129 | | |
(1) Work in progress includes information technology assets and production tooling.
Depreciation expense was as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three-Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
Depreciation expense | $ | 2,039 | | | $ | 1,843 | | | | | |
| | | | | | | | | | | |
| Three-Months Ended June 30, |
| 2022 | | 2021 |
Depreciation expense | $ | 2,291 | | | $ | 2,039 | |
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The roll forward of goodwill was as follows (in thousands): | | | | | | | | |
| | | Total | |
Balance, March 31, 2022 | | | $ | 24,510 | | |
Goodwill impairment | | | (24,510) | | |
| | | | |
Balance, June 30, 2022 | | | $ | — | | |
| | | | |
| | | | |
In accordance with ASC 350 — Intangibles — Goodwill and Other, we perform our goodwill and indefinite-lived trade names impairment valuations annually, on March 31, or sooner if triggering events are identified. While the fair value of our reporting units exceeded their respective carrying values as of March 31, 2022, we observed continued market volatility including significant declines in our market capitalization during the three-month period ended June 30, 2022, identified as a triggering event. Our trailing 30-day average market capitalization was approximately $137 million at March 31, 2022 compared to $66 million, the trailing 30-day average as of June 30, 2022. We performed an interim evaluation and a market capitalization reconciliation during the first quarter of fiscal 2023, which resulted in non-cash goodwill impairment charge of $24.5 million.
We assigned assets and liabilities to each reporting unit based on either specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit. We determined the fair value of our reporting units in Step 1 of the ASC 350 analysis using the market approach. In addition, we determined the fair value by adding a control premium observed from recent transactions of comparable companies to determine the reasonableness of that assumption and the fair values of the reporting units estimated in Step 1. Significant unobservable inputs and assumptions inherent in the valuation methodologies from Level 3 inputs were employed and include, but were not limited to, prospective financial information, growth rates, terminal value, royalty rates, discount rates, and comparable multiples from publicly traded companies in our industry. We compared the carrying amount of each reporting unit to its respective fair value. We reconciled the aggregate fair values of the reporting units determined in Step 1 (as described above) to the enterprise market capitalization plus a reasonable control premium. This total value was compared to a trailing 30-day average market capitalization of approximately $66 million as of June 30, 2022. As a result, the market capitalization reconciliation analysis identified that the Direct reporting unit's fair value was significantly lower than its carrying value, resulting in a non-cash goodwill impairment charge of $24.5 million.
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
| | | Estimated Useful Life (in years) | | As of | | Estimated Useful Life (in years) | | As of |
| | June 30, 2021 | | March 31, 2021 | | Estimated Useful Life (in years) | | June 30, 2022 | | March 31, 2022 | |
Indefinite-lived trademarks(1) | Indefinite-lived trademarks(1) | N/A | | $ | 9,052 | | | $ | 9,052 | | | Indefinite-lived trademarks(1) | N/A | | $ | 6,597 | | | $ | 9,052 | | |
| Patents | Patents | 7 | to | 24 | | 1,443 | | | 1,443 | | | Patents | 7 | to | 24 | | 1,043 | | | 1,043 | | |
| | | 10,495 | | | 10,495 | | | | 7,640 | | | 10,095 | | |
Accumulated amortization - definite-lived intangible assets | Accumulated amortization - definite-lived intangible assets | | (1,145) | | | (1,130) | | | Accumulated amortization - definite-lived intangible assets | | (807) | | | (791) | | |
Other intangible assets, net | Other intangible assets, net | | $ | 9,350 | | | $ | 9,365 | | | Other intangible assets, net | | $ | 6,833 | | | $ | 9,304 | | |
(1) During the first quarter of fiscal 2023, we identified impairment indicators with our indefinite-lived trademarks resulting in a $2.5 million non-cash intangible impairment charge.
Amortization expense was as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three-Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
Amortization expense | $ | 15 | | | $ | 803 | | | | | |
| | | | | | | | | | | |
| Three-Months Ended June 30, |
| 2022 | | 2021 |
Amortization expense | $ | 15 | | | $ | 15 | |
Future amortization of definite-lived intangible assets is as follows (in thousands):
| 2022 | $ | 46 | | |
2023 | 61 | | |
Remainder of fiscal 2023 | | Remainder of fiscal 2023 | $ | 46 | |
2024 | 2024 | 61 | | 2024 | 61 | |
2025 | 2025 | 61 | | 2025 | 61 | |
2026 | 2026 | 47 | | 2026 | 47 | |
2027 | | 2027 | 3 | |
Thereafter | Thereafter | 22 | | Thereafter | 18 | |
| | $ | 298 | | | $ | 236 | |
(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
Lease expense was as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three-Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
Operating lease expense | $ | 1,466 | | | $ | 1,145 | | | | | |
| | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| Three-Months Ended June 30, |
| 2022 | | 2021 |
Operating lease expense | $ | 1,533 | | | $ | 1,466 | |
Amortization of finance lease assets | 28 | | | — | |
| | | |
Total lease expense | $ | 1,561 | | | $ | 1,466 | |
|
| | | |
| | | |
| | | |
| | | |
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(in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | June 30, 2021 | | March 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) | | 6.26 | | 6.97 | | |
Weighted average discount rate on operating leases | | 5.00% | | 4.95% | | |
| | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | June 30, 2022 | | March 31, 2022 | | |
Supplemental cash flow information related to leases was as follows: | | | | | | |
| | | | | | | |
Operating leases: | | | | | | | |
Operating lease right-of-use-assets | | $ | 22,353 | | | $ | 23,620 | | | |
| | | | | | | |
Operating lease liabilities, non-current | | $ | 19,778 | | | $ | 20,926 | | | |
Operating lease liabilities, current portion | | 4,316 | | | 4,494 | | | |
Total operating lease liabilities | | $ | 24,094 | | | $ | 25,420 | | | |
| | | | | | | |
Finance leases: | | | | | | | |
Property, plant and equipment, at cost | | $ | 512 | | | $ | 569 | | | |
Accumulated depreciation | | (28) | | | (57) | | | |
Property, plant and equipment, net | | $ | 484 | | | $ | 512 | | | |
| | | | | | | |
Finance lease obligations, non-current | | $ | 367 | | | $ | 395 | | | |
Finance lease obligations, current portion | | 120 | | | 119 | | | |
Total finance lease liabilities | | $ | 487 | | | $ | 514 | | | |
| | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flow from operating leases | | $ | 1,940 | | | $ | 6,485 | | | |
Finance cash flows from finance leases | | 30 | | | 60 | | | |
| | | | | | | |
Additional lease information: | | | | | | |
ROU assets obtained in exchange for operating lease obligations | | $ | — | | | $ | 10,323 | | | |
ROU assets obtained in exchange for finance lease obligations | | — | | | 569 | | | |
Reductions to ROU assets resulting from reductions to operating lease obligations | | 316 | | | 1,358 | | | |
| | | | | | | |
| | | | | | | |
Weighted Average Remaining Lease Term: | | | | | | | |
Operating leases | | 2.8 years | | 3.1 years | | |
Finance leases | | | 4.3 years | | 4.5 years | | |
| | | | | | | |
Weighted Average Discount Rate: | | | | | | | |
Operating leases | | 4.65% | | 4.65% | | |
Finance leases | | | 2.14% | | 2.14% | | |
We determined the discount rate for leases using a portfolio approach to determine an incremental borrowing rate to calculate the right-of-use assets and lease liabilities.
Maturities of operating lease liabilities under non-cancellable leases were as follows (in thousands):
| | | | | |
| As of |
| June 30, 2021 |
2022 | $ | 4,502 | |
2023 | 5,606 | |
2024 | 5,168 | |
2025 | 5,330 | |
2026 | 4,267 | |
Thereafter | 7,969 | |
Total undiscounted lease payments | 32,842 | |
Less imputed interest | (4,915) | |
Total lease liabilities | $ | 27,927 | |
| | | | | | | | | | | | | | | |
| | | | | |
| As of June 30, 2022 | | | | |
| Operating leases | | Finance leases | | | | |
Remainder of fiscal 2023 | $ | 4,060 | | | $ | 89 | | | | | |
2024 | 5,528 | | | 120 | | | | | |
2025 | 5,592 | | | 120 | | | | | |
2026 | 4,509 | | | 120 | | | | | |
2027 | 2,353 | | | 60 | | | | | |
Thereafter | 5,796 | | | — | | | | | |
Total undiscounted lease payments | 27,838 | | | 509 | | | | | |
Less imputed interest | (3,744) | | | (22) | | | | | |
Total lease liabilities | $ | 24,094 | | | $ | 487 | | | | | |
(9) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | As of |
| | As of | | June 30, 2022 | | March 31, 2022 | |
| | June 30, 2021 | | March 31, 2021 | | | | | | |
Payroll and related liabilities | Payroll and related liabilities | $ | 5,485 | | | $ | 6,616 | | | Payroll and related liabilities | $ | 9,233 | | | $ | 10,405 | | |
Deferred revenue | | Deferred revenue | 6,581 | | | 6,285 | | |
Legal settlement (2) | | Legal settlement (2) | 4,602 | | | 4,250 | | |
Other | | Other | 2,786 | | | 4,013 | | |
Reserves (1) | Reserves (1) | 3,405 | | | 2,624 | | | Reserves (1) | 1,218 | | | 4,433 | | |
Deferred revenue | 1,757 | | | 5,551 | | | |
Other | 3,868 | | | 4,836 | | | |
| Total accrued liabilities | Total accrued liabilities | $ | 14,515 | | | $ | 19,627 | | | Total accrued liabilities | $ | 24,420 | | | $ | 29,386 | | |
(1) Reserves is primarily consists of inventory, sales return, inventory, sales tax and product liability reserves.
(2) Legal settlement is a loss contingency accrual related to a legal settlement involving a class action lawsuit related to advertisement of our treadmills. For further information, see Note 16, Commitments and Contingencies.
(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, | | | Three-Months Ended June 30, |
| | | 2021 | | 2020 | | | | 2022 | | 2021 |
Balance, beginning of period | Balance, beginning of period | | $ | 8,651 | | | $ | 3,154 | | | Balance, beginning of period | | $ | 6,216 | | | $ | 8,651 | |
Accruals | Accruals | | 3,226 | | | 276 | | | Accruals | | 844 | | | 3,226 | |
| Payments | Payments | | (2,093) | | | (879) | | | Payments | | (2,064) | | | (2,093) | |
Balance, end of period | Balance, end of period | | $ | 9,784 | | | $ | 2,551 | | | Balance, end of period | | $ | 4,996 | | | $ | 9,784 | |
(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)LOSS
The following tables set forth the changes in accumulated other comprehensive loss, net of tax (in thousands):
13 | | | | | | | | | | | | | | | |
| | | | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, March 31, 2022 | | | | | $ | (527) | | | $ | (527) | |
Current period other comprehensive loss before reclassifications | | | | | (859) | | | (859) | |
| | | | | | | |
Net other comprehensive loss during period | | | | | (859) | | | (859) | |
Balance, June 30, 2022 | | | | | $ | (1,386) | | | $ | (1,386) | |
| | | | Unrealized Loss on Available-for-Sale Securities | | Gain (Loss) on Derivative Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Income | | Unrealized Loss on Available-for-Sale Securities | | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
Balance, March 31, 2021 | Balance, March 31, 2021 | $ | (8) | | | $ | 0 | | | $ | (147) | | | $ | (155) | | Balance, March 31, 2021 | $ | (8) | | | | $ | (147) | | | $ | (155) | |
Current period other comprehensive loss before reclassifications | 0 | | | 0 | | | 217 | | | 217 | | |
Current period other comprehensive income before reclassifications | | Current period other comprehensive income before reclassifications | — | | | | 217 | | | 217 | |
| Net other comprehensive loss during period | 0 | | | 0 | | | 217 | | | 217 | | |
Net other comprehensive income during period | | Net other comprehensive income during period | — | | | | 217 | | | 217 | |
Balance, June 30, 2021 | Balance, June 30, 2021 | $ | (8) | | | $ | 0 | | | $ | 70 | | | $ | 62 | | Balance, June 30, 2021 | $ | (8) | | | | $ | 70 | | | $ | 62 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Unrealized (Loss) Gain on Available-for-Sale Securities | | Gain (Loss) on Derivative Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, March 31, 2020 | $ | 0 | | | $ | 0 | | | $ | (1,312) | | | $ | (1,312) | |
Current period other comprehensive loss before reclassifications | 0 | | | 0 | | | 353 | | | 353 | |
| | | | | | | |
Net other comprehensive loss during period | 0 | | | 0 | | | 353 | | | 353 | |
Balance, June 30, 2020 | $ | 0 | | | $ | 0 | | | $ | (959) | | | $ | (959) | |
| | | | | | | |
(12) (LOSS) 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 (loss) income per share were as follows (in thousands):
| | | Three-Months Ended June 30, | | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 |
Shares used to calculate basic income per share | Shares used to calculate basic income per share | 30,697 | | | 29,909 | | | Shares used to calculate basic income per share | 31,405 | | | 30,697 | |
Dilutive effect of outstanding stock options, performance stock units and restricted stock units | Dilutive effect of outstanding stock options, performance stock units and restricted stock units | 1,811 | | | 0 | | | Dilutive effect of outstanding stock options, performance stock units and restricted stock units | — | | | 1,811 | |
Shares used to calculate diluted income per share | Shares used to calculate diluted income per share | 32,508 | | | 29,909 | | | Shares used to calculate diluted income per share | 31,405 | | | 32,508 | |
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 anti-dilutive potential common shares in the future (in thousands):
| | | | | | | | | | | | | | | |
| Three-Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
| | | | | | | |
Restricted stock units | 220 | | | 580 | | | | | |
Stock options | 0 | | | 45 | | | | | |
| | | | | | | | | | | |
| Three-Months Ended June 30, |
| 2022 | | 2021 |
| | | |
Stock options | 2 | | | — | |
RSUs | 1,576 | | | 220 | |
Total anti-dilutive shares excluded | 1,578 | | | 220 | |
(13) SEGMENT AND ENTERPRISE-WIDE INFORMATION
We have 2 operating segments, Direct and Retail. There were no changes in our operating segments during the three-months ended June 30, 2021.2022.
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, cash equivalents 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, | | |
| 2021 | | 2020 | | | | |
Net sales: | | | | | | | |
Direct | $ | 63,396 | | | $ | 50,433 | | | | | |
Retail | 120,484 | | | 62,948 | | | | | |
Royalty | 713 | | | 807 | | | | | |
Consolidated net sales | $ | 184,593 | | | $ | 114,188 | | | | | |
| | | | | | | |
Contribution: | | | | | | | |
Direct | $ | 6,759 | | | $ | 16,995 | | | | | |
Retail | 22,090 | | | 11,613 | | | | | |
Royalty | 713 | | | 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: | 2021 | | 2021 | | |
Direct | $ | 45,176 | | | $ | 47,002 | | | |
Retail | 192,189 | | | 146,001 | | | |
Unallocated corporate | 145,021 | | | 161,227 | | | |
Total assets | $ | 382,386 | | | $ | 354,230 | | | |
| | | | | | | | | | | | |
| Three-Months Ended June 30, | |
| 2022 | | 2021 | |
Net sales: | | | | |
Direct | $ | 26,476 | | | $ | 63,396 | | |
Retail | 27,444 | | | 120,484 | | |
Royalty | 897 | | | 713 | | |
Consolidated net sales | $ | 54,817 | | | $ | 184,593 | | |
| | | | |
Contribution: | | | | |
Direct | $ | (9,893) | | | $ | 6,759 | | |
Retail | (5,408) | | | 22,090 | | |
Royalty | 897 | | | 713 | | |
Consolidated contribution | $ | (14,404) | | | $ | 29,562 | | |
| | | | |
Reconciliation of consolidated contribution to (loss) income from continuing operations: | | | |
Consolidated contribution | $ | (14,404) | | | $ | 29,562 | | |
Amounts not directly related to segments: | | | | |
Operating expenses(1) | (36,781) | | | (11,695) | | |
Other expense, net | (889) | | | (413) | | |
Income tax expense | (8,096) | | | (3,438) | | |
(Loss) income from continuing operations | $ | (60,170) | | | $ | 14,016 | | |
(1) Included in unallocated Operating expenses is $25.4 million of Goodwill and intangible impairment charge related to the Direct segment and $1.6 million of intangible impairment charge related to the Retail segment that is not included in the contribution performance measured by the chief operating decision maker. | |
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| As of |
| June 30, 2022 | | March 31, 2022 | | |
Assets: | | | | | |
Direct | $ | 61,067 | | | $ | 93,554 | | | |
Retail | 108,264 | | | 144,683 | | | |
Unallocated corporate | 59,807 | | | 75,808 | | | |
Total assets | $ | 229,138 | | | $ | 314,045 | | | |
The following customers accounted for 10% or more of total net sales as follows:
| | | Three-Months Ended June 30, | | | Three-Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 |
Amazon.com | Amazon.com | 17.9 | % | | 18.0 | % | | Amazon.com | 29.4% | | 17.9% |
Best Buy | Best Buy | 17.1 | % | | * | | Best Buy | * | | 17.1% |
| *Less than 10% of total net sales. | *Less than 10% of total net sales. | | | *Less than 10% of total net sales. | |
(14) BORROWINGS
Wells Fargo Bank Credit Agreement
On May 14,October 29, 2021, we amended theour Credit Agreement dated 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”Lenders”) (“Credit Agreement”), pursuant to which the. 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"“Credit Facility”). The aggregate principal amount available under the ABL Revolving Facility is $100.0 million (the “Revolver”), in each case, as such amounts may increase or decrease in accordance withsubject to a borrowing base. The unamortized balance on 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 thatTerm Loan was scheduled to commence February 1, 2022.$11.5 million. 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 millionmatures on October 29, 2026 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. Principalassets, with principal and interest amounts are required to be paid as scheduled.
As of June 30, 2022, outstanding borrowings totaled $37.2 million, with $9.8 million and $27.4 million under our Term Loan Facility and Revolver, respectively. As of June 30, 2022, we were in compliance with the financial covenants of the Credit Agreement and $35.1 million was available for borrowing under the ABL Revolving Facility.
Interest on the ABL Revolving FacilityRevolver will accrue at LIBORthe Secured Overnight Financing Rate ("SOFR") plus a margin of 1.75%1.86% to 2.25%2.36% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBORSOFR plus 4.50%4.61%. As of June 30, 2021,2022, our interest rate was 1.85%3.65% for the ABL Revolving FacilityRevolver and 4.60%6.40% 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) INCOME TAXES
Under ASC Topic 740, Accounting for Income Taxes, we must periodically evaluate deferred tax assets to determine if it is more-likely-than-not that the future tax benefits will be realized. If the negative evidence outweighs the positive, a valuation allowance must be recognized to reduce the net carrying amount of the deferred tax assets to the amount more-likely-than-not to be realized.
Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified. We generally consider the following, but are not limited to, objectively verified evidence to determine the likelihood of realization of the deferred tax assets:
•Our current financial position and our historical results of operations for recent years. We generally consider cumulative pre-tax losses in the three-year period ending with the current quarter or a projected three-year cumulative loss position within the next 12 months following the current quarter to be significant negative evidence.
•A pattern of objectively-measured historical and current financial reporting loss trend is heavily weighted as a source of negative evidence.
•Sources of taxable income of the appropriate character. Future realization of deferred tax assets is dependent on projected taxable income of the appropriate character. Future reversals of existing temporary differences are heavily weighted sources of objectively verifiable evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and current financial trends and can be reasonably estimated.
•Carry-back and carry-forward periods available. The carry-back and carry-forward periods permitted under the tax law are objectively verified evidence.
•Tax planning strategies. Tax planning strategies can be, depending on their nature, heavily-weighted sources of objectively verifiable positive evidence when the strategies are available and can be reasonably executed. We consider tax planning strategies only if they are feasible and justifiable considering our current operations and our strategic plan. Tax planning strategies, if executed, may accelerate the recovery of a deferred tax asset so the tax benefit of the deferred tax asset can be carried back.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant new piece of objective negative evidence evaluated was the three-year cumulative losses projected to incur within the next twelve months.
Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
Based on this evaluation, as of June 30, 2022, Management determined that it was no longer more likely than not that the tax benefits from the existing U.S deferred tax assets would be realized. Accordingly, we recorded a $14.2 million valuation allowance in the first quarter of fiscal 2023 against our domestic uncovered net deferred tax assets.
(16) COMMITMENTS AND CONTINGENCIES
Operating leases
We lease property and equipment under non-cancellable operating leases which, in the aggregate, extend through 2029. Many of these leases contain renewal options and provide for rent escalations and payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
For additional information related to leases, see Note 8, Leases.
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of June 30, 2021,2022, we had standby letters of 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 June 30, 2021,2022, we had approximately $174.9$34.5 million compared to $216.3$39.8 million as of March 31, 20212022 in non-cancelablenon-cancellable market-based purchase obligations, primarily to securedsecure additional factory capacity for inventory purchases in the next twelve months. The decrease in purchase obligations was primarily due to having received much of the inventory we have ordered for the season. 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,
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 June 30, 2021.2022.
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.
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, other than as discussed below, 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.
As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
During the second quarter of fiscal 2022, we recorded a $4.7 million loss contingency related to a legal settlement involving a class action lawsuit related to advertisement of our treadmills. The settlement included damages, a one-year free membership to JRNY®, and administrative fees and was included as a component of General and administrative on our Condensed Consolidated Statements of Operations. As of June 30, 2022, $4.6 million remained accrued and was reflected in Accrued liabilities on our Condensed Consolidated Balance Sheets. We expect to pay the settlement damages and related administrative fees during the second fiscal quarter of fiscal 2023.
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 fiscal year ended DecemberMarch 31, 20202022 (the “2020“2022 Form 10-K”). All references to the first quarterquarters of 2021fiscal 2023 and 2020fiscal 2022 mean for the three-month periodsperiod ended June 30, 20212022 and 2020,2021, 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.
Cautionary Notice About 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 20202022 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. Weexperiences and are committed to buildbuilding 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.
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 seasonOur results 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 impacted2022, are driven by strong demand driven bythe actions outlined in our North Star strategy and the at home fitness surge.strategy. The five strategic pillars of our North Star arestrategy are: (1) Adopt a consumer first mindset; (2) Scale a differentiated digital offering; (3) Focus investments on core businesses; (4) Evolve supply chain to be a strategic advantage; and (5) Build organizational capabilities to win by unleashing the power of our team. We willintend to 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.
At the center of health and well-being is fitness and the market has so far behaved largely as we expected. The market size more than doubled over the past 2 years, is regulating from its peak with more normal seasonality, and we expect will settle at a “new normal” significantly above pre-pandemic levels based on a profound evolution in consumers’ workouts and workplace habits. As a result of these changed habits and sentiments, we continue to believe much of the industry growth opportunity will remain at elevated levels relative to pre-pandemic. This results in stronger opportunity for our industry and Nautilus.
For fiscal 2023, we expect to return to a more typical pre-pandemic seasonality, with the second half of the fiscal year contributing more of the full year's revenue. Additionally, to gauge sales growth and progress against more "normalized," or pre-pandemic results, we will rely more heavily on measuring performance of fiscal 2023 sales growth versus the pre-pandemic twelve-month period ended March 31, 2020 ("fiscal 2020") to guide business strategy, rather than measuring performance against the atypical, outsized results that occurred during the pandemic.
Comparison for the Three-Months Ended June 30, 2022 to the Three-Months ended June 30, 2021
•Net sales for the three-months ended June 30, 2021 were $54.8 million, compared to $184.6 million, reflecting a 61.7% increase asdecline of 70.3% versus last year. Net sales are up 11%, or 3% CAGR, when compared to net sales of $114.2 million for the three-months ended June 30, 2020. Sales were up 74.4%,same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in October 2020.Sales growth was2020. The sales decline versus last year is 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.return to pre-pandemic seasonal demand.
•Net sales of our Direct segment increaseddecreased by $13.0$36.9 million, or 25.7%58.2%, for the three-months ended June 30, 2021,2022, compared to the three-months ended June 30, 2020.2021. The net sales decrease was primarily driven by higher sales discounting and the return to pre-pandemic seasonal demand.
•Net sales of our Retail segment increaseddecreased by $57.5$93.0 million, or 91.4%77.2%, for the three-months ended June 30, 2021,2022, compared to the three-months ended June 30, 2020.2021. Excluding sales related to the Octane brand, which was sold in 2020, net sales grew 120.7%.were down 2%, or a -1% CAGR, compared to the same period in fiscal 2020. The decrease in sales compared to last year is primarily driven by lower cardio sales and higher sales discounting as Retailers work through higher-than-normal inventory levels.
•Royalty income for the three-months ended June 30, 2021 decreased2022 increased by $0.1$0.2 million compared to the three-months ended June 30, 2020.2021.
•Gross profit for the three-months ended June 30, 2021 was $7.0 million, compared to $55.5 million reflecting a 17.1% increase aslast year. Gross profit margins were 12.7% 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.last year. The 11.417.4 ppt decrease in gross margins was primarily due to: higher landed product costs driven by inflationary price increasesto increased discounting (-8 ppts), unfavorable logistics overhead absorption (-8 ppts) and increased investments in commodities and components, foreign exchange, and elevated transportation costs, partiallyJRNY® (-4 ppts), offset by sales price increases (-6improvements in other costs (3 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$58.1 million, a decreasean increase of $16.9$20.5 million, or 30.9%54.5%, as compared to operating expenses of $54.5 million for the three-months ended June 30, 2020,last year, primarily due to the $29.0a goodwill and intangible impairment charge of $27.0 million loss on disposal group for the same period last yearand a $3.6 million increase in JRNY® investments, partially offset by increased$5.7 million lower media spending and $2.7 million lower other variable selling and marketing expenses as the Direct business returneddue to more normalized levels of advertising and the company invested in incremental brand marketing.decreased sales. Total advertising expenses were $11.6$5.1 million this year versus $2.8$10.8 million last year. General and administrative expenses and product development expenses also increased versus
•Operating loss was $51.2 million or negative 93.4% operating margin, compared to operating income of $17.9 million last year, primarily driven by investments in JRNY®.a goodwill and intangible impairment charge of $27.0 million and lower gross profit associated with lower sales demand during the period.
•Operating income for the three-months ended June 30, 2021Loss from continuing operations was $17.9$60.2 million, or 9.7% operating margin, a $25.0 million improvement$(1.92) per diluted share, compared to an operating lossincome of $7.1$14.0 million, for the three-months ended June 30, 2020. JRNY® investments were $4.6 million this year versus $1 millionor $0.43 per diluted share, 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 operationsNet loss was $14.0$60.2 million, for the three-months ended June 30, 2021,or $(1.92) per diluted share, compared to net income of $13.9 million 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.
•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.last year.
•The effectiveincome tax rates forexpense was $8.1 million this year compared to $3.4 million last year. The income tax expense this year was primarily a result of a U.S. deferred tax asset valuation allowance in the three-months ended June 30, 2021 and for the three-months ended amount of $14.2 million recorded this quarter.
June 30, 2020 were 19.7% and 32.0%, respectively.
North Star Strategy Update
JRNY® updateDigital Platform
•Nautilus Inc. continuesis continuing to enhance the JRNY® platform creatingthrough many unique features including the expansion of differentiated connected fitnessvisual 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.Members.
Today, Nautilus also announced a strategic partnership with digital fitness provider, FitOn. Under the agreement, JRNY•® members will have access to hundredsAs of off-product workouts through the JRNY® digitalJune 30, 2022, Members of JRNY®, Nautilus’ personalized connected fitness platform, exceeded 360k representing approximately 133% growth versus the same quarter last year. Of these members, 127k were Subscribers, representing approximately 290% growth over the same period. We define JRNY® Members as all individuals who have a JRNY® account and/or subscription, which includes Subscribers, their respective associated users and appusers who consume free content. We define Subscribers as a person or household who paid for a Subscription, are in a trial, or have requested a "pause"' to keep members engagedtheir subscriptions for up to three months.
•Additionally, the Company has made great strides over the last two years expanding the number of products featuring JRNY® connectivity. In FY 2022, approximately 80% of total units sold were JRNY® compatible, compared to only 22% in the pre-pandemic FY 2020. The trend of approximately 80% of total units sold being JRNY® compatible continued in Q1 FY 2023.
•Nautilus' integration of VAY's motion-tracking capabilities into JRNY® will further advance and reaching their fitness goals.accelerate personalized strength workout options, including the addition of rep counting and form coaching for SelectTech® users, which we believe will drive JRNY® membership growth during FY 2023.
Forward Looking Guidance
Second Quarter FiscalThe following forward-looking statements reflect the Company's full fiscal year 2023 expectations as of August 9, 2022, and are subject to risks and uncertainties.
•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 yearis reiterating Second Half and versus the same period two years ago for the next few quarters.Full Year 2023 Guidance.
•Demand curves for the Direct segment in Q1Second Half 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.Fiscal 2023
•The Company expects total company net sales for the 2nd quarterfull year revenue of fiscal 2022 to be between $145$380 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.$460 million.
•Given these investments and the external macro pressure on gross margin,impact of elevated inventory levels at the Company’s retail partners, the Company expects operating marginsthe 2nd half of the year to be in the low single digits.
Back Halfrepresent between 65% and 70% of Fiscal 2022
•The Company expects to continue investing in North Star on a “pay as we go” basis.full year sales, slightly higher than pre-pandemic 2nd half seasonality of approximately 60%.
•Gross margins for the second half of the year are expected to be in the range of 27% to 30%. Improvements versus last year are driven by lower in-bound freight and demurrage fees, and the reduction in logistics facilities footprint. The Company assumes that the external macro factors negatively affecting gross margins will continue in Q3 and Q4. Although it’s unclearis closing one of its distribution centers when the pressureassociated lease expires in the Fall of 2022 and will ease,not be renewing the Company expects that over time, prices will stabilize and eventually return closer to pre-pandemic levels.leases of some storage locations.
•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 toWe expect full year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY® investments.
members to exceed 500,000 at March 31, 2023.
•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 unableunprecedented rate and as the pandemic lessened there was a return 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.a more normal seasonality. We cannot predict with certainty the longer-term impacts of the COVID-19 pandemic and the change to consumer habits and sentiments and therefore, the impact on our results of operations is uncertain.
Our gross margins are being impacted by, fluctuationsamong other things:
•Increased product costs, primarily driven by our increasing use of more expensive components in our products, which now include our connected fitness JRNY® platform.
•Fluctuations in the availability, and as a result the costs, or availability of materials used to manufacture our products, tariffs,products.
•Tariffs and expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations
•Fluctuations in cost associated with the acquisition or license of products and technologies, product warranty costs, the cost ofclaims, fuel, foreign currency exchange rates, and changes in costs of other distribution or manufacturing-related services.
•Costs relating to the addition of a new distribution facility in Southern California prior to the anticipated exit from our Portland DC facility.
•The efficiency and effectiveness of our organization and operations.
•A return to product discounting practices in place prior to the pandemic, which were temporarily suspended in part during the pandemic.
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, websites 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 20202022 Form 10-K as supplemented by our quarterly reports on Form 10-Q.
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 as of December 31, 2012. Although there was no revenue related to the former Commercial business in either the 2021fiscal 2022 or 2020year-to-date fiscal 2023 periods, we continue to incur product liability and other legal expenses associated with product previously sold into the Commercial channel.
RESULTS OF OPERATIONS
Results of operations information was as follows (dollars in(in thousands):
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| Three-Months Ended June 30, | | Change |
| 2021 | | 2020 | | $ | | % |
Net sales | $ | 184,593 | | | $ | 114,188 | | | $ | 70,405 | | | 61.7 | % |
Cost of sales | 129,088 | | | 66,792 | | | 62,296 | | | 93.3 | % |
Gross profit | 55,505 | | | 47,396 | | | 8,109 | | | 17.1 | % |
Operating expenses: | | | | | | | |
Selling and marketing | 21,300 | | | 12,446 | | | 8,854 | | | 71.1 | % |
General and administrative | 11,523 | | | 9,315 | | | 2,208 | | | 23.7 | % |
Research and development | 4,815 | | | 3,728 | | | 1,087 | | | 29.2 | % |
Loss on disposal group | — | | | 29,013 | | | (29,013) | | | (100.0) | % |
Total operating expenses | 37,638 | | | 54,502 | | | (16,864) | | | (30.9) | % |
Operating income (loss) | 17,867 | | | (7,106) | | | 24,973 | | | (351.4) | % |
Other expense: | | | | | | | |
Interest income | 21 | | | 1 | | | 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 taxes | 17,454 | | | (7,328) | | | 24,782 | | | |
Income tax expense (benefit) | 3,438 | | | (2,342) | | | 5,780 | | | |
Income (loss) from continuing operations | 14,016 | | | (4,986) | | | 19,002 | | | |
Loss from discontinued operations, net of income taxes | (132) | | | (124) | | | (8) | | | |
Net income (loss) | $ | 13,884 | | | $ | (5,110) | | | $ | 18,994 | | | |
*Not meaningful
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| Three-Months Ended June 30, | | Change |
| 2022 | | 2021 | | $ | | % |
Net sales | $ | 54,817 | | | $ | 184,593 | | | $ | (129,776) | | | (70.3) | % |
Cost of sales | 47,860 | | | 129,088 | | | (81,228) | | | (62.9) | % |
Gross profit | 6,957 | | | 55,505 | | | (48,548) | | | (87.5) | % |
Operating expenses: | | | | | | | |
Selling and marketing | 12,891 | | | 21,300 | | | (8,409) | | | (39.5) | % |
General and administrative | 12,463 | | | 11,523 | | | 940 | | | 8.2 | % |
Research and development | 5,823 | | | 4,815 | | | 1,008 | | | 20.9 | % |
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Goodwill and intangible impairment charge | 26,965 | | | — | | | 26,965 | | | NM |
Total operating expenses | 58,142 | | | 37,638 | | | 20,504 | | | 54.5 | % |
Operating (loss) income | (51,185) | | | 17,867 | | | (69,052) | | | (386.5) | % |
Other expense: | | | | | | | |
Interest income | 1 | | | 21 | | | (20) | | | |
Interest expense | (376) | | | (314) | | | (62) | | | |
Other, net | (514) | | | (120) | | | (394) | | | |
Total other expense, net | (889) | | | (413) | | | (476) | | | |
(Loss) income from continuing operations before income taxes | (52,074) | | | 17,454 | | | (69,528) | | | |
Income tax expense | 8,096 | | | 3,438 | | | 4,658 | | | |
(Loss) income from continuing operations | (60,170) | | | 14,016 | | | (74,186) | | | |
Loss from discontinued operations, net of taxes | (7) | | | (132) | | | 125 | | | |
Net (loss) income | $ | (60,177) | | | $ | 13,884 | | | $ | (74,061) | | | |
NM = Not meaningful | | | | | | | |
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Results of operations information by segment and major product lines was as follows (dollars in thousands):
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| 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 | % |
Direct | 63,396 | | | 50,433 | | | 12,963 | | | 25.7 | % |
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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 | % |
Retail | 120,484 | | | 62,948 | | | 57,536 | | | 91.4 | % |
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Royalty | 713 | | | 807 | | | (94) | | | (11.6) | % |
| $ | 184,593 | | | $ | 114,188 | | | $ | 70,405 | | | 61.7 | % |
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Cost of sales: | | | | | | | |
Direct | $ | 38,882 | | | $ | 22,910 | | | $ | 15,972 | | | 69.7 | % |
Retail | 90,206 | | | 43,882 | | | 46,324 | | | 105.6 | % |
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| $ | 129,088 | | | $ | 66,792 | | | $ | 62,296 | | | 93.3 | % |
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Gross profit: | | | | | | | |
Direct | $ | 24,514 | | | $ | 27,523 | | | $ | (3,009) | | | (10.9) | % |
Retail | 30,278 | | | 19,066 | | | 11,212 | | | 58.8 | % |
Royalty | 713 | | | 807 | | | (94) | | | (11.6) | % |
| $ | 55,505 | | | $ | 47,396 | | | $ | 8,109 | | | 17.1 | % |
Gross margin: | | | | | | | |
Direct | 38.7 | % | | 54.6 | % | | (1,590) | | basis points |
Retail | 25.1 | % | | 30.3 | % | | (520) | | basis points |
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Contribution: | | | | | | | |
Direct | $ | 6,759 | | | $ | 16,995 | | | (10,236) | | | (60.2) | % |
Retail | 22,090 | | | 11,613 | | | 10,477 | | | 90.2 | % |
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Contribution rate: | | | | | | | |
Direct | 10.7 | % | | 33.7 | % | | (2,300) | | basis points |
Retail | 18.3 | % | | 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. |
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| Three-Months Ended June 30, | | Change |
| 2022 | | 2021 | | $ | | % |
Net sales: | | | | | | | |
Direct net sales: | | | | | | | |
Cardio products(1) | $ | 17,133 | | | $ | 31,430 | | | $ | (14,297) | | | (45.5) | % |
Strength products(2) | 9,343 | | | 31,966 | | | (22,623) | | | (70.8) | % |
Direct | 26,476 | | | 63,396 | | | (36,920) | | | (58.2) | % |
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Retail net sales: | | | | | | | |
Cardio products(1) | $ | 11,843 | | | $ | 89,924 | | | $ | (78,081) | | | (86.8) | % |
Strength products(2) | 15,601 | | | 30,560 | | | (14,959) | | | (48.9) | % |
Retail | 27,444 | | | 120,484 | | | (93,040) | | | (77.2) | % |
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Royalty | 897 | | | 713 | | | 184 | | | 25.8 | % |
| $ | 54,817 | | | $ | 184,593 | | | $ | (129,776) | | | (70.3) | % |
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Cost of sales: | | | | | | | |
Direct | $ | 21,914 | | | $ | 38,882 | | | $ | (16,968) | | | (43.6) | % |
Retail | 25,946 | | | 90,206 | | | (64,260) | | | (71.2) | % |
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| $ | 47,860 | | | $ | 129,088 | | | $ | (81,228) | | | (62.9) | % |
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Gross profit: | | | | | | | |
Direct | $ | 4,562 | | | $ | 24,514 | | | $ | (19,952) | | | (81.4) | % |
Retail | 1,498 | | | 30,278 | | | (28,780) | | | (95.1) | % |
Royalty | 897 | | | 713 | | | 184 | | | 25.8 | % |
| $ | 6,957 | | | $ | 55,505 | | | $ | (48,548) | | | (87.5) | % |
Gross profit margin: | | | | | | | |
Direct | 17.2 | % | | 38.7 | % | | (2,150) | | basis points |
Retail | 5.5 | % | | 25.1 | % | | (1,960) | | basis points |
| | | | | | | |
Contribution: | | | | | | | |
Direct | $ | (9,893) | | | $ | 6,759 | | | $ | (16,652) | | | (246.4) | % |
Retail | (5,408) | | | 22,090 | | | (27,498) | | | (124.5) | % |
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Contribution rate: | | | | | | | |
Direct | (37.4) | % | | 10.7 | % | | (4,810) | | basis points |
Retail | (19.7) | % | | 18.3 | % | | (3,800) | | basis points |
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(1) Cardio products include: connected-fitness bikes, the Bowflex® C6, VeloCore®, Schwinn® IC4, Max Trainer®,connected-fitness treadmills, other exercise bikes, ellipticals andsubscription services. |
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories. |
Sales and Gross Profit
Direct Segment
Comparison of Segment Results for the Three-Month Period Ended June 30, 2022 to the Three-Month Period Ended June 30, 2021
Net sales were $26.5 million for the three-monthsthree-month period ended June 30, 2021 were2022, compared to $63.4 million, a decline of 58.2%, versus the same period in 2021, and up 25.7%, from $50.427.1% compared to the same period in fiscal 2020. Net sales decrease was primarily driven by the return to pre-pandemic seasonal demand and higher sales discounting.
Cardio sales declined 45.5% versus the same period in 2021, and were up 6.5% compared to the same period in fiscal 2020. Lower cardio sales this quarter were primarily driven by lower bike demand. Strength product sales declined 70.8% versus the same period in 2021, and increased 96.7% compared to the same period in fiscal 2020. Lower strength sales this quarter were primarily driven by lower demand for SelectTech® weights.
The Direct segment ended the quarter with $0.4 million inof backlog as of June 30, 2022, as product demand has declined compared the same period last year. These amounts represent unfulfilled consumer orders net of current promotional programs and sales discounts.
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 that are no longer available for sale this year and a decline in sales of the Schwinn® IC4 Bowflex® C6 bikes thatGross profit margin was partially offset by VeloCore® sales.
Gross margin rate17.2% for the three-monthsthree-month period ended June 30, 2021 was2022 versus 38.7%, down 15.9%, from 54.6% in for the same period last year.in 2021. The 15.921.5 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6
increased discounting (-8 ppts), higher outbound freight costs (-6unfavorable logistics overhead absorption (-7 ppts), deleveraging of fixed costs as direct sales grew slower than retail’s (-2 ppts), a strategic decision to end production of select SKUs (-1 ppt), and increased investments in JRNY®(-1 ppt) (-7 ppts). Gross profit was $24.5$4.6 million, down 10.9%81.4% 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.in 2021.
Segment contribution incomeloss was $9.9 million for the three-monthsthree-month period ended June 30, 2021 was $6.8 million or 10.7%, down 60.2%,2022, compared to segment contribution income of $17.0$6.8 million or 33.7% for the same period last year.in 2021. The $10.2 million decline was primarily driven by lower gross profit, and the return to normalized levels ofas explained above, offset by decreased media spend. Advertising expenses were $5.2 million compared to $8.0 million for the three-months ended June 30, 2021 compared to $2.4 million last year.same period in 2021.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the three-monthsthree-month period ended June 30, 20212022 were 53.0%53.8%, compared to 48.4% in53.0% for the same period of 2020.in 2021. The increase in approval ratesapprovals reflects higher credit quality applications.
Retail Segment
Retail segment sales
Comparison of $120.5 millionSegment Results for the three-months endedThree-Month Period Ended June 30, 2021,2022 to the best quarterly sales in segment history.Three-Month Period Ended June 30, 2021
Net sales for the three-monthsthree-month period ended June 30, 20212022 were up 91.4%$27.4 million, down 77.2%, from $62.9$120.5 million for the same period last year, or 120.7% excludingin 2021. Excluding sales related to Octane, net sales were down 2% compared to the Octane brand.same period in fiscal 2020. Retail segment sales outside the United States and Canada grew 70%, or 102% excluding Octane.were down 83.4% versus last year. The decrease in sales compared to last year is primarily driven by lower cardio sales and higher sales discounting as Retailers work through higher than normal inventory levels.
Cardio sales for the three-month period ended June 30, 2022 decreased by 86.8%. Excluding sales related to Octane, cardio sales were down 28.7% compared to the same period in fiscal 2020. Strength product sales grewdeclined by 119.3%,48.9% versus last year. Strength sales were up 36.8% compared to the same period in fiscal 2020, led by ourthe popular SelectTech® weights and benches and Bowflex® Home Gyms. CardioSelectTech® weights. The decrease in sales increased by 83.5%,compared to a historical record,last year is primarily driven by connected-fitness bikeslower bike sales and treadmills.higher sales discounting as Retailers work through higher than normal inventory levels.
Gross margin rate forAs of June 30,2022, the three-months ended June 30, 2021 was 25.1%, down from 30.3% inRetail segment's backlog totaled $48.0 million, as retailers are now ordering closer to time of need compared to the same period last year. These amounts represent customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers.
Gross profit margins were 5.5% for the three-month period ended June 30, 2022, down from 25.1% for the same period in 2021. The 5.219.6 ppt decrease in gross margin was primarily driven by: higher landed product costs (-6increased discounting (-11 ppts), and unfavorable logistics overhead absorption (-9 ppts). Gross profit was $1.5 million, a strategic decision to end productiondecrease of select SKUs (-1 ppt), offset by leverage on fixed costs as retail segment sales grew faster than direct segment sales (+2 ppts).Gross profit95.1% versus the same period in 2021.
Segment contribution loss for the three-monthsthree-month period ended June 30, 20212022 was $30.3$5.4 million, an increaseor 19.7% of 58.8%sales, compared to gross profit of $19.1 million same period last year.
Segmentsegment contribution income for the three-months ended June 30, 2021 wasof $22.1 million, or 18.3%, compared to $11.6 million or 18.4% of sales for the same period last year,in 2021, primarily driven by higherlower gross profit and expense leverage.as explained above.
Royalty
Royalty income increased by $0.2 million, or 25.8%, to $0.9 million for the three-month period ended June 30, 2022, compared to the same period of 2021, primarily due to royalty settlements.
Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, sales incentives related to our JRNY® platform and other programs.
Selling and marketing information was as follows (dollars in thousands):
| | | Three-Months Ended June 30, | | Change | | Three-Months Ended June 30, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Selling and marketing | Selling and marketing | $21,300 | | $12,446 | | $8,854 | | 71.1% | Selling and marketing | $ | 12,891 | | | $ | 21,300 | | | $ | (8,409) | | | (39.5)% |
As % of net sales | As % of net sales | 11.5% | | 10.9% | | As % of net sales | 23.5 | % | | 11.5 | % | |
The increasedecrease in selling and marketing expense inexpenses for the three-month period ended June 30, 2021 as2022 compared to the same period of 20202021 was primarily related to a $5.6decrease of $5.7 million increase in Direct media advertisingspend and a $3.1decrease of $2.7 million increase for brand marketing.in other variable selling and marketing expenses due to decreased sales. We expect variable selling and marketing expenses to continue to flex with sales.
Media advertising expense
of our Direct business is the largest component of selling and marketing and was as follows (dollars in thousands):
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| Three-Months Ended June 30, | | Change |
| 2022 | | 2021 | | $ | | % |
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Total advertising | $ | 5,120 | | | $ | 10,824 | | | $ | (5,704) | | | (52.7)% |
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| Three-Months Ended June 30, | | Change |
| 2021 | | 2020 | | $ | | % |
Media advertising | $8,016 | | $2,385 | | $5,631 | | 236.1% |
As % of net sales | 4.3% | | 2.1% | | | | |
The increase$5.7 million decrease in media advertising expense for the three-month period ended June 30, 20212022, as compared to the same period of 2020 was primarily due the2021 reflects a return to normalizedmore historical, pre-pandemic levels of media spend.advertising support to preserve market share and control costs. Advertising as a percentage of selling and marketing for the three-month period ended June 30, 2022 was 39.7% as compared to 50.8% for the same quarter last year and 37.2% for the same period in fiscal 2020.
General and Administrative
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with the executive team, finance, legal, IT, facilities, certain human resources and other administrative personnel, and other administrative fees.
General and administrative expenses was as follows (dollars in thousands):
| | | Three-Months Ended June 30, | | Change | | Three-Months Ended June 30, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2022 | | 2021 | | $ | | % |
General and administrative | General and administrative | $11,523 | | $9,315 | | $2,208 | | 23.7% | General and administrative | $ | 12,463 | | | $ | 11,523 | | | $ | 940 | | | 8.2% |
As % of net sales | As % of net sales | 6.2% | | 8.2% | | As % of net sales | 22.7 | % | | 6.2 | % | |
The increase in general and administrative expenses were higher for the three-monthsthree-month period ended June 30, 20212022 compared to the same period of 20202021 was primarily driven bydue to increases in IT, and for short-term incentive and personnel costs.
Research and Development
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.
Research and development expenses werewas as follows (dollars in thousands):
| | | Three-Months Ended June 30, | | Change | | Three-Months Ended June 30, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Research and development | Research and development | $4,815 | | $3,728 | | $1,087 | | 29.2% | Research and development | $ | 5,823 | | | $ | 4,815 | | | $ | 1,008 | | | 20.9% |
As % of net sales | As % of net sales | 2.6% | | 3.3% | | As % of net sales | 10.6 | % | | 2.6 | % | |
The increase in research and development expenses for the three-month period ended June 30, 20212022, as compared to the same period of 20202021, was driven primarily driven by an increaseincreased investments in investment for our digital platform JRNY®, which more than offset savings associated with the divestiture of Octane.our digital platform.
Loss on Disposal GroupGoodwill and Intangible Impairment Charge
In accordance with ASC 350 — Intangibles — Goodwill and Other, we perform a goodwill and indefinite-lived asset impairment evaluation during the fourth quarter of each year. However, as a result of the decline in our market value relative to the market and our industry, which was identified as a triggering event, we performed an interim evaluation and a market capitalization reconciliation during the first quarter of fiscal 2023, which resulted in a non-cash goodwill and indefinite-lived intangible assets impairment charge of $27.0 million.
ASC 350 requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, growth rates and terminal value. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also use market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses.
In accordance with ASC 360 — Property, Plant, and Equipment and other long-lived assets, we perform a test for recoverability when triggering events occur. No impairment was recognized 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 Octane Fitness brand name which was sold in October 2020.2022.
Interest ExpenseFor additional information related to our goodwill and intangible impairment charge, see Note 7
Interest expense
Operating (Loss) Income
Operating loss for the three-months ended June 30, 2022 was nearly flat at $0.3$51.2 million, a decrease of $69.1 million, or 386.5%, as compared to an operating income of $17.9 million for the three-monthsame period ended June 30, 2021of 2021. The decrease was primarily driven by a goodwill and June 30, 2020.intangible impairment charge of $27.0 million and lower gross profit associated with lower sales and lower gross margins during the period.
Other, Net
Other, net primarily relates to the effect of exchange rate fluctuations betweenwith the U.S. and our foreign subsidiaries and foreign exchange derivative contracts.subsidiaries.
Income Tax Expense (Benefit)
Income tax provisionexpense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.
Income tax expense (benefit) was as follows (dollars in(in thousands):
| | | Three-Months Ended June 30, | | Change | | Three-Months Ended June 30, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Income tax expense (benefit) | $3,438 | | $(2,342) | | $5,780 | | (246.8)% | |
Income tax expense | | Income tax expense | $ | 8,096 | | | $ | 3,438 | | | $ | 4,658 | | | 135.5% |
Effective tax rate | Effective tax rate | 19.7% | | 32.0% | | Effective tax rate | (15.5) | % | | 19.7 | % | |
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Income tax expense for the three-months ended June 30, 2022 was primarily a result of the U.S. deferred tax asset valuation allowance in the amount of $14.2 million recorded during the period. Income tax expense for the three-months ended June 30, 2021 was primarily driven by the profit generated in the U.S.
The incomeeffective tax expenserate from continuing operations for the three-monthsthree-month period ended June 30, 2022, was primarily as a result of the aforementioned U.S deferred tax asset valuation allowance to reduce the existing U.S domestic deferred tax assets to their anticipated realizable value.
The effective tax rate from continuing operations for the three-month period ended June 30, 2021 was a result of the profit generated in the U.S. The reduced effective tax rate for the same period was primarily due toU.S offset by the excess tax benefit related to stock-based compensation recognized as a current period benefit through the Condensed Consolidated Statements of Operations.compensation.
The income tax benefit and effective tax rate(Loss) Income from Continuing Operations
Loss from continuing operations was $60.2 million for the same periodthree-months ended June 30, 2022, or $(1.92) per diluted share, compared to income from continuing operations of $14.0 million, or $0.43 per diluted share, for the prior year werethree-months ended June 30, 2021. The decrease in income from continuing operations was primarily due to the loss recordedlower gross profit and higher operating expenses as a result of the held-for-sale valuation of our Octane Fitness disposal groupdiscussed in the quarter.more detail above.
Net (Loss) Income
Net loss was $60.2 million for the three-months ended June 30, 2022, compared to net income of $13.9 million for the three-months ended June 30, 2021. Net loss per diluted share was $(1.92) for the three-months ended June 30, 2022, compared to net income per diluted share of $0.43 for the three-months ended June 30, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
As of June 30, 2021,2022, we had $82.8$8.7 million of cash, cash equivalents and restricted cash, and available-for-sale securities, and $53.6$35.1 million was available for borrowing under the ABL Revolving Facility, compared to $113.2$14.2 million of cash, cash equivalents and restricted cash, and available-for-sale securities, and $54.4$65.8 million was available for borrowing under the ABL Revolving Facility as of March 31, 2021.2022. We expect our cash, cash equivalents, restricted cash and investments and amounts available for borrowing under our Wells Fargo FinancingCredit Facility as of June 30, 2021,2022, 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 June 30, 2021.2022.
Cash used in operating activities was $6.0 million for the three-month period ended June 30, 2022, compared to cash used in operating activities of $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, 2020.2021. The decrease in cash flows from operating activities for the three-month period ended June 30, 20212022 as compared to the same period of 20202021 was primarily due to changes in our operating assets and liabilities discussed below, partially offset by the increasedecrease in net income.
Trade receivables increased by $9.5 milliondecreased to $98.2$27.5 million as of June 30, 2021,2022, compared to $88.7$61.5 million as of March 31, 2021,2022, primarily was due to timing of customer payments on increased sales. Trade receivables as of June 30, 2021 compared to June 30, 2020 increased by $64.4 million due tolower sales and the timing of customer payments on increased sales.payments.
Inventory was $111.1$103.9 million as of June 30, 2022, compared to $68.1$111.2 million as of March 31, 2021.2022. The increasedecrease in inventory iswas driven by thesell-through and strategic decision to increasedemand planning as we balance on-hand inventory levels ahead of the fitness season given continued disruption in global logistics. More than 60%season. About 8% of inventory as of June 30, 20212022 was in-transit. Inventories as of June 30, 2021 compared to June 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$2.6 million to $15.7$12.0 million, compared to $25.8$14.5 million as of March 31, 2021,2022, primarily relateddue to other short-term deposits for inventory.decreases in prepaid marketing and prepaid insurance.
Trade payables increaseddecreased by $15.7$26.4 million to $114.6$26.8 million as of June 30, 2021,2022, compared to $98.9$53.2 million as of March 31, 2021,2022, primarily due to timing of payments for inventory.
Accrued liabilities decreased by $5.1$5.0 million to $14.5$24.4 million as of June 30, 2021,2022, compared to $19.6$29.4 million as of March 31, 2021,2022, primarily due to deferred revenue liabilities.
$2.8 million and decreases in accrued personnel expenses of $1.2 million.
Cash provided byused in investing activities of $15.3$3.4 million for the three-month period ended June 30, 20212022 was primarily due to proceeds from sales and maturities of available-for-sale securities.capital purchases related to our digital platform. We anticipate spending between $12.0 million and $14.0 million in 2022fiscal 2023 for digital platform enhancements, systems integration, and production tooling.
Cash used inprovided by financing activities of $1.1$7.1 million for the three-month period ended June 30, 20212022 was primarily related to taxproceeds from long-term debt offset by payments related to stock award issuances.on long-term debt.
Financing Arrangements
On May 14,October 29, 2021, we amended theour Credit Agreement dated 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”Lenders”) (“Credit Agreement”), pursuant to which the. 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"“Credit Facility”). The aggregate principal amount available under the ABL Revolving Facility is $100.0 million (the “Revolver”), in each case, as such amounts may increase or decrease in accordance withsubject to a borrowing base. The unamortized balance on 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 thatTerm Loan was scheduled to commence February 1, 2022.$11.5 million. 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 millionmatures on October 29, 2026 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. Principalassets, with principal and interest amounts are required to be paid as scheduled.
As of June 30, 2022, outstanding borrowings totaled $37.2 million, with $9.8 million and $27.4 million under our Term Loan Facility and Revolver, respectively. As of June 30, 2022, we were in compliance with the financial covenants of the Credit Agreement and $35.1 million was available for borrowing under the ABL Revolving Facility.
Interest on the ABL Revolving FacilityRevolver will accrue at LIBORthe Secured Overnight Financing Rate ("SOFR") plus a margin of 1.75%1.86% to 2.25%2.36% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBORSOFR plus 4.50%4.61%. As of June 30, 2021,2022, our interest rate was 1.85%3.65% for the ABL Revolving FacilityRevolver and 4.60%6.40% 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.
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, 2021,2022, we had approximately $174.9approximately $34.5 million,, compared to $216.3$39.8 million as of March 31, 20212022 in non-cancelablenon-cancellable 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. The decrease in purchase obligations was primarily due to seasonality.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications.
Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at June 30, 2021.2022.
SEASONALITY
Prior to the COVID-19 pandemic,We expect our revenue from fitness equipment products variedto vary seasonally. Sales wereare typically strongest in theour fiscal third quarter ending December and fiscal fourth calendar quarter ending March and lowestare generally weakest in theour fiscal first quarter ending June and fiscal second calendar quarter as weending September. We believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment thisequipment. This seasonality hadcan have 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 other than goodwill from those discussed in our 2020fiscal 2022 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 newrecent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Exchange Risk
Our exposure toThere have been no material changes in our market risk from changesas compared to the disclosures in interest rates relates primarily to our cash equivalents, derivative assets and variable-rate debt obligations. Our cash equivalents mature within three-months or less from the date of purchase. Marketable securities with original maturities of greater than three-months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. We have classified our marketable securities as available-for-sale and, therefore, we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instrumentsPart II, Item 7A in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affectAnnual Report on Form 10-K for the market price or liquidity of certain securities withinyear ended March 31, 2022, filed with the portfolio.
Our negotiated credit facilities generally charge interest basedSEC 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 June 30, 2021, the outstanding balances on our credit facilities totaled $13.7 million.
We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. Total notional amounts outstanding as of June 30, 2021 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 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.3, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15 of the SecuritiesSecurities 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 Principal Executive Officer, and our Principal Financial Officer and Principal 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 Principal Executive Officer, and Principal Financial Officer, and Principal Accounting Officer, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this 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 Officer, and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three-months ended June 30, 2021,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
During the quarter ended September 30, 2022, we recorded a $4.7 million loss contingency related to a legal settlement involving a class action lawsuit related to advertisement of our treadmills. The settlement includes damages, a one-year free membership to JRNY, and administrative fees and was included as a component of General and administrative on our Condensed Consolidated Statements of Operations for the fiscal year ended March 31, 2022. As of June 30, 2022, $4.6 million remained accrued and was reflected in Accrued liabilities on our Condensed Consolidated Balance Sheets. We expect to pay the settlement damages and related administrative fees during the second fiscal quarter of fiscal 2023.
On June 27, 2022, the Court approved the settlement and no appeals were filed. We expect to fund the common fund prior to our next quarter ending September 30, 2022.
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 20202022 Form 10-K are not the only risks and uncertainties to which we are subject, and there may be other risk and uncertainties that presently are not currently considered material or are not known to us and therefore are not mentioned herein, maythat could impair our business or operations. If any of the risks described in our 20202022 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There has nothave been ano material changechanges to the risk factors as set forth in our 20202022 Form 10-K.
Item 6. Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
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Exhibit No. | | Description | |
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| | 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. | |
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| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
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| | 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. | |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
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101.SCH | | XBRL Taxonomy Extension Schema Document | |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | |
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* Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | NAUTILUS, INC. |
| | (Registrant) |
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August 9, 20212022 | | By: | /S/ James Barr IV |
Date | | | James Barr IV |
| | | Chief Executive Officer
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| | NAUTILUS, INC. |
| | (Registrant) |
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August 9, 20212022 | | By: | /S/ Aina E. Konold |
Date | | | Aina E. Konold |
| | | Chief Financial Officer
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