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 September 30,December 31, 2021
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 November 5, 2021February 4, 2022 was 31,176,24631,248,298 shares.
NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,DECEMBER 31, 2021
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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 |
| September 30, 2021 | | March 31, 2021 | | |
Assets | | | | | |
Cash and cash equivalents | $ | 20,179 | | | $ | 38,441 | | | |
Restricted cash | 1,339 | | | 1,339 | | | |
Available-for-sale securities | — | | | 73,448 | | | |
Trade receivables, net of allowances of $1,065 and $1,177 | 88,712 | | | 88,657 | | | |
Inventories | 162,669 | | | 68,085 | | | |
Prepaids and other current assets | 13,120 | | | 25,840 | | | |
Income taxes receivable | 2,404 | | | — | | | |
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Total current assets | 288,423 | | | 295,810 | | | |
Property, plant and equipment, net | 29,463 | | | 24,496 | | | |
Operating lease right-of-use assets | 24,540 | | | 19,108 | | | |
Goodwill | 24,508 | | | — | | | |
Other intangible assets, net | 9,334 | | | 9,365 | | | |
Deferred income tax assets, non-current | 2,950 | | | 2,144 | | | |
Income taxes receivable, non-current | 5,673 | | | — | | | |
Other assets - restricted, non-current | 3,887 | | | — | | | |
Other assets | 2,252 | | | 3,307 | | | |
Total assets | $ | 391,030 | | | $ | 354,230 | | | |
Liabilities and Shareholders' Equity | | | | | |
Trade payables | $ | 115,238 | | | $ | 98,878 | | | |
Accrued liabilities | 22,402 | | | 19,627 | | | |
Operating lease liabilities, current portion | 4,766 | | | 3,384 | | | |
Warranty obligations, current portion | 5,899 | | | 7,243 | | | |
Income taxes payable, current portion | 595 | | | 5,709 | | | |
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $83 | 3,250 | | | 3,000 | | | |
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Total current liabilities | 152,150 | | | 137,841 | | | |
Operating lease liabilities, non-current | 22,006 | | | 17,875 | | | |
Warranty obligations, non-current | 1,467 | | | 1,408 | | | |
Income taxes payable, non-current | 3,990 | | | 3,657 | | | |
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Other non-current liabilities | 4,908 | | | 607 | | | |
Debt payable, non-current, net of unamortized debt issuance costs of $194 and $236 | 13,998 | | | 10,297 | | | |
Total liabilities | 198,519 | | | 171,685 | | | |
Commitments and contingencies (Note 16) | 0 | | 0 | | |
Shareholders' equity: | | | | | |
Common stock - no par value, 75,000 shares authorized, 31,159 and 30,576 shares issued and outstanding | 3,058 | | | 2,176 | | | |
Retained earnings | 189,806 | | | 180,524 | | | |
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Accumulated other comprehensive loss | (353) | | | (155) | | | |
Total shareholders' equity | 192,511 | | | 182,545 | | | |
Total liabilities and shareholders' equity | $ | 391,030 | | | $ | 354,230 | | | |
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| As of |
| December 31, 2021 | | March 31, 2021 | | |
Assets | | | | | |
Cash and cash equivalents | $ | 18,402 | | | $ | 38,441 | | | |
Restricted cash | 1,339 | | | 1,339 | | | |
Available-for-sale securities | — | | | 73,448 | | | |
Trade receivables, net of allowances of $657 and $1,177 | 93,611 | | | 88,657 | | | |
Inventories | 128,113 | | | 68,085 | | | |
Prepaids and other current assets | 10,981 | | | 25,840 | | | |
Income taxes receivable | 8,103 | | | — | | | |
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Total current assets | 260,549 | | | 295,810 | | | |
Property, plant and equipment, net | 30,976 | | | 24,496 | | | |
Operating lease right-of-use assets | 24,534 | | | 19,108 | | | |
Goodwill | 24,510 | | | — | | | |
Other intangible assets, net | 9,319 | | | 9,365 | | | |
Deferred income tax assets, non-current | 4,554 | | | 2,144 | | | |
Income taxes receivable, non-current | 5,673 | | | — | | | |
Other assets - restricted, non-current | 3,887 | | | — | | | |
Other assets | 2,963 | | | 3,307 | | | |
Total assets | $ | 366,965 | | | $ | 354,230 | | | |
Liabilities and Shareholders' Equity | | | | | |
Trade payables | $ | 61,850 | | | $ | 98,878 | | | |
Accrued liabilities | 25,232 | | | 19,627 | | | |
Operating lease liabilities, current portion | 4,653 | | | 3,384 | | | |
Financing lease liabilities, current portion | 119 | | | — | | | |
Warranty obligations, current portion | 5,724 | | | 7,243 | | | |
Income taxes payable, current portion | 914 | | | 5,709 | | | |
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $83 | 2,217 | | | 3,000 | | | |
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Total current liabilities | 100,709 | | | 137,841 | | | |
Operating lease liabilities, non-current | 21,855 | | | 17,875 | | | |
Financing lease liabilities, non-current | 423 | | | — | | | |
Warranty obligations, non-current | 1,401 | | | 1,408 | | | |
Income taxes payable, non-current | 3,997 | | | 3,657 | | | |
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Other non-current liabilities | 4,301 | | | 607 | | | |
Debt payable, non-current, net of unamortized debt issuance costs of $173 and $236 | 53,594 | | | 10,297 | | | |
Total liabilities | 186,280 | | | 171,685 | | | |
Commitments and contingencies (Note 16) | 0 | | 0 | | |
Shareholders' equity: | | | | | |
Common stock - no par value, 75,000 shares authorized, 31,245 and 30,576 shares issued and outstanding | 4,879 | | | 2,176 | | | |
Retained earnings | 176,307 | | | 180,524 | | | |
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Accumulated other comprehensive loss | (501) | | | (155) | | | |
Total shareholders' equity | 180,685 | | | 182,545 | | | |
Total liabilities and shareholders' equity | $ | 366,965 | | | $ | 354,230 | | | |
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 September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Net sales | Net sales | $ | 137,959 | | | $ | 155,391 | | | $ | 322,552 | | | $ | 269,579 | | Net sales | $ | 147,258 | | | $ | 189,259 | | | $ | 469,810 | | | $ | 458,838 | |
Cost of sales | Cost of sales | 95,906 | | | 87,453 | | | 224,994 | | | 154,245 | | Cost of sales | 117,342 | | | 111,388 | | | 342,336 | | | 265,633 | |
Gross profit | Gross profit | 42,053 | | | 67,938 | | | 97,558 | | | 115,334 | | Gross profit | 29,916 | | | 77,871 | | | 127,474 | | | 193,205 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Selling and marketing | Selling and marketing | 21,939 | | | 19,207 | | | 43,239 | | | 31,653 | | Selling and marketing | 32,395 | | | 21,998 | | | 75,634 | | | 53,651 | |
General and administrative | General and administrative | 16,376 | | | 8,841 | | | 27,899 | | | 18,156 | | General and administrative | 11,456 | | | 10,364 | | | 39,355 | | | 28,520 | |
Research and development | Research and development | 5,688 | | | 4,240 | | | 10,503 | | | 7,968 | | Research and development | 5,379 | | | 4,029 | | | 15,882 | | | 11,997 | |
(Gain) loss on disposal group | — | | | (8,345) | | | — | | | 20,668 | | |
Loss on disposal group | | Loss on disposal group | — | | | — | | | — | | | 20,668 | |
| Total operating expenses | Total operating expenses | 44,003 | | | 23,943 | | | 81,641 | | | 78,445 | | Total operating expenses | 49,230 | | | 36,391 | | | 130,871 | | | 114,836 | |
Operating (loss) income | Operating (loss) income | (1,950) | | | 43,995 | | | 15,917 | | | 36,889 | | Operating (loss) income | (19,314) | | | 41,480 | | | (3,397) | | | 78,369 | |
Other expense: | Other expense: | | Other expense: | |
Interest income | Interest income | 12 | | | 1 | | | 33 | | | 2 | | Interest income | 1 | | | 7 | | | 34 | | | 9 | |
Interest expense | Interest expense | (481) | | | (253) | | | (795) | | | (591) | | Interest expense | (354) | | | (280) | | | (1,149) | | | (871) | |
Other, net | Other, net | 94 | | | (376) | | | (26) | | | (261) | | Other, net | (789) | | | (3,367) | | | (815) | | | (3,628) | |
Total other expense, net | Total other expense, net | (375) | | | (628) | | | (788) | | | (850) | | Total other expense, net | (1,142) | | | (3,640) | | | (1,930) | | | (4,490) | |
(Loss) income from continuing operations before income taxes | (Loss) income from continuing operations before income taxes | (2,325) | | | 43,367 | | | 15,129 | | | 36,039 | | (Loss) income from continuing operations before income taxes | (20,456) | | | 37,840 | | | (5,327) | | | 73,879 | |
Income tax expense | 2,242 | | | 9,398 | | | 5,680 | | | 7,056 | | |
Income tax (benefit) expense | | Income tax (benefit) expense | (7,001) | | | 8,588 | | | (1,321) | | | 15,644 | |
(Loss) income from continuing operations | (Loss) income from continuing operations | (4,567) | | | 33,969 | | | 9,449 | | | 28,983 | | (Loss) income from continuing operations | (13,455) | | | 29,252 | | | (4,006) | | | 58,235 | |
Discontinued operations: | Discontinued operations: | | Discontinued operations: | |
Income (loss) from discontinued operations before income taxes | 49 | | | (34) | | | (77) | | | (63) | | |
Income tax expense of discontinued operations | 84 | | | 97 | | | 90 | | | 192 | | |
Loss from discontinued operations before income taxes | | Loss from discontinued operations before income taxes | (118) | | | (65) | | | (195) | | | (128) | |
Income tax (benefit) expense of discontinued operations | | Income tax (benefit) expense of discontinued operations | (74) | | | 251 | | | 16 | | | 443 | |
Loss from discontinued operations | Loss from discontinued operations | (35) | | | (131) | | | (167) | | | (255) | | Loss from discontinued operations | (44) | | | (316) | | | (211) | | | (571) | |
Net (loss) income | Net (loss) income | $ | (4,602) | | | $ | 33,838 | | | $ | 9,282 | | | $ | 28,728 | | Net (loss) income | $ | (13,499) | | | $ | 28,936 | | | $ | (4,217) | | | $ | 57,664 | |
| Basic (loss) income per share from continuing operations | Basic (loss) income per share from continuing operations | $ | (0.15) | | | $ | 1.13 | | | $ | 0.31 | | | $ | 0.97 | | Basic (loss) income per share from continuing operations | $ | (0.43) | | | $ | 0.97 | | | $ | (0.13) | | | $ | 1.94 | |
Basic loss per share from discontinued operations | Basic loss per share from discontinued operations | — | | | — | | | (0.01) | | | (0.01) | | Basic loss per share from discontinued operations | — | | | (0.01) | | | (0.01) | | | (0.02) | |
Basic net (loss) income per share | Basic net (loss) income per share | $ | (0.15) | | | $ | 1.13 | | | $ | 0.30 | | | $ | 0.96 | | Basic net (loss) income per share | $ | (0.43) | | | $ | 0.96 | | | $ | (0.14) | | | $ | 1.92 | |
| Diluted (loss) income per share from continuing operations | Diluted (loss) income per share from continuing operations | $ | (0.15) | | | $ | 1.05 | | | $ | 0.29 | | | $ | 0.90 | | Diluted (loss) income per share from continuing operations | $ | (0.43) | | | $ | 0.90 | | | $ | (0.13) | | | $ | 1.80 | |
Diluted loss per share from discontinued operations | Diluted loss per share from discontinued operations | — | | | (0.01) | | | — | | | — | | Diluted loss per share from discontinued operations | — | | | (0.01) | | | (0.01) | | | (0.02) | |
Diluted net (loss) income per share | Diluted net (loss) income per share | $ | (0.15) | | | $ | 1.04 | | | $ | 0.29 | | | $ | 0.90 | | Diluted net (loss) income per share | $ | (0.43) | | | $ | 0.89 | | | $ | (0.14) | | | $ | 1.78 | |
| Shares used in per share calculations: | Shares used in per share calculations: | | Shares used in per share calculations: | |
Basic | Basic | 30,968 | | | 30,038 | | | 30,833 | | | 29,974 | | Basic | 31,199 | | | 30,284 | | | 30,955 | | | 30,077 | |
Diluted | Diluted | 30,968 | | | 32,401 | | | 32,437 | | | 32,038 | | Diluted | 31,199 | | | 32,633 | | | 30,955 | | | 32,336 | |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited and in thousands)
| | | Three-Months Ended September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Net (loss) income | Net (loss) income | $ | (4,602) | | | $ | 33,838 | | | $ | 9,282 | | | $ | 28,728 | | Net (loss) income | $ | (13,499) | | | $ | 28,936 | | | $ | (4,217) | | | $ | 57,664 | |
Other comprehensive income: | Other comprehensive income: | | Other comprehensive income: | |
Unrealized loss on available-for-sale securities, net of income tax expense of $7, $—, $— and $— | (4) | | | — | | | (4) | | | — | | |
Unrealized loss on available-for-sale securities, net of income tax expense of $—, $—, $— and $— | | Unrealized loss on available-for-sale securities, net of income tax expense of $—, $—, $— and $— | — | | | (4) | | | (4) | | | (4) | |
| Foreign currency translation, net of income tax (expense) benefit of $(21), $(13), $(8) and $2 | (411) | | | 217 | | | (194) | | | 570 | | |
Foreign currency translation, net of income tax (expense) benefit of $(2), $(10), $2 and $(4) | | Foreign currency translation, net of income tax (expense) benefit of $(2), $(10), $2 and $(4) | (148) | | | 760 | | | (342) | | | 1,330 | |
Other comprehensive (loss) income | Other comprehensive (loss) income | (415) | | | 217 | | | (198) | | | 570 | | Other comprehensive (loss) income | (148) | | | 756 | | | (346) | | | 1,326 | |
Comprehensive (loss) income | Comprehensive (loss) income | $ | (5,017) | | | $ | 34,055 | | | $ | 9,084 | | | $ | 29,298 | | Comprehensive (loss) income | $ | (13,647) | | | $ | 29,692 | | | $ | (4,563) | | | $ | 58,990 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited and in thousands)
| | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Shareholders' Equity | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Shareholders' Equity |
| | Shares | | Amount | | | Shares | | Amount | |
| Balances at March 31, 2021 | 30,576 | | | $ | 2,176 | | | $ | 180,524 | | | $ | (155) | | | $ | 182,545 | | |
Balance, March 31, 2021 | | Balance, March 31, 2021 | 30,576 | | | $ | 2,176 | | | $ | 180,524 | | | $ | (155) | | | $ | 182,545 | |
Net income | Net income | — | | | — | | | 13,884 | | | — | | | 13,884 | | Net income | — | | | — | | | 13,884 | | | — | | | 13,884 | |
Unrealized loss on marketable securities, net of income tax benefit of $7 | Unrealized loss on marketable securities, net of income tax benefit of $7 | — | | | — | | | — | | | — | | | — | | Unrealized loss on marketable securities, net of income tax benefit of $7 | — | | | — | | | — | | | — | | | — | |
| Foreign currency translation adjustment, net of income tax benefit of $13 | Foreign currency translation adjustment, net of income tax benefit of $13 | — | | | — | | | — | | | 217 | | | 217 | | Foreign currency translation adjustment, net of income tax benefit of $13 | — | | | — | | | — | | | 217 | | | 217 | |
Stock-based compensation expense | Stock-based compensation expense | — | | | 1,225 | | | — | | | — | | | 1,225 | | Stock-based compensation expense | — | | | 1,225 | | | — | | | — | | | 1,225 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | Common stock issued under equity compensation plan, net of shares withheld for tax payments | 201 | | | (1,259) | | | — | | | — | | | (1,259) | | 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 | Common stock issued under employee stock purchase plan | 17 | | | 269 | | | — | | | — | | | 269 | | Common stock issued under employee stock purchase plan | 17 | | | 269 | | | — | | | — | | | 269 | |
| Balances at June 30, 2021 | 30,794 | | | 2,411 | | | 194,408 | | | 62 | | | 196,881 | | |
Balance, June 30, 2021 | | Balance, June 30, 2021 | 30,794 | | | 2,411 | | | 194,408 | | | 62 | | | 196,881 | |
Net loss | Net loss | — | | | — | | | (4,602) | | | — | | | (4,602) | | Net loss | — | | | — | | | (4,602) | | | — | | | (4,602) | |
Unrealized loss on marketable securities, net of income tax expense of $7 | Unrealized loss on marketable securities, net of income tax expense of $7 | — | | | — | | | — | | | (4) | | | (4) | | Unrealized loss on marketable securities, net of income tax expense of $7 | — | | | — | | | — | | | (4) | | | (4) | |
| Foreign currency translation adjustment, net of income tax benefit of $21 | — | | | — | | | — | | | (411) | | | (411) | | |
Foreign currency translation adjustment, net of income tax expense of $21 | | Foreign currency translation adjustment, net of income tax expense of $21 | — | | | — | | | — | | | (411) | | | (411) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | 1,540 | | | — | | | — | | | 1,540 | | Stock-based compensation expense | — | | | 1,540 | | | — | | | — | | | 1,540 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | Common stock issued under equity compensation plan, net of shares withheld for tax payments | 365 | | | (893) | | | — | | | — | | | (893) | | Common stock issued under equity compensation plan, net of shares withheld for tax payments | 365 | | | (893) | | | — | | | — | | | (893) | |
Common stock issued under employee stock purchase plan | | Common stock issued under employee stock purchase plan | — | | | — | | | — | | | — | | | — | |
| Balance, September 30, 2021 | | Balance, September 30, 2021 | 31,159 | | | 3,058 | | | 189,806 | | | (353) | | | 192,511 | |
Net loss | | Net loss | — | | | — | | | (13,499) | | | — | | | (13,499) | |
| Balances at September 30, 2021 | 31,159 | | | $ | 3,058 | | | $ | 189,806 | | | $ | (353) | | | $ | 192,511 | | |
Foreign currency translation adjustment, net of income tax expense of $2 | | Foreign currency translation adjustment, net of income tax expense of $2 | — | | | — | | | — | | | (148) | | | (148) | |
Stock-based compensation expense | | Stock-based compensation expense | — | | | 1,846 | | | — | | | — | | | 1,846 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | | Common stock issued under equity compensation plan, net of shares withheld for tax payments | 57 | | | (242) | | | — | | | — | | | (242) | |
Common stock issued under employee stock purchase plan | | Common stock issued under employee stock purchase plan | 29 | | | 217 | | | — | | | — | | | 217 | |
| Balance, December 31, 2021 | | Balance, December 31, 2021 | 31,245 | | | $ | 4,879 | | | $ | 176,307 | | | $ | (501) | | | $ | 180,685 | |
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| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| Shares | | Amount | | | |
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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) | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation adjustment, net of income tax benefit of $15 | — | | | — | | | — | | | 353 | | | 353 | |
Stock-based compensation expense | — | | | 865 | | | — | | | — | | | 865 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 87 | | | — | | | — | | | — | | | — | |
Common stock issued under employee stock purchase plan | 63 | | | 83 | | | — | | | — | | | 83 | |
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Balances at June 30, 2020 | 29,967 | | | 2,729 | | | 87,346 | | | (959) | | | 89,116 | |
Net income | — | | | — | | | 33,838 | | | — | | | 33,838 | |
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| | | | | | | | | |
Foreign currency translation adjustment, net of income tax expense of $13 | — | | | — | | | — | | | 217 | | | 217 | |
Stock-based compensation expense | — | | | 1,071 | | | — | | | — | | | 1,071 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 290 | | | (796) | | | — | | | — | | | (796) | |
| | | | | | | | | |
| | | | | | | | | |
Balances at September 30, 2020 | 30,257 | | | $ | 3,004 | | | $ | 121,184 | | | $ | (742) | | | $ | 123,446 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| Shares | | Amount | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance, March 31, 2020 | 29,817 | | | $ | 1,781 | | | $ | 92,456 | | | $ | (1,312) | | | $ | 92,925 | |
Net loss | — | | | — | | | (5,110) | | | — | | | (5,110) | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation adjustment, net of income tax benefit of $15 | — | | | — | | | — | | | 353 | | | 353 | |
Stock-based compensation expense | — | | | 865 | | | — | | | — | | | 865 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 87 | | | — | | | — | | | — | | | — | |
Common stock issued under employee stock purchase plan | 63 | | | 83 | | | — | | | — | | | 83 | |
| | | | | | | | | |
Balance, June 30, 2020 | 29,967 | | | 2,729 | | | 87,346 | | | (959) | | | 89,116 | |
Net income | — | | | — | | | 33,838 | | | — | | | 33,838 | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation adjustment, net of income tax expense of $13 | — | | | — | | | — | | | 217 | | | 217 | |
Stock-based compensation expense | — | | | 1,071 | | | — | | | — | | | 1,071 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 290 | | | (796) | | | — | | | — | | | (796) | |
| | | | | | | | | |
| | | | | | | | | |
Balance, September 30, 2020 | 30,257 | | | 3,004 | | | 121,184 | | | (742) | | | 123,446 | |
Net income | — | | | — | | | 28,936 | | | — | | | 28,936 | |
Unrealized gain on marketable securities, net of income tax expense of $— | — | | | — | | | — | | | (4) | | | (4) | |
| | | | | | | | | |
Foreign currency translation adjustment, net of income tax benefit of $2 | — | | | — | | | — | | | 760 | | | 760 | |
Stock-based compensation expense | — | | | 1,234 | | | — | | | — | | | 1,234 | |
Common stock issued under equity compensation plan, net of shares withheld for tax payments | 42 | | | (1,350) | | | — | | | — | | | (1,350) | |
Common stock issued under employee stock purchase plan | 31 | | | 173 | | | — | | | — | | | 173 | |
| | | | | | | | | |
Balance, December 31, 2020 | 30,330 | | | $ | 3,061 | | | $ | 150,120 | | | $ | 14 | | | $ | 153,195 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
| | | Six-Months Ended September 30, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Income from continuing operations | $ | 9,449 | | | $ | 28,983 | | |
(Loss) income from continuing operations | | (Loss) income from continuing operations | $ | (4,006) | | | $ | 58,235 | |
Loss from discontinued operations | Loss from discontinued operations | (167) | | | (255) | | Loss from discontinued operations | (211) | | | (571) | |
Net income | 9,282 | | | 28,728 | | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | |
Net (loss) income | | Net (loss) income | (4,217) | | | 57,664 | |
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: | | Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: |
Depreciation and amortization | Depreciation and amortization | 3,979 | | | 4,497 | | Depreciation and amortization | 5,987 | | | 6,638 | |
(Benefit) provision for allowance for doubtful accounts | (179) | | | 612 | | |
Benefit for allowance for doubtful accounts | | Benefit for allowance for doubtful accounts | (468) | | | (42) | |
Inventory lower of cost or net realizable value | Inventory lower of cost or net realizable value | — | | | 1,137 | | Inventory lower of cost or net realizable value | 291 | | | 1,409 | |
Stock-based compensation expense | Stock-based compensation expense | 2,765 | | | 1,936 | | Stock-based compensation expense | 4,611 | | | 3,170 | |
Deferred income taxes, net of valuation allowances | | Deferred income taxes, net of valuation allowances | (2,938) | | | (8,037) | |
Other | | Other | 610 | | | (1,160) | |
Loss on asset dispositions | Loss on asset dispositions | — | | | 980 | | Loss on asset dispositions | — | | | 709 | |
| Loss on disposal group, goodwill and other intangible impairment charge | — | | | 20,668 | | |
Deferred income taxes, net of valuation allowances | (1,336) | | | (4,885) | | |
Loss on disposal group | | Loss on disposal group | — | | | 20,668 | |
Loss on other investment in non-controlled affiliates impairment | | Loss on other investment in non-controlled affiliates impairment | — | | | 2,500 | |
| Other | 1,361 | | | (1,740) | | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Trade receivables | Trade receivables | 213 | | | (39,373) | | Trade receivables | (4,298) | | | (61,830) | |
Inventories | Inventories | (94,107) | | | (10,347) | | Inventories | (59,258) | | | (28,529) | |
Prepaids and other assets | Prepaids and other assets | 7,256 | | | (868) | | Prepaids and other assets | 10,059 | | | (8,616) | |
Income taxes receivable | Income taxes receivable | (8,080) | | | 3,549 | | Income taxes receivable | (13,774) | | | 6,128 | |
Trade payables | Trade payables | 16,182 | | | 52,595 | | Trade payables | (36,366) | | | 62,090 | |
Accrued liabilities and other liabilities, including warranty obligations | Accrued liabilities and other liabilities, including warranty obligations | 5,910 | | | 6,117 | | Accrued liabilities and other liabilities, including warranty obligations | 8,178 | | | 12,573 | |
Net cash (used in) provided by operating activities | Net cash (used in) provided by operating activities | (56,754) | | | 63,606 | | Net cash (used in) provided by operating activities | (91,583) | | | 65,335 | |
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 | 73,448 | | | — | | Proceeds from sales and maturities of available-for-sale securities | 73,448 | | | — | |
| Acquisition of business, net of cash acquired | Acquisition of business, net of cash acquired | (26,759) | | | — | | Acquisition of business, net of cash acquired | (26,012) | | | — | |
Purchases of property, plant and equipment | Purchases of property, plant and equipment | (4,985) | | | (6,268) | | Purchases of property, plant and equipment | (9,136) | | | (8,033) | |
Purchases of available-for-sale securities | | Purchases of available-for-sale securities | — | | | (36,199) | |
| Proceeds from the sale of disposal group | | Proceeds from the sale of disposal group | — | | | 21,410 | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | 41,704 | | | (6,268) | | Net cash provided by (used in) investing activities | 38,300 | | | (22,822) | |
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 | 7,025 | | | 1,143 | | Proceeds from long-term debt | 63,652 | | | 1,616 | |
Payments on long-term debt | Payments on long-term debt | (3,556) | | | (13,566) | | Payments on long-term debt | (22,477) | | | (14,815) | |
| Payment of debt issuance costs | | Payment of debt issuance costs | (577) | | | (19) | |
| Payments on finance lease liabilities | | Payments on finance lease liabilities | (30) | | | — | |
Proceeds from employee stock purchases | Proceeds from employee stock purchases | 269 | | | 83 | | Proceeds from employee stock purchases | 486 | | | 256 | |
Proceeds from exercise of stock options | Proceeds from exercise of stock options | 470 | | | 47 | | Proceeds from exercise of stock options | 472 | | | 50 | |
Tax payments related to stock award issuances | Tax payments related to stock award issuances | (2,623) | | | (843) | | Tax payments related to stock award issuances | (2,866) | | | (2,196) | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 1,585 | | | (13,136) | | Net cash provided by (used in) financing activities | 38,660 | | | (15,108) | |
Effect of exchange rate changes | Effect of exchange rate changes | (910) | | | 1,719 | | Effect of exchange rate changes | (1,529) | | | 4,059 | |
(Decrease) increase in cash, cash equivalents and restricted cash | (14,375) | | | 45,921 | | |
Less: Net change in cash balances classified as assets held-for-sale | — | | | (108) | | |
Net change in cash, cash equivalents and restricted cash | (14,375) | | | 45,813 | | |
Cash, cash equivalents and restricted cash: | | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | (16,152) | | | 31,464 | |
| 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 | 39,780 | | | 26,456 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 25,405 | | | $ | 72,269 | | Cash, cash equivalents and restricted cash at end of period | $ | 23,628 | | | $ | 57,920 | |
| 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 | $ | 323 | | | $ | 466 | | Cash paid for interest | $ | 639 | | | $ | 651 | |
Cash paid for income taxes, net | Cash paid for income taxes, net | 19,960 | | | 8,462 | | Cash paid for income taxes, net | 19,857 | | | 17,257 | |
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 | $ | 1,052 | | | $ | 989 | | Capital expenditures incurred but not yet paid | $ | 333 | | | $ | 908 | |
| 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: |
| | September 30, | | December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Cash and cash equivalents | Cash and cash equivalents | $ | 20,179 | | | $ | 70,072 | | Cash and cash equivalents | $ | 18,402 | | | $ | 56,581 | |
Restricted cash | Restricted cash | 1,339 | | | 2,197 | | Restricted cash | 1,339 | | | 1,339 | |
Other assets - restricted, non-current | Other assets - restricted, non-current | 3,887 | | | — | | Other assets - restricted, non-current | 3,887 | | | — | |
Total cash, cash equivalents and restricted cash | Total cash, cash equivalents and restricted cash | $ | 25,405 | | | $ | 72,269 | | Total cash, cash equivalents and restricted cash | $ | 23,628 | | | $ | 57,920 | |
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 secondthird fiscal quarter, which ended September 30,December 31, 2021, of our fiscal year from April 1, 2021 through March 31, 2022.
The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. 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 2020 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 September 30,December 31, 2021 and March 31, 2021, and our results of operations, comprehensive (loss) income and shareholders' equity for the three and six-monthnine-month periods ended September 30,December 31, 2021 and 2020 and our cash flows for the six-month periodsnine-month period ended September 30,December 31, 2021 and 2020. Interim results are not necessarily indicative of results for a full year. Our revenues typically vary seasonally, and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.
Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.
UpdatesUpdate to Significant Accounting Policies
Goodwill
Goodwill consists of the excess of acquisition costs over the fair values of net assets acquired in business combinations. We review goodwill for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that the carrying amount may be impaired. For this purpose, goodwill is evaluated at the reporting unit level. For further information regarding goodwill, see Note 2, Business Acquisition and Note 8, Goodwill and Other intangible assets.Intangible Assets.
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 intra-period allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the 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 FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” 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) BUSINESS ACQUISITION
On September 17, 2021, we acquired VAY AG (“VAY”) for an aggregate purchase consideration of approximately $27.0$26.9 million using cash on hand. Headquartered in Zurich, Switzerland, VAY specializes in computer vision and AI technology solutions and has developed software solutions for human motion analysis using any normal RGB (red-green-blue) camera from a device, such as a laptop, smartphone, or tablet. With a mission to democratize professional human motion analysis, VAY enables clients in fitness and health industries to understand and analyze human movement, providing personalized feedback on repetitions and form in real-time.
We accounted for the transaction as a business combination. Goodwill from the acquisition of $24.5 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets and liabilities assumed and is not deductible for tax purposes. Goodwill recorded in connection with this acquisition is primarily attributable to VAY intellectual property base, employee workforce and application to future digital technologies. Acquired assets were recorded at estimated fair value as of the acquisition date. Certain liabilities were acquired as part of the transaction and were recorded at estimated fair value.
Total acquisition costs incurred through the three-months and six monthsnine-months ended September 30,December 31, 2021 were $0.8 million and $1.0 million respectively, and were expensed in general and administrative costs. Since the acquisition occurred on September 17, 2021, no material amount of net sales or net income related to the VAY business was included in our reported September 30,December 31, 2021 financial statements.
The sellers of VAY have the opportunity to earn additional contingency consideration subject to the achievement of continued employment over an 18 month period and a total of 20 software engineers. The contingent consideration arrangement requires the Companyof $3.9 million will be paid to pay the former owners of VAY upon achievement of these milestones $3.9 million and will be recognized as compensatory expense over the service period. An escrow account was funded for the contingency consideration and is reported on the Condensed Consolidated Balance Sheets as Other assets - restricted, non-current.
Purchase Price Allocation
Acquired assets were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of identifiable net assets resulted in the recognition of goodwill of $24.5 million, and is attributed primarily to VAY intellectual property base, employee workforce and application to future digital technologies. The goodwill is not deductible for income tax purposes. Certain liabilities were acquired as part of the transaction.
The purchase price allocation was determined based on the preliminary fair values of the assets and liabilities identified as of the acquisition date. Itdate and may be adjusted, within a period of no more than 12 months from the acquisition date, if the preliminaryfinal fair values change as a result of circumstances existing at the acquisition date, and upon receipt of final appraisals and valuations. Such fair value adjustments may arise in respect of property, plant and equipment upon completion of the necessary valuations and physical verifications of such assets.
As of September 30, 2021, the fair values of the assets acquired are preliminary because final appraisals and valuations have not yet been completed. The following table summarizes the preliminary fair values of the net assets acquired as ofand liabilities assumed and measurement period adjustments since September 17, 2021, the acquisition date (in thousands):
| | | | | |
| Preliminary Valuation at September 17, 2021 |
Cash | $ | 230 | |
Accounts receivable | 9 | |
| |
Prepaid expenses | 15 | |
Deferred tax assets | 58 | |
Developed technology (included in property, plant and equipment) | 3,000 | |
| |
Identifiable assets acquired | 3,312 | |
| |
| |
Accrued liabilities | 187 | |
Unearned revenue | 53 | |
Deferred tax liabilities, non-current | 591 | |
| |
Total liabilities assumed | 831 | |
| |
Net identifiable assets acquired | 2,481 | |
Goodwill | 24,508 | |
Total assets acquired | $ | 26,989 | |
| | | | | | | | | | | | | | | | | |
| Preliminary valuation at September 17, 2021 | | Measurement period adjustments | | Adjusted valuation at December 31, 2021 |
Cash | $ | 230 | | | $ | 637 | | | $ | 867 | |
Accounts receivable | 9 | | | — | | | 9 | |
| | | | | |
Prepaid expenses | 15 | | | (2) | | | 13 | |
Deferred tax assets | 58 | | | 1 | | | 59 | |
Developed technology (included in property, plant and equipment) | 3,000 | | | — | | | 3,000 | |
| | | | | |
Identifiable assets acquired | 3,312 | | | 636 | | | 3,948 | |
| | | | | |
| | | | | |
| | | | | |
Accrued liabilities | 187 | | | 745 | | | 932 | |
Unearned revenue | 53 | | | 3 | | | 56 | |
Deferred tax liabilities, non-current | 591 | | | — | | | 591 | |
| | | | | |
Total liabilities assumed | 831 | | | 748 | | | 1,579 | |
| | | | | |
Net identifiable assets acquired | 2,481 | | | (112) | | | 2,369 | |
Goodwill | 24,508 | | | 2 | | | 24,510 | |
Total assets acquired | $ | 26,989 | | | $ | (110) | | | $ | 26,879 | |
| | | | | |
The allocation of the purchase price is preliminary and is based upon valuation information available and estimates and assumptions made as of December 31, 2021. We are still in the process of verifying data and finalizing information including valuation and recording of the assets acquired and liabilities assumed, and the resulting amount of recognized goodwill
This acquisition is not material to our net sales, results of operations or total assets during any period presented. Accordingly, our consolidated results from operations do not differ materially from historical performance as a result of this acquisition, and, therefore, pro forma results are not presented.
(3) REVENUES
Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
| | | Three-Months Ended September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Product sales | Product sales | $ | 133,126 | | | $ | 150,639 | | | $ | 312,937 | | | $ | 261,234 | | Product sales | $ | 141,885 | | | $ | 183,642 | | | $ | 454,822 | | | $ | 444,876 | |
Extended warranties and services | Extended warranties and services | 1,388 | | | 1,905 | | | 3,144 | | | 3,370 | | Extended warranties and services | 1,841 | | | 2,852 | | | 4,985 | | | 6,222 | |
Other(1) | Other(1) | 3,445 | | | 2,847 | | | 6,471 | | | 4,975 | | Other(1) | 3,532 | | | 2,765 | | | 10,003 | | | 7,740 | |
Net sales | Net sales | $ | 137,959 | | | $ | 155,391 | | | $ | 322,552 | | | $ | 269,579 | | Net sales | $ | 147,258 | | | $ | 189,259 | | | $ | 469,810 | | | $ | 458,838 | |
(1) Other revenue is primarily subscription revenue, freight and delivery and royalty income and subscription revenue.income.
Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
| | | Three-Months Ended September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
United States | United States | $ | 102,521 | | | $ | 130,289 | | | $ | 249,670 | | | $ | 227,652 | | United States | $ | 110,870 | | | $ | 153,919 | | | $ | 360,540 | | | $ | 381,571 | |
Canada | Canada | 17,852 | | | 12,744 | | | 37,214 | | | 18,992 | | Canada | 22,912 | | | 17,955 | | | 60,126 | | | 36,947 | |
Europe, the Middle East and Africa | Europe, the Middle East and Africa | 13,140 | | | 8,505 | | | 27,582 | | | 16,998 | | Europe, the Middle East and Africa | 9,874 | | | 14,024 | | | 37,456 | | | 31,022 | |
All other | All other | 4,446 | | | 3,853 | | | 8,086 | | | 5,937 | | All other | 3,602 | | | 3,361 | | | 11,688 | | | 9,298 | |
Net sales | Net sales | $ | 137,959 | | | $ | 155,391 | | | $ | 322,552 | | | $ | 269,579 | | Net sales | $ | 147,258 | | | $ | 189,259 | | | $ | 469,810 | | | $ | 458,838 | |
As of September 30,December 31, 2021, estimated revenue expected to be recognized in the future totaled $84.0$53.0 million, primarily related to customer order backlog, which includes firm orders for future shipment and unfulfilled orders to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. We have further refined our Retail backlog to include unfilled future orders. Direct orders of $1.1$8.8 million and Retail orders of $82.9$44.2 million comprised our backlog as of September 30,December 31, 2021, compared to Direct orders of $23.1$46.5 million and Retail orders of $208.5$208.7 million as of September 30,December 31, 2020. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers, and net of current promotional programs and sales discounts for our Direct customers. Due to the severe shortage of shipping containers, some factory fulfilled orders, representing over $22 million in revenue, did not ship as planned in late September. 56% of those orders shipped in October.
The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue for which advance consideration is received prior to the transfer of control. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature and were recorded on the condensed consolidated balance sheets as accrued liabilities. 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 September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Balance, beginning of period | Balance, beginning of period | $ | 1,757 | | | $ | 3,503 | | | $ | 5,551 | | | $ | 2,050 | | Balance, beginning of period | $ | 3,453 | | | $ | 3,639 | | | $ | 5,551 | | | $ | 2,050 | |
Cash additions | Cash additions | 3,457 | | | 1,182 | | | 4,546 | | | 3,553 | | Cash additions | 4,203 | | | 3,496 | | | 8,749 | | | 7,049 | |
Revenue recognition | Revenue recognition | (1,761) | | | (1,046) | | | (6,644) | | | (1,964) | | Revenue recognition | (1,378) | | | (743) | | | (8,022) | | | (2,707) | |
Balance, end of period | Balance, end of period | $ | 3,453 | | | $ | 3,639 | | | $ | 3,453 | | | $ | 3,639 | | Balance, end of period | $ | 6,278 | | | $ | 6,392 | | | $ | 6,278 | | | $ | 6,392 | |
(4) FAIR VALUE MEASUREMENTS
Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:
•Level 1 - observable inputs such as quoted prices (unadjusted) in active liquid markets for identical securities as of the reporting date;
•Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk, or observable market prices in markets with insufficient volume and/or infrequent transactions; and
•Level 3 - significant inputs that are generally unobservable inputs for which there is little or no market data available, including our own assumptions in determining fair value.
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
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Derivatives | | | | | | | | |
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Foreign currency forward contracts | | — | | | 126 | | | — | | | 126 | |
Total derivatives | | — | | | 126 | | | — | | | 126 | |
Total assets measured at fair value | | $ | — | | | $ | 126 | | | $ | — | | | $ | 126 | |
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| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
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Derivatives | | | | | | | | |
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Foreign currency forward contracts | | $ | — | | | $ | 19 | | | $ | — | | | $ | 19 | |
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Total assets measured at fair value | | $ | — | | | $ | 19 | | | $ | — | | | $ | 19 | |
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Liabilities: | | | | | | | | |
Derivatives | | | | | | | | |
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Foreign currency forward contracts | | $ | — | | | $ | 36 | | | $ | — | | | $ | 36 | |
Total liabilities measured at fair value | | $ | — | | | $ | 36 | | | $ | — | | | $ | 36 | |
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| | March 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Cash Equivalents | | | | | | | | |
Money market funds | | $ | 9,679 | | | $ | — | | | $ | — | | | $ | 9,679 | |
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Total cash equivalents | | 9,679 | | | — | | | — | | | 9,679 | |
Available-for-Sale Securities | | | | | | | | |
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Commercial paper | | — | | | 9,994 | | | — | | | 9,994 | |
Corporate bonds | | — | | | 8,227 | | | — | | | 8,227 | |
U.S. government bonds | | — | | | 55,227 | | | — | | | 55,227 | |
Total available-for-sale securities | | — | | | 73,448 | | | — | | | 73,448 | |
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Total assets measured at fair value | | $ | 9,679 | | | $ | 73,448 | | | $ | — | | | $ | 83,127 | |
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Liabilities: | | | | | | | | |
Derivatives | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 672 | | | $ | — | | | $ | 672 | |
Total liabilities measured at fair value | | $ | — | | | $ | 672 | | | $ | — | | | $ | 672 | |
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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 six-monthnine-month period ended September 30,December 31, 2021, nor for the year ended March 31, 2021.
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 during the six-monthnine-month period ended September 30,December 31, 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. Other than assets acquired, see Note 2, Business Acquisition, we determined the fair value of our developed technology included in property, plant and equipment using the cost approach which considers how much it would cost to replace an asset of equivalent utility. We did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis. We performOther than our annual goodwill and indefinite-lived trade names impairment assessments and valuations, annuallywe did not perform any assessments or when triggering eventsvaluations on assets or liabilities that are identified.valued at fair value on a nonrecurring basis.
As of September 30,December 31, 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.
(5) DERIVATIVES
From time to time, we enter into 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 foreign currency exposure. That is, we do not engage in 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 September 30,December 31, 2021, total outstanding contract notional amounts were $42.3$30.2 million and had maturities of 78109 days or less.
The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):
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| | Balance Sheet Classification | | As of | | |
| | | September 30, 2021 | | March 31, 2021 | | |
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Derivative instruments not designated as cash flow hedges: | | | | | | | | |
Foreign currency forward contracts | | Prepaids and other current assets | | $ | 126 | | | $ | — | | | |
| | Accrued liabilities | | — | | | 672 | | | |
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| | Balance Sheet Classification | | As of | | |
| | | December 31, 2021 | | March 31, 2021 | | |
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Derivative instruments not designated as cash flow hedges: | | | | | | | | |
Foreign currency forward contracts | | Prepaids and other current assets | | $ | 19 | | | $ | — | | | |
Foreign currency forward contracts | | Accrued liabilities | | 36 | | | 672 | | | |
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The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
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| | Statement of Operations Classification | | Three-Months Ended September 30, | | Six-Months Ended September 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
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Derivative instruments not designated as cash flow hedges: | | | | | | | | | | |
Loss recognized in earnings | | Other, net | | $ | (943) | | | $ | (284) | | | $ | (960) | | | $ | (425) | |
Income tax benefit | | Income tax expense | | 238 | | | 71 | | | 234 | | | 106 | |
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| | Statement of Operations Classification | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
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Derivative instruments not designated as cash flow hedges: | | | | | | | | | | |
Income (loss) recognized in earnings | | Other, net | | $ | 797 | | | $ | (1,981) | | | $ | (163) | | | $ | (2,406) | |
Income tax (benefit) expense | | Income tax (benefit) expense | | (194) | | | 488 | | | 40 | | | 594 | |
(6) INVENTORIES
Inventories are stated at the lower of cost and net realizable value, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):
| | | As of | | | As of | |
| | September 30, 2021 | | March 31, 2021 | | | December 31, 2021 | | March 31, 2021 | |
Finished goods (1) | Finished goods (1) | $ | 155,962 | | | $ | 63,918 | | | Finished goods (1) | $ | 121,073 | | | $ | 63,918 | | |
Parts and components | Parts and components | 6,707 | | | 4,167 | | | Parts and components | 7,040 | | | 4,167 | | |
Total inventories | Total inventories | $ | 162,669 | | | $ | 68,085 | | | Total inventories | $ | 128,113 | | | $ | 68,085 | | |
(1) FinishedThe increase in finished goods increase was driven by the strategic decision to increase on-hand inventory levels ahead of the fitness season given continued disruption in global logistics.
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| | | Estimated Useful Life (in years) | | As of | | Estimated Useful Life (in years) | | As of |
| | September 30, 2021 | | March 31, 2021 | | Estimated Useful Life (in years) | | December 31, 2021 | | March 31, 2021 | |
Automobiles | Automobiles | 5 | | $ | 23 | | | $ | 23 | | | Automobiles | 5 | | $ | 23 | | | $ | 23 | | |
Leasehold improvements | Leasehold improvements | 4 | to | 20 | | 3,149 | | | 3,059 | | | Leasehold improvements | 4 | to | 20 | | 3,150 | | | 3,059 | | |
Computer software and equipment | Computer software and equipment | 2 | to | 7 | | 41,112 | | | 36,956 | | | Computer software and equipment | 2 | to | 7 | | 42,231 | | | 36,956 | | |
Machinery and equipment | Machinery and equipment | 3 | to | 5 | | 15,861 | | | 15,699 | | | Machinery and equipment | 3 | to | 5 | | 16,466 | | | 15,699 | | |
Furniture and fixtures | Furniture and fixtures | 5 | to | 20 | | 2,635 | | | 2,586 | | | Furniture and fixtures | 5 | to | 20 | | 2,635 | | | 2,586 | | |
Work in progress(1) | Work in progress(1) | N/A | | 5,438 | | | 1,314 | | | Work in progress(1) | N/A | | 7,430 | | | 1,314 | | |
Total cost | Total cost | | 68,218 | | | 59,637 | | | Total cost | | 71,935 | | | 59,637 | | |
Accumulated depreciation | Accumulated depreciation | | (38,755) | | | (35,141) | | | Accumulated depreciation | | (40,959) | | | (35,141) | | |
Total property, plant and equipment, net | Total property, plant and equipment, net | | $ | 29,463 | | | $ | 24,496 | | | Total property, plant and equipment, net | | $ | 30,976 | | | $ | 24,496 | | |
(1) Work in progress includes information technology assets and production tooling.
Depreciation expense was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Months Ended September 30, | | Six-Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Depreciation expense | $ | 1,909 | | | $ | 1,815 | | | $ | 3,948 | | | $ | 3,658 | |
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| Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Depreciation expense | $ | 1,993 | | | $ | 2,114 | | | $ | 5,941 | | | $ | 5,772 | |
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The roll forward of goodwill was as follows (in thousands): | | | | | | | | |
| | | Total | |
Balance, April 1, 2021 | | | $ | — | | |
Business acquisition (Note 2) | | | 24,508 | | |
| | | | |
Balance, September 30, 2021 | | | $ | 24,508 | | |
Business acquisition (Note 2) - measurement period adjustments | | | 2 | | |
Balance, December 31, 2021 | | | $ | 24,510 | | |
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 our stock price and related market capitalization remained above our reporting unit carrying values as of December 31, 2021, we are observing continued market volatility including declines in our market capitalization subsequent to December 31, 2021 which, in part, could increase the possibility of a future impairment charge. Based on our analysis, including
our market capitalization during the period, we determined there were no triggering events during the quarter ended December 31, 2021.
Should the facts and circumstances surrounding our assumptions change, our goodwill impairment analysis may fail. Assumptions and estimates to determine far values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we continue to experience a sustained decline in our market capitalization, adjusted for estimated control premium, that is determined to be indicative of a reduction in fair value one or more of our reporting units, we may be required to record future impairment charges for goodwill. An impairment could have a material effect on our consolidated balance sheet and results of operations
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 |
| | September 30, 2021 | | March 31, 2021 | | Estimated Useful Life (in years) | | December 31, 2021 | | March 31, 2021 | |
Indefinite-lived trademarks | Indefinite-lived trademarks | N/A | | $ | 9,052 | | | $ | 9,052 | | | Indefinite-lived trademarks | N/A | | $ | 9,052 | | | $ | 9,052 | | |
| Patents | Patents | 7 | to | 24 | | 1,443 | | | 1,443 | | | Patents | 7 | to | 24 | | 1,443 | | | 1,443 | | |
| | | 10,495 | | | 10,495 | | | | 10,495 | | | 10,495 | | |
Accumulated amortization - definite-lived intangible assets | Accumulated amortization - definite-lived intangible assets | | (1,161) | | | (1,130) | | | Accumulated amortization - definite-lived intangible assets | | (1,176) | | | (1,130) | | |
Other intangible assets, net | Other intangible assets, net | | $ | 9,334 | | | $ | 9,365 | | | Other intangible assets, net | | $ | 9,319 | | | $ | 9,365 | | |
Amortization expense was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Months Ended September 30, | | Six-Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Amortization expense | $ | 16 | | | $ | 38 | | | $ | 31 | | | $ | 841 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Amortization expense | $ | 15 | | | $ | 25 | | | $ | 46 | | | $ | 866 | |
Future amortization of definite-lived intangible assets is as follows (in thousands):
| 2022 | 2022 | $ | 31 | | 2022 | $ | 15 | |
2023 | 2023 | 61 | | 2023 | 61 | |
2024 | 2024 | 61 | | 2024 | 61 | |
2025 | 2025 | 61 | | 2025 | 61 | |
2026 | 2026 | 47 | | 2026 | 47 | |
Thereafter | Thereafter | 21 | | Thereafter | 22 | |
| | $ | 282 | | | $ | 267 | |
(9) 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 September 30, | | Six-Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Operating lease expense | $ | 1,466 | | | $ | 1,052 | | | $ | 2,932 | | | $ | 2,197 | |
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| Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Operating lease expense | $ | 1,465 | | | $ | 1,072 | | | $ | 4,397 | | | $ | 3,269 | |
Amortization of finance lease assets | 29 | | | — | | | 29 | | | — | |
| | | | | | | |
Total lease expense | $ | 1,494 | | | $ | 1,072 | | | $ | 4,426 | | | $ | 3,269 | |
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Leases with an initial term of 12 months or less (“short-term lease”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term.
Other information related to leases was as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | September 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 | | $ | 1,497 | | | $ | 1,076 | | | |
Additional operating lease information: | | | | | | |
| | | | | | |
Reductions to ROU assets resulting from reductions to operating lease obligations | | $ | 343 | | | $ | 268 | | | |
| | | | | | | |
Weighted average remaining operating lease term (years) | | 6.07 | | 6.97 | | |
Weighted average discount rate on operating leases | | 5.01% | | 4.95% | | |
| | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | December 31, 2021 | | March 31, 2021 | | |
Supplemental cash flow information related to leases was as follows: | | | | | | |
| | | | | | | |
Operating leases: | | | | | | | |
Operating lease right-of-use-assets | | $ | 24,534 | | | $ | 19,108 | | | |
| | | | | | | |
Operating lease liabilities | | 21,855 | | | 17,875 | | | |
Operating lease liabilities, net of current portion | | 4,653 | | | 3,384 | | | |
Total operating lease liabilities | | $ | 26,508 | | | $ | 21,259 | | | |
| | | | | | | |
Finance leases: | | | | | | | |
Property, plant and equipment, at cost | | $ | 569 | | | $ | — | | | |
Accumulated depreciation | | (29) | | | — | | | |
Property, plant and equipment, net | | $ | 540 | | | $ | — | | | |
| | | | | | | |
Finance lease obligations | | $ | 423 | | | $ | — | | | |
Finance lease obligations, net of current portion | | 119 | | | — | | | |
Total finance lease liabilities | | $ | 542 | | | $ | — | | | |
| | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flow from operating leases | | $ | 1,724 | | | $ | 1,076 | | | |
Finance cash flows from finance leases | | 30 | | | — | | | |
| | | | | | | |
Additional lease information: | | | | | | |
ROU assets obtained in exchange for operating lease obligations | | $ | 1,032 | | | $ | — | | | |
ROU assets obtained in exchange for finance lease obligations | | 569 | | | — | | | |
Reductions to ROU assets resulting from reductions to operating lease obligations | | 329 | | | 268 | | | |
| | | | | | | |
| | | | | | | |
Weighted Average Remaining Lease Term: | | | | | | | |
Operating leases | | 5.89 | | 6.94 | | |
Finance leases | | | 4.75 | | — | | |
| | | | | | | |
Weighted Average Discount Rate: | | | | | | | |
Operating leases | | 5.00% | | 4.95% | | |
Finance leases | | | 2.08% | | —% | | |
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 |
| | As of | | December 31, 2021 |
| | September 30, 2021 | | Operating leases | Finance leases |
2022 | 2022 | $ | 3,005 | | 2022 | $ | 1,344 | | $ | 120 | |
2023 | 2023 | 5,606 | | 2023 | 5,859 | | 120 | |
2024 | 2024 | 5,168 | | 2024 | 5,422 | | 120 | |
2025 | 2025 | 5,330 | | 2025 | 5,584 | | 120 | |
2026 | 2026 | 4,267 | | 2026 | 4,520 | | 90 | |
Thereafter | Thereafter | 7,967 | | Thereafter | 8,158 | | — | |
Total undiscounted lease payments | Total undiscounted lease payments | 31,343 | | Total undiscounted lease payments | 30,887 | | 570 | |
Less imputed interest | Less imputed interest | (4,571) | | Less imputed interest | (4,379) | | (28) | |
Total lease liabilities | Total lease liabilities | $ | 26,772 | | Total lease liabilities | $ | 26,508 | | $ | 542 | |
(10) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
| | | As of | | As of |
| | September 30, 2021 | | March 31, 2021 | | | December 31, 2021 | | March 31, 2021 | |
Deferred revenue | | Deferred revenue | $ | 6,278 | | | $ | 5,551 | | |
Reserves (1) | | Reserves (1) | 5,230 | | | 2,624 | | |
Payroll and related liabilities | Payroll and related liabilities | $ | 7,420 | | | $ | 6,616 | | | Payroll and related liabilities | 4,818 | | | 6,616 | | |
Reserves (1) | 3,081 | | | 2,624 | | | |
Deferred revenue | 3,453 | | | 5,551 | | | |
Legal settlement (2) | Legal settlement (2) | 4,250 | | | — | | | Legal settlement (2) | 4,250 | | | — | | |
Other | Other | 4,198 | | | 4,836 | | | Other | 4,656 | | | 4,836 | | |
Total accrued liabilities | Total accrued liabilities | $ | 22,402 | | | $ | 19,627 | | | Total accrued liabilities | $ | 25,232 | | | $ | 19,627 | | |
(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.
(11) PRODUCT WARRANTIES
Our products carry defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs of supplying and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from thirty days to, in limited circumstances, the lifetime of certain product components. We record a liability at the time of sale for the estimated costs of fulfilling future warranty claims. If necessary, we adjust the liability for specific warranty-related matters when they become known and are reasonably estimable. Estimated warranty expense is included in cost of sales, based on historical warranty claim experience and available product quality data. Warranty expense is affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer, product failure rates, and higher or lower than expected repair costs. If warranty expense differs from previous estimates, or if circumstances change such that the assumptions inherent in previous estimates are no longer valid, the amount of product warranty obligations is adjusted accordingly.
Changes in our product warranty obligations were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Six-Months Ended September 30, |
| | 2021 | | 2020 |
Balance, beginning of period | | $ | 9,782 | | | $ | 6,250 | |
Accruals (1) | | (551) | | | (487) | |
| | | | |
Payments | | (1,865) | | | (2,238) | |
Balance, end of period | | $ | 7,366 | | | $ | 3,525 | |
(1) Accruals were negative for the six-months ended September 30, 2021 due to a reversal of a special warranty reserve related to indoor cycling bikes and for the six-months ended September 30, 2020 due to assets held for sale.
| | | | | | | | | | | | | | |
| | Nine-Months Ended December 31, |
| | 2021 | | 2020 |
Balance, beginning of period | | $ | 8,651 | | | $ | 6,250 | |
Accruals | | 4,416 | | | 2,791 | |
| | | | |
Payments | | (5,942) | | | (3,843) | |
Balance, end of period | | $ | 7,125 | | | $ | 5,198 | |
(12) ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables set forth the changes in accumulated other comprehensive loss, net of tax (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized (Loss) Income on Available-for-Sale Securities | | Gain on Derivative Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, March 31, 2021 | $ | (8) | | | $ | — | | | $ | (147) | | | $ | (155) | |
Current period other comprehensive income (loss) before reclassifications | (4) | | | — | | | (194) | | | (198) | |
| | | | | | | |
Net other comprehensive income (loss) during period | (4) | | | — | | | (194) | | | (198) | |
Balance, September 30, 2021 | $ | (12) | | | $ | — | | | $ | (341) | | | $ | (353) | |
| | | | | | | | | | | | | | | | | | | |
| Unrealized Loss on Available-for-Sale Securities | | | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, March 31, 2021 | $ | (8) | | | | | $ | (147) | | | $ | (155) | |
Current period other comprehensive loss before reclassifications | (4) | | | | | (342) | | | (346) | |
| | | | | | | |
Net other comprehensive loss during period | (4) | | | | | (342) | | | (346) | |
Balance, December 31, 2021 | $ | (12) | | | | | $ | (489) | | | $ | (501) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Unrealized (Loss) Gain on Available-for-Sale Securities | | Gain on Derivative Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Income (Loss) |
Balance, June 30, 2021 | $ | (8) | | | $ | — | | | $ | 70 | | | $ | 62 | |
Current period other comprehensive income (loss) before reclassifications | (4) | | | — | | | (411) | | | (415) | |
| | | | | | | |
Net other comprehensive income (loss) during period | (4) | | | — | | | (411) | | | (415) | |
Balance, September 30, 2021 | $ | (12) | | | $ | — | | | $ | (341) | | | $ | (353) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Unrealized Loss on Available-for-Sale Securities | | | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss |
Balance, September 30, 2021 | $ | (12) | | | | | $ | (341) | | | $ | (353) | |
Current period other comprehensive loss before reclassifications | — | | | | | (148) | | | (148) | |
| | | | | | | |
Net other comprehensive loss during period | — | | | | | (148) | | | (148) | |
Balance, December 31, 2021 | $ | (12) | | | | | $ | (489) | | | $ | (501) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Unrealized Gain on Available-for-Sale Securities | | Gain on Derivative Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Loss (Income) |
Balance, March 31, 2020 | $ | — | | | $ | — | | | $ | (1,312) | | | $ | (1,312) | |
Current period other comprehensive income before reclassifications | — | | | — | | | 570 | | | 570 | |
| | | | | | | |
Net other comprehensive income during period | — | | | — | | | 570 | | | 570 | |
Balance, September 30, 2020 | $ | — | | | $ | — | | | $ | (742) | | | $ | (742) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Unrealized Loss on Available-for-Sale Securities | | | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
Balance, March 31, 2020 | $ | — | | | | | $ | (1,312) | | | $ | (1,312) | |
Current period other comprehensive (loss) income before reclassifications | (4) | | | | | 1,330 | | | 1,326 | |
| | | | | | | |
Net other comprehensive (loss) income during period | (4) | | | | | 1,330 | | | 1,326 | |
Balance, December 31, 2020 | $ | (4) | | | | | $ | 18 | | | $ | 14 | |
| | | | | | | |
| | | | Unrealized Gain on Available-for-Sale Securities | | Gain on Derivative Securities | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income | | Unrealized Loss on Available-for-Sale Securities | | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
Balance, June 30, 2020 | $ | — | | | $ | — | | | $ | (959) | | | $ | (959) | | |
Current period other comprehensive income before reclassifications | — | | | — | | | 217 | | | 217 | | |
Balance, September 30, 2020 | | Balance, September 30, 2020 | $ | — | | | | $ | (742) | | | $ | (742) | |
Current period other comprehensive (loss) income before reclassifications | | Current period other comprehensive (loss) income before reclassifications | (4) | | | | 760 | | | 756 | |
| Net other comprehensive income during period | Net other comprehensive income during period | — | | | — | | | 217 | | | 217 | | Net other comprehensive income during period | (4) | | | | 760 | | | 756 | |
Balance, September 30, 2020 | $ | — | | | $ | — | | | $ | (742) | | | $ | (742) | | |
Balance, December 31, 2020 | | Balance, December 31, 2020 | $ | (4) | | | | $ | 18 | | | $ | 14 | |
(13) (LOSS) INCOME 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 September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Shares used to calculate basic income per share | Shares used to calculate basic income per share | 30,968 | | | 30,038 | | | 30,833 | | | 29,974 | | Shares used to calculate basic income per share | 31,199 | | | 30,284 | | | 30,955 | | | 30,077 | |
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 | — | | | 2,363 | | | 1,604 | | | 2,064 | | Dilutive effect of outstanding stock options, performance stock units and restricted stock units | — | | | 2,349 | | | — | | | 2,259 | |
Shares used to calculate diluted income per share | Shares used to calculate diluted income per share | 30,968 | | | 32,401 | | | 32,437 | | | 32,038 | | Shares used to calculate diluted income per share | 31,199 | | | 32,633 | | | 30,955 | | | 32,336 | |
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted per share due to loss from continuing operations, as such, the exercise or conversion of any potential shares would increase the number of shares in the denominator and result in a lower loss per share (in thousands):
| | | Three-Months Ended September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Restricted stock units | Restricted stock units | 894 | | | — | | | — | | | — | | Restricted stock units | 673 | | | — | | | 1,024 | | | — | |
Stock options | Stock options | 526 | | | — | | | — | | | — | | Stock options | 357 | | | — | | | 504 | | | — | |
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 September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2021 | | 2021 | | 2020 | | 2021 | | 2020 |
| Restricted stock units | Restricted stock units | 407 | | | 1 | | | 295 | | | 2 | | Restricted stock units | 1,168 | | | 31 | | | 333 | | | 15 | |
Stock options | Stock options | 2 | | | 4 | | | 2 | | | 14 | | Stock options | 2 | | | — | | | 2 | | | 3 | |
(14) SEGMENT AND ENTERPRISE-WIDE INFORMATION
We have 2 operating segments, Direct and Retail. There were no changes in our operating segments during the six-monthsnine-months ended September 30,December 31, 2021.
We evaluate performance of the operating segments using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is the measure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories 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 September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | | | | |
Direct | Direct | $ | 37,853 | | | $ | 61,194 | | | $ | 101,249 | | | $ | 111,627 | | Direct | $ | 60,705 | | | $ | 82,158 | | | $ | 161,954 | | | $ | 193,785 | |
Retail | Retail | 99,153 | | | 93,155 | | | 219,637 | | | 156,103 | | Retail | 85,701 | | | 106,320 | | | 305,338 | | | 262,423 | |
Royalty | Royalty | 953 | | | 1,042 | | | 1,666 | | | 1,849 | | Royalty | 852 | | | 781 | | | 2,518 | | | 2,630 | |
Consolidated net sales | Consolidated net sales | $ | 137,959 | | | $ | 155,391 | | | $ | 322,552 | | | $ | 269,579 | | Consolidated net sales | $ | 147,258 | | | $ | 189,259 | | | $ | 469,810 | | | $ | 458,838 | |
| Contribution: | Contribution: | | Contribution: | |
Direct | Direct | $ | (1,835) | | | $ | 17,588 | | | $ | 4,924 | | | $ | 34,583 | | Direct | $ | (8,980) | | | $ | 23,584 | | | $ | (4,056) | | | $ | 58,167 | |
Retail | Retail | 18,741 | | | 23,442 | | | 40,831 | | | 35,055 | | Retail | 3,270 | | | 25,338 | | | 44,101 | | | 60,393 | |
Royalty | Royalty | 953 | | | 1,042 | | | 1,666 | | | 1,849 | | Royalty | 852 | | | 781 | | | 2,518 | | | 2,630 | |
Consolidated contribution | Consolidated contribution | $ | 17,859 | | | $ | 42,072 | | | $ | 47,421 | | | $ | 71,487 | | Consolidated contribution | $ | (4,858) | | | $ | 49,703 | | | $ | 42,563 | | | $ | 121,190 | |
| Reconciliation of consolidated contribution to (loss) income from continuing operations: | Reconciliation of consolidated contribution to (loss) income from continuing operations: | | Reconciliation of consolidated contribution to (loss) income from continuing operations: | |
Consolidated contribution | Consolidated contribution | $ | 17,859 | | | $ | 42,072 | | | $ | 47,421 | | | $ | 71,487 | | Consolidated contribution | $ | (4,858) | | | $ | 49,703 | | | $ | 42,563 | | | $ | 121,190 | |
Amounts not directly related to segments: | Amounts not directly related to segments: | | Amounts not directly related to segments: | |
Operating expenses | Operating expenses | (19,809) | | | 1,923 | | | (31,504) | | | (34,598) | | Operating expenses | (14,456) | | | (8,223) | | | (45,960) | | | (42,821) | |
Other expense, net | Other expense, net | (375) | | | (628) | | | (788) | | | (850) | | Other expense, net | (1,142) | | | (3,640) | | | (1,930) | | | (4,490) | |
Income tax expense | (2,242) | | | (9,398) | | | (5,680) | | | (7,056) | | |
Income tax benefit (expense) | | Income tax benefit (expense) | 7,001 | | | (8,588) | | | 1,321 | | | (15,644) | |
(Loss) income from continuing operations | (Loss) income from continuing operations | $ | (4,567) | | | $ | 33,969 | | | $ | 9,449 | | | $ | 28,983 | | (Loss) income from continuing operations | $ | (13,455) | | | $ | 29,252 | | | $ | (4,006) | | | $ | 58,235 | |
| | |
| | | | | | | | | | | | | |
| As of |
| September 30, 2021 | | March 31, 2021 | | |
Assets: | | | | | |
Direct | $ | 64,780 | | | $ | 47,002 | | | |
Retail | 211,566 | | | 146,001 | | | |
Unallocated corporate | 114,684 | | | 161,227 | | | |
Total assets | $ | 391,030 | | | $ | 354,230 | | | |
| | | | | | | | | | | | | |
| As of |
| December 31, 2021 | | March 31, 2021 | | |
Assets: | | | | | |
Direct | $ | 50,585 | | | $ | 47,002 | | | |
Retail | 198,791 | | | 146,001 | | | |
Unallocated corporate | 117,589 | | | 161,227 | | | |
Total assets | $ | 366,965 | | | $ | 354,230 | | | |
The following customers accounted for 10% or more of total net sales as follows:
| | | Three-Months Ended September 30, | | Six-Months Ended September 30, | | Three-Months Ended December 31, | | Nine-Months Ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Amazon.com | | Amazon.com | * | | 13.5% | | 14.4% | | 17.8% |
Best Buy | Best Buy | 18.6% | | * | | 17.8% | | * | Best Buy | 14.0% | | * | | 16.6% | | * |
Amazon.com | 15.4% | | 22.9% | | 16.8% | | 20.8% | |
| Dick's Sporting Goods | | Dick's Sporting Goods | * | | 14.0% | | * | | 10.7% |
*Less than 10% of total net sales. | *Less than 10% of total net sales. | | *Less than 10% of total net sales. | |
(15) BORROWINGS
Wells Fargo Bank Credit Agreement
On May 13,October 29, 2021, we amended our Credit Agreement dated May 13, 2021 which amended our original Credit Agreement, dated January 31, 2020, with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility, in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Credit Facility”), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. Several key features have been beneficially amended including permanently removingThe amendment increased the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence on February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availabilityaggregate principal amount available under the ABL Revolving Facility. In additionFacility from $55.0 million to $100.0 million (the “Revolver”), subject to a borrowing base. The maturity date of the above structural improvements, the interest rateCredit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan Facility was reduced$11.5 million, as of the effective date of the amendment, and will amortize on a new 60-month straight line basis to LIBOR plus 4.50% versus 5.00%.The Term Loan Facility continues to contain amortizationcoincide with the extended maturity date. In connection with the October 29, 2021 credit amendment we recorded $0.6 million in new financing costs as originally scheduled.Other assets on our Condensed Consolidated Balance Sheet. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.
Other structural improvements to the Credit Agreement include amending the definition of Springing Trigger Event to mean the greater of (i) 10.0% of the lesser of (a) the Revolver Commitment and (b) the Borrowing Base as of such date of determination and (ii) $7.5 million. The Springing Trigger Event pertains to the period in which a Fixed Charge Coverage Ratio test will apply and be tested. Consistent with the Credit Agreement before the amendment, there continues to be no additional financial maintenance covenants. Additionally, the borrowing base definitions were favorably amended to change the eligible in-transit inventory sublimit from $10.0 million to $22.5 million and the total inventory sublimit from $35.0 million to $65.0 million.
As of December 31, 2021, outstanding borrowings totaled $56.1 million, with $10.9 million and $45.2 million under our Term Loan Facility and Revolver, respectively. As of December 31, 2021, we were in compliance with the financial covenants of the Credit Agreement and $54.9 million was available for borrowing under the ABL Revolving Facility.
Interest on the ABL Revolving FacilityRevolver will accrue at LIBORSecured 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%. As of September 30,December 31, 2021, our interest rate was 1.83%1.97% for the ABL Revolving FacilityRevolver and 4.58%4.60% for the Term Loan Facility.
As of September 30, 2021, outstanding borrowings totaled $17.5 million, with $11.5 million and $6.0 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of September 30, 2021, we were in compliance with the financial covenants of the Credit Agreement and $49.0 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.
See Note 17 for a discussion of an amendment to the Credit Agreement in October 2021, which included extending the maturity date from January 31, 2025 to October 29, 2026.
(16) COMMITMENTS AND CONTINGENCIES
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of September 30,December 31, 2021, 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 September 30,December 31, 2021, we had approximately $78.0$59.2 million compared to $216.3 million as of March 31, 2021 in non-cancellable market-based purchase obligations, primarily to secure 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 September 30,December 31, 2021.
Legal Matters
From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur.
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.
AsDuring the second quarter of September 30, 2021,fiscal 2022, we accruedrecorded a $4.7 million for a 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 iswas included as a component of General and administrative on our Condensed Consolidated Statements of Operations. As of December 31, 2021, $4.3 million remained accrued and was reflected in Accrued liabilities and Other long-term liabilities on the face of our Condensed Consolidated Balance Sheet and reported as general and administrative expenses.Sheets.
(17) SUBSEQUENT EVENTS
On October 29, 2021, we amended our Credit Agreement. The amendment increased the aggregate principal amount available under the ABL Revolving Facility from $55.0 million to $100.0 million (“Revolver”), subject to a borrowing base. The maturity date of the Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million, as of the effective date of the Amendment, and will amortize on a new 60-month straight line basis to coincide with the extended maturity date.
Other structural improvements to the Credit Agreement include amending the definition of Springing Trigger Event to mean the greater of (i) 10.0% of the lesser of (a) the Revolver Commitment and (b) the Borrowing Base as of such date of determination and (ii) $7.5 million. The Springing Trigger Event pertains to the period in which a Fixed Charge Coverage Ratio test will apply and be tested. Consistent with the Credit Agreement before the Amendment, there continues to be no additional financial maintenance covenants. Additionally, the borrowing base definitions were favorably amended to change the eligible in-transit inventory sublimit from $10.0 million to $22.5 million and the total inventory sublimit from $35.0 million to $65.0 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). All references to the second quarterthird quarters of fiscal 2022 and 2021 and 2020to mean the for the three and six-monthnine-month periods ended September 30,December 31, 2021 and 2020, respectively. Unless the context otherwise requires, “Nautilus,” “we,” “us” and “our” refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.
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 2020 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.
Overview
We empower healthier living through individualized connected fitness experiences and are committed to building a healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and 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.
Our results for the three and six-monthsnine-months ended September 30,December 31, 2021, are driven by the actions outlined in our North Star strategy. The five strategic pillars of our North Star strategy are: (1) Adopt a consumer first mindset; (2) Scale a differentiated digital offering; (3) Focus investments on core businesses; (4) Evolve supply chain to be a strategic advantage; and (5) Build organizational capabilities to win by unleashing the power of our team. We intend to leverage our many strengths to transform into a company that empowers healthier living through individualized connected fitness experiences. Our transformation will 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 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.
Comparison for the Three-Months Ended September 30,December 31, 2021 to the Three-Months ended September 30,December 31, 2020
•Net sales were $138.0$147.3 million for the three-months ended September 30,December 31, 2021, compared to $155.4$189.3 million a decline of 11.2%22.2% versus for the three-months ended September 30,December 31, 2020, or down 5.4%21.7%, excluding sales related to the Octane brand, which was sold in October 2020. TheLower demand of our cardio products were partially offset by sales decline was driven primarily by lower Direct salesof SelectTech® weights and shipping constraints. Duebenches compared to the severe shortage of shipping containers, some factory fulfilled orders, representing over $22 millionsame period in revenue, did not ship as planned in late September. 56% of those orders shipped in October.2020.
•Net sales of our Direct segment decreased by $23.3$21.5 million, or 38.1%26.1%, for the three-months ended September 30,December 31, 2021, compared to the three-months ended September 30,December 31, 2020. Net sales decrease was primarily driven by lower cardio sales and higher sales discounting.
•Net sales of our Retail segment increaseddecreased by $6.0$20.6 million, or 6.4%19.4%, for the three-months ended September 30,December 31, 2021, compared to the three-months ended September 30,December 31, 2020. Excluding sales related to the Octane brand, which was sold in 2020, net sales grew 18.6%were down 18.5%. The decrease in sales is primarily driven by lower cardio sales and higher sales discounting, partially offset by strong sales of SelectTech® weights and benches.
•Royalty income for the three-months ended September 30,December 31, 2021 decreasedincreased by $0.1 million compared to the three-months ended September 30,December 31, 2020.
•Gross profit was $42.1$29.9 million for the three-months ended September 30,December 31, 2021, compared to gross profit of $67.9$77.9 million for the three-months ended September 30,December 31, 2020. Gross profit margins were 30.5%20.3% for the three-months ended September 30,December 31, 2021 compared to 43.7%41.1% for the three-months ended September 30,December 31, 2020. The 13.220.8 ppt decrease in gross margins was primarily due to: increased product costs, logistics (-8 ppts), commodities, components, and foreign exchange (-4discounting (-18 ppts) and increased investments in JRNY® (-1 ppt)(-3 ppts).
•Operating expenses were $44.0$49.2 million for the three-months ended September 30,December 31, 2021, an increase of $20.1$12.8 million, or 83.8%35.3%, compared to operating expenses of $23.9$36.4 million for the three-months ended September 30,December 31, 2020, primarily due to the $8.3 million Octane Gain on Disposal Group for the three-months ended September 30, 2020, a legal settlement of $4.7 million, $4.0$11.0 million more in advertising $3.5and $3.6 million increase in JRNY® investments, and acquisition expenses of $0.8 million.investments. Total advertising expenses were $12.1$21.5 million for the three-months ended September 30,December 31, 2021 versus $8.0$10.5 million for the three-months ended September 30,December 31, 2020 trending more towards historical levels..
•Operating loss was $2.0$19.3 million or negative 1.4%13.1% operating margin for the three-months ended September 30,December 31, 2021, compared to an operating income of $44.0$41.5 million for the three-months ended September 30,December 31, 2020, primarily due to lower gross profits and higher operating expenses.
•Loss from continuing operations was $4.6$13.5 million, or -$0.15$(0.43) per diluted share, for the three-months ended September 30,December 31, 2021, compared to income from continuing operations of $34.0$29.3 million, or $1.05$0.90 per diluted share, for the three-months ended September 30, 2020.
•Net loss was $4.6 million for the three-months ended September 30, 2021, compared to net income of $33.8 million for the three-months ended September 30,December 31, 2020.
•Net loss was $13.5 million for the three-months ended December 31, 2021, compared to net income of $28.9 million for the three-months ended December 31, 2020.
•The effective tax rates were negative 96.4%34.2% for the three-months ended September 30,December 31, 2021 and 21.7%22.7% for the three-months ended September 30,December 31, 2020, primarily due to the impact of the VAY acquisition.lower income.
Comparison for the Six-MonthsNine-Months Ended September 30,December 31, 2021 to the Six-MonthsNine-Months Ended September 30,December 31, 2020
•Net sales were $322.6$469.8 million up 19.7%2.4% for the six-monthsnine-months ended September 30,December 31, 2021 compared to net sales of $269.6$458.8 million for the six-monthsnine-months ended September 30,December 31, 2020. Excluding sales related to the Octane brand, net sales were up 28.2%6.8% compared to the six-monthsnine-months ended September 30,December 31, 2020. The sales increase compared to the same period in 2020 was driven primarily by robust sales of our popular SelectTech® weights.weights and benches.
•Gross profit was $97.6$127.5 million for the six-monthsnine-months ended September 30,December 31, 2021, compared to gross profit of $115.3$193.2 million for the six-monthsnine-months ended September 30,December 31, 2020. Gross profit margins were 30.2%27.1% for the six-monthsnine-months ended September 30,December 31, 2021, compared to 42.8%42.1% for the six-monthsnine-months ended September 30,December 31, 2020. The 12.615 ppts decrease in gross margins was primarily due to: increased product costs, logistics (-7 ppts), commodities, components, and foreign exchange (-5discounting (-13 ppts) and increased investments in JRNY®(-1 ppt) (-2 ppts).
•Operating expenses were $81.6$130.9 million, an increase of $3.2$16.0 million, or 4.1%14.0% for the six-monthsnine-months ended September 30,December 31, 2021, compared to operating expenses of $78.4$114.8 million for the six-monthsnine-months ended September 30,December 31, 2020, primarily due to $12.5a $23.5 million more in advertising, increased JRNY® investments of $5.9$9.5 million, a legal settlement of $4.7 million, and acquisition expenses of $1.0$1.7 million, and partially offset by the $20.7 million Octane Loss on Disposal Group for the six-monthsnine-months ended September 30,December 31, 2020. Total advertising expenses were $22.9$44.3 million for the six-monthsnine-months ended September 30,December 31, 2021, compared to $10.4$20.9 million for the six-monthsnine-months ended September 30,December 31, 2020.
•Operating incomeloss was $15.9$3.4 million for the six-monthsnine-months ended September 30,December 31, 2021, compared to operating income of $36.9$78.4 million for the six-monthsnine-months ended September 30,December 31, 2020. The decrease was primarily due to lower gross profit and higher operating expenses.expenses, partially offset by the Octane Loss on Disposal Group.
•Net incomeloss was $9.3$4.2 million for the six-monthsnine-months ended September 30,December 31, 2021, compared to net income of $28.7$57.7 million for the six-monthsnine-months ended September 30,December 31, 2020.
Comparison for the Three and Nine-Month Periods Ended December 31, 2021 to the Three and Nine-Month Periods Ended December 31, 2020 and 2019, respectively.
The Company measured the sales results versus the same period both one, and in addition, two years ago as we return to our new normal level of demand post COVID pandemic.
•Net sales were $147.3 million, a decline of 22.2% versus the three-month period ended December 31, 2020. When excluding sales related to the Octane brand net sales grew 63% a 28% CAGR for the three-month period ended December 31, 2021 when compared to the same period in 2019.
•Net sales were $469.8 million, grew 2.4% versus the nine-month period ended December 31, 2020. When excluding sales related to the Octane brand net sales grew 144% a 56% CAGR for the nine-month period ended December 31, 2021 when compared to the same period in 2019.
JRNY® Update
•Nautilus, Inc. continues to enhance the JRNY®platform, creating differentiated connected-fitness experiences for their members. On September 17, 2021, Nautilus completed its acquisition of VAY AG (“VAY”). VAY specializes in computer vision and AI technology and has developed reliable and precise software solutions for human motion analysis using input from a standard RGB (red-green-blue) camera, such as those found on laptops, smartphones, and tablets. With a mission to democratize professional human motion analysis, VAY enables clients in fitness & health to understand and analyze human movement, providing personalized feedback on repetitions and form in real-time. This acquisition will enhance
•In the third quarter, the Company expanded the JRNY® connected-fitness experience by driving innovation and functionality for members, keeping them engaged, and helping them reach their fitness goals.
The Company recently announced thatenabled product line, adding the JRNYBowflex® Max Total® digital fitness platform now includes a video library of instructor-led strength workouts for16 and Bowflex® SelectTech® 552 and 1090 dumbbells, and that, for a limited time, newdumbbells. The attachment of JRNY® customers will receiveto the Bowflex® SelectTech® modalities has been a one-year complimentary membership. This marks the latest step in makingsignificant growth driver of the JRNY® experience available to more consumers — whether they are using cardio or strength equipment.
The Company also recently introduced the Bowflex® Max Total® 16 cardio machine — the premier model in the popular, one-of-a-kind Max Trainer line —member base, which includes a 16”, embedded HD touch screen that integrates with the enhanced JRNY® digital fitness platform to helpreached nearly 250k members achieve their fitness goals by offering curated workouts and entertainment options that stream while being coached. The Max Trainer has been oneas of the Company’s all-time best-selling products. This latest offering includes a one-year JRNY® digital fitness platform membership. JRNY® members stay engaged and motivated with unlimited access to voice-coached individualized workouts, world-class trainer-led workouts, and immersive experiences where workouts are paired with Explore the World™ routes. JRNY® also provides integration with other fitness app workouts, which are tracked and saved in the JRNY® member’s journal.
The Company defines JRNY® Members as all individuals who have a JRNY® account and/or subscription, which includes Subscribers, their respective associated members and members who consume free content.December 31, 2021.
•The Company extended JRNY® to include whole body workouts, including FitOn and new strength videos on demand. This enables customers to track workouts across strength, cardio, and whole-body in their journal. Year-to-date, the Company has added more than 150 locations to their popular Explore the World™ experiences and continues to add new trainer-led videos to the platform.
•The Company began offering 12-month complimentary trials in late September, offering customers the opportunity to create lasting habits with the platform and provide feedback on their experience over a longer term.
•The Company also recently launched JRNY.com a new subscription management and billing platform, establishing a browser-based portal for customers to manage their membership and interact with JRNY®. The subscription platform provides critical customer engagement, including payment confirmation, payment refunds, subscription changes and cancellations, and trial ending and renewal reminders.
Forward Looking Guidance
BackSecond Half of Fiscal 2022
•The Company’s revenue forGiven the next few quarters will be comparedeffect of the COVID-19 pandemic on last year’s 2nd Half sales and to record results due to the pandemic’s effect on net sales last year. To gauge continuedgrowth and progress against the expanded addressable market,more “normalized” results, the Company will be measuring businessthis year’s sales versus the same period two years ago for the next few quarters. In addition, because fitness season straddles the last two quarters of the year, the Company believes it is prudent to consider results on a six-month basis from October 1, 2021 to March 31, 2022.
•The Company now expects total company net sales in the second half of Fiscal 2022 to be between $260 million and $280 million, an increase of 31% to 41% versus the same period in 2020. The decline versus previous guidance is driven by lower demand in International and increased promotional activity in the US and Canada in this fiscal year’s fitness season.
•The Company expects total company net sales for the back halfimpact of fiscal 2022increased logistics, product costs, and discounting to be between $290 million and $320 million, a 2-year revenue CAGR of 21%decline operating margins by 15 to 27%. Sales guidance reflects $6.0 million16 percentage points, 3 to $7.0 million of deferred revenue related4 percentage points worse than previous guidance. The change is primarily due to the Company’s plan to continue bundling 12-month JRNY® trials with cardio equipment sales.more promotional environment as mentioned above.
•The Company expects global supply chain challenges to continue pressuring gross margins in the back half. Gross margins are expected to be 15 to 17 percentage points lower than the same period last year driven by increased logistics, deferred revenue, and investments in JRNY®. and in Marketing to increase versus the same period last year. As a rate of sales compared to last year, overall investments in JRNY® will be 6 to 9 percentage points higher, and advertising spend will be 8 to 9 percentage points higher.
•The Company was pleased withAs previously guided, for the resultssecond half of the JRNY® investments in the 1st Half and plans to increase investments in the back half to accelerate membership acquisition. The Company expects these investments to dilute operating margins by 5 to 6 percentage points.
•The Company expects to increase advertising spend in the 2nd Half by 9 to 11 percentage points as a rate of sales to market the latest connected fitness offerings to remain competitive in share of voice in the upcoming fitness season.
•Lastly,Fiscal 2022, the Company expects to continue investing in the infrastructure needed to scale and expects these investments to dilute operating margins by 4 to 5 percentage points.
•Given these investments and the external macro pressure on gross margin the Company expects a loss in the back half with negative operating margins in the mid-teens.
•For the second half of Fiscal 2022, the Company expects adjusted EBITDA loss in the low-teens.
•The Company continues to expectis reiterating full year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY® investments.
•The Company is raising their guidance forexpects the number of JRNY® members at year-end to 250,000 to 350,000 bycross 300,000 slightly above the endmid-point of FY22our previous guidance.
Longer term view, beyond Fiscal 2022
•For fiscal year 2023, the Company expects gross margin to improve to the low 30% range driven by stabilization in the logistics environment and the accretive impact of the higher margin subscription business. Thus, theThe Company expects to return to positive adjusted EBITDA in fiscal year 2023.
•The Company stated that they have made the strategic decision2023 and are on track to accelerate investments in JRNY for the remainder of fiscal 2022 and through fiscal 2023 with a focus on product innovation and marketing. The Company now believes that JRNY will be accretive sooner than previously expected and will accelerate the achievement of their long-termachieve operating margin goalmargins of 15% by one year to FYE 2025, with margins expanding to high teens by FYE 26.2026.
Factors Affecting Our Performance
Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing
sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the U.S. and Canada. The COVID-19 pandemic has created a heightened need for home-fitness products at an unplanned rate. We are unable to estimate the length of time that the short-term increases in demand for many of our home-fitness products will outpace supply and we are accelerating the manufacturing and delivery of key products. We cannot predict the longer-term impacts of COVID-19 and the impact on our results of operations is uncertain. Our gross margins are being impacted by fluctuations in the costs or availability of materials used to manufacture our products, tariffs,
expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations in cost associated with acquisition or license of products and technologies, product warranty costs, the cost of fuel, foreign currency exchange rates, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, 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 2020 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 2021 or 2020 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 thousands):
| | | Three-Months Ended September 30, | | Change | | Three-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Net sales | Net sales | $ | 137,959 | | | $ | 155,391 | | | $ | (17,432) | | | (11.2) | % | Net sales | $ | 147,258 | | | $ | 189,259 | | | $ | (42,001) | | | (22.2) | % |
Cost of sales | Cost of sales | 95,906 | | | 87,453 | | | 8,453 | | | 9.7 | % | Cost of sales | 117,342 | | | 111,388 | | | 5,954 | | | 5.3 | % |
Gross profit | Gross profit | 42,053 | | | 67,938 | | | (25,885) | | | (38.1) | % | Gross profit | 29,916 | | | 77,871 | | | (47,955) | | | (61.6) | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Selling and marketing | Selling and marketing | 21,939 | | | 19,207 | | | 2,732 | | | 14.2 | % | Selling and marketing | 32,395 | | | 21,998 | | | 10,397 | | | 47.3 | % |
General and administrative | General and administrative | 16,376 | | | 8,841 | | | 7,535 | | | 85.2 | % | General and administrative | 11,456 | | | 10,364 | | | 1,092 | | | 10.5 | % |
Research and development | Research and development | 5,688 | | | 4,240 | | | 1,448 | | | 34.2 | % | Research and development | 5,379 | | | 4,029 | | | 1,350 | | | 33.5 | % |
Gain on disposal group | — | | | (8,345) | | | 8,345 | | | (100.0) | % | |
| Total operating expenses | Total operating expenses | 44,003 | | | 23,943 | | | 20,060 | | | 83.8 | % | Total operating expenses | 49,230 | | | 36,391 | | | 12,839 | | | 35.3 | % |
Operating (loss) income | Operating (loss) income | (1,950) | | | 43,995 | | | (45,945) | | | (104.4) | % | Operating (loss) income | (19,314) | | | 41,480 | | | (60,794) | | | (146.6) | % |
Other expense: | Other expense: | | Other expense: | |
Interest income | Interest income | 12 | | | 1 | | | 11 | | | Interest income | 1 | | | 7 | | | (6) | | |
Interest expense | Interest expense | (481) | | | (253) | | | (228) | | | Interest expense | (354) | | | (280) | | | (74) | | |
Other, net | Other, net | 94 | | | (376) | | | 470 | | | Other, net | (789) | | | (3,367) | | | 2,578 | | |
Total other expense, net | Total other expense, net | (375) | | | (628) | | | 253 | | | Total other expense, net | (1,142) | | | (3,640) | | | 2,498 | | |
(Loss) income from continuing operations before income taxes | (Loss) income from continuing operations before income taxes | (2,325) | | | 43,367 | | | (45,692) | | | (Loss) income from continuing operations before income taxes | (20,456) | | | 37,840 | | | (58,296) | | |
Income tax expense | 2,242 | | | 9,398 | | | (7,156) | | | |
Income tax (benefit) expense | | Income tax (benefit) expense | (7,001) | | | 8,588 | | | (15,589) | | |
(Loss) income from continuing operations | (Loss) income from continuing operations | (4,567) | | | 33,969 | | | (38,536) | | | (Loss) income from continuing operations | (13,455) | | | 29,252 | | | (42,707) | | |
Loss from discontinued operations, net of taxes | Loss from discontinued operations, net of taxes | (35) | | | (131) | | | 96 | | | Loss from discontinued operations, net of taxes | (44) | | | (316) | | | 272 | | |
Net (loss) income | Net (loss) income | $ | (4,602) | | | $ | 33,838 | | | $ | (38,440) | | | Net (loss) income | $ | (13,499) | | | $ | 28,936 | | | $ | (42,435) | | |
|
| | | Six-Months Ended September 30, | | Change | | Nine-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Net sales | Net sales | $ | 322,552 | | | $ | 269,579 | | | $ | 52,973 | | | 19.7 | % | Net sales | $ | 469,810 | | | $ | 458,838 | | | $ | 10,972 | | | 2.4 | % |
Cost of sales | Cost of sales | 224,994 | | | 154,245 | | | 70,749 | | | 45.9 | % | Cost of sales | 342,336 | | | 265,633 | | | 76,703 | | | 28.9 | % |
Gross profit | Gross profit | 97,558 | | | 115,334 | | | (17,776) | | | (15.4) | % | Gross profit | 127,474 | | | 193,205 | | | (65,731) | | | (34.0) | % |
Operating expenses: | Operating expenses: | | | | Operating expenses: | | | |
Selling and marketing | Selling and marketing | 43,239 | | | 31,653 | | | 11,586 | | | 36.6 | % | Selling and marketing | 75,634 | | | 53,651 | | | 21,983 | | | 41.0 | % |
General and administrative | General and administrative | 27,899 | | | 18,156 | | | 9,743 | | | 53.7 | % | General and administrative | 39,355 | | | 28,520 | | | 10,835 | | | 38.0 | % |
Research and development | Research and development | 10,503 | | | 7,968 | | | 2,535 | | | 31.8 | % | Research and development | 15,882 | | | 11,997 | | | 3,885 | | | 32.4 | % |
Loss on disposal group | Loss on disposal group | — | | | 20,668 | | | (20,668) | | | (100.0) | % | Loss on disposal group | — | | | 20,668 | | | (20,668) | | | (100.0) | % |
Total operating expenses | Total operating expenses | 81,641 | | | 78,445 | | | 3,196 | | | 4.1 | % | Total operating expenses | 130,871 | | | 114,836 | | | 16,035 | | | 14.0 | % |
Operating income | 15,917 | | | 36,889 | | | (20,972) | | | (56.9) | % | |
Operating (loss) income | | Operating (loss) income | (3,397) | | | 78,369 | | | (81,766) | | | (104.3) | % |
Other expense: | Other expense: | | | | Other expense: | | | |
Interest income | Interest income | 33 | | | 2 | | | 31 | | | Interest income | 34 | | | 9 | | | 25 | | |
Interest expense | Interest expense | (795) | | | (591) | | | (204) | | | Interest expense | (1,149) | | | (871) | | | (278) | | |
Other, net | Other, net | (26) | | | (261) | | | 235 | | | Other, net | (815) | | | (3,628) | | | 2,813 | | |
Total other expense, net | Total other expense, net | (788) | | | (850) | | | 62 | | | Total other expense, net | (1,930) | | | (4,490) | | | 2,560 | | |
Income from continuing operations before income taxes | 15,129 | | | 36,039 | | | (20,910) | | | |
Income tax expense | 5,680 | | | 7,056 | | | (1,376) | | | |
Income from continuing operations | 9,449 | | | 28,983 | | | (19,534) | | | |
(Loss) income from continuing operations before income taxes | | (Loss) income from continuing operations before income taxes | (5,327) | | | 73,879 | | | (79,206) | | |
Income tax (benefit) expense | | Income tax (benefit) expense | (1,321) | | | 15,644 | | | (16,965) | | |
(Loss) income from continuing operations | | (Loss) income from continuing operations | (4,006) | | | 58,235 | | | (62,241) | | |
Loss from discontinued operations, net of taxes | Loss from discontinued operations, net of taxes | (167) | | | (255) | | | 88 | | | Loss from discontinued operations, net of taxes | (211) | | | (571) | | | 360 | | |
Net income | $ | 9,282 | | | $ | 28,728 | | | $ | (19,446) | | | |
Net (loss) income | | Net (loss) income | $ | (4,217) | | | $ | 57,664 | | | $ | (61,881) | | |
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Results of operations information by segment and major product lines was as follows (dollars in thousands):
| | | Three-Months Ended September 30, | | Change | | Three-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | | | | |
Direct net sales: | Direct net sales: | | Direct net sales: | |
Cardio products(1) | Cardio products(1) | $ | 22,406 | | | $ | 44,278 | | | $ | (21,872) | | | (49.4) | % | Cardio products(1) | $ | 35,558 | | | $ | 52,876 | | | $ | (17,318) | | | (32.8) | % |
Strength products(2) | Strength products(2) | 15,447 | | | 16,916 | | | (1,469) | | | (8.7) | % | Strength products(2) | 25,147 | | | 29,282 | | | (4,135) | | | (14.1) | % |
Direct | Direct | 37,853 | | | 61,194 | | | (23,341) | | | (38.1) | % | Direct | 60,705 | | | 82,158 | | | (21,453) | | | (26.1) | % |
| Retail net sales: | Retail net sales: | | Retail net sales: | |
Cardio products(1) | Cardio products(1) | $ | 58,848 | | | $ | 71,924 | | | (13,076) | | | (18.2) | % | Cardio products(1) | $ | 37,199 | | | $ | 78,255 | | | (41,056) | | | (52.5) | % |
Strength products(2) | Strength products(2) | 40,305 | | | 21,231 | | | 19,074 | | | 89.8 | % | Strength products(2) | 48,502 | | | 28,065 | | | 20,437 | | | 72.8 | % |
Retail | Retail | 99,153 | | | 93,155 | | | 5,998 | | | 6.4 | % | Retail | 85,701 | | | 106,320 | | | (20,619) | | | (19.4) | % |
| | Royalty | Royalty | 953 | | | 1,042 | | | (89) | | | (8.5) | % | Royalty | 852 | | | 781 | | | 71 | | | 9.1 | % |
| | $ | 137,959 | | | $ | 155,391 | | | $ | (17,432) | | | (11.2) | % | | $ | 147,258 | | | $ | 189,259 | | | $ | (42,001) | | | (22.2) | % |
| Cost of sales: | Cost of sales: | | Cost of sales: | |
Direct | Direct | $ | 23,877 | | | $ | 26,204 | | | $ | (2,327) | | | (8.9) | % | Direct | $ | 42,597 | | | $ | 38,155 | | | $ | 4,442 | | | 11.6 | % |
Retail | Retail | 72,029 | | | 61,249 | | | 10,780 | | | 17.6 | % | Retail | 74,745 | | | 73,233 | | | 1,512 | | | 2.1 | % |
| | | $ | 95,906 | | | $ | 87,453 | | | $ | 8,453 | | | 9.7 | % | | $ | 117,342 | | | $ | 111,388 | | | $ | 5,954 | | | 5.3 | % |
| Gross profit: | Gross profit: | | | | | | | | Gross profit: | | | | | | | |
Direct | Direct | $ | 13,976 | | | $ | 34,990 | | | $ | (21,014) | | | (60.1) | % | Direct | $ | 18,108 | | | $ | 44,003 | | | $ | (25,895) | | | (58.8) | % |
Retail | Retail | 27,124 | | | 31,906 | | | (4,782) | | | (15.0) | % | Retail | 10,956 | | | 33,087 | | | (22,131) | | | (66.9) | % |
Royalty | Royalty | 953 | | | 1,042 | | | (89) | | | (8.5) | % | Royalty | 852 | | | 781 | | | 71 | | | 9.1 | % |
| | $ | 42,053 | | | $ | 67,938 | | | $ | (25,885) | | | (38.1) | % | | $ | 29,916 | | | $ | 77,871 | | | $ | (47,955) | | | (61.6) | % |
Gross profit margin: | Gross profit margin: | | | | | | | | Gross profit margin: | | | | | | | |
Direct | Direct | 36.9 | % | | 57.2 | % | | (2,030) | | basis points | Direct | 29.8 | % | | 53.6 | % | | (2,380) | | basis points |
Retail | Retail | 27.4 | % | | 34.3 | % | | (690) | | basis points | Retail | 12.8 | % | | 31.1 | % | | (1,830) | | basis points |
| Contribution: | Contribution: | | Contribution: | |
Direct | Direct | $ | (1,835) | | | $ | 17,588 | | | (19,423) | | | (110.4) | % | Direct | $ | (8,980) | | | $ | 23,584 | | | (32,564) | | | (138.1) | % |
Retail | Retail | 18,741 | | | 23,442 | | | (4,701) | | | (20.1) | % | Retail | 3,270 | | | 25,338 | | | (22,068) | | | (87.1) | % |
| Contribution rate: | Contribution rate: | | Contribution rate: | |
Direct | Direct | (4.8) | % | | 28.7 | % | | (3,350) | | basis points | Direct | (14.8) | % | | 28.7 | % | | (4,350) | | basis points |
Retail | Retail | 18.9 | % | | 25.2 | % | | (630) | | basis points | Retail | 3.8 | % | | 23.8 | % | | (2,000) | | 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 and subscription services. |
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories. |
| | | Six-Months Ended September 30, | | Change | | Nine-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | | | | |
Direct net sales: | Direct net sales: | | Direct net sales: | |
Cardio products(1) | Cardio products(1) | $ | 53,836 | | | $ | 89,863 | | | $ | (36,027) | | | (40.1) | % | Cardio products(1) | $ | 89,394 | | | $ | 142,739 | | | $ | (53,345) | | | (37.4) | % |
Strength products(2) | Strength products(2) | 47,413 | | | 21,764 | | | 25,649 | | | 117.9 | % | Strength products(2) | 72,560 | | | 51,046 | | | 21,514 | | | 42.1 | % |
Direct | Direct | 101,249 | | | 111,627 | | | (10,378) | | | (9.3) | % | Direct | 161,954 | | | 193,785 | | | (31,831) | | | (16.4) | % |
| Retail net sales: | Retail net sales: | | Retail net sales: | |
Cardio products(1) | Cardio products(1) | 148,772 | | | 120,935 | | | 27,837 | | | 23.0 | % | Cardio products(1) | 185,971 | | | 199,190 | | | (13,219) | | | (6.6) | % |
Strength products(2) | Strength products(2) | 70,865 | | | 35,168 | | | 35,697 | | | 101.5 | % | Strength products(2) | 119,367 | | | 63,233 | | | 56,134 | | | 88.8 | % |
Retail | Retail | 219,637 | | | 156,103 | | | 63,534 | | | 40.7 | % | Retail | 305,338 | | | 262,423 | | | 42,915 | | | 16.4 | % |
| | Royalty | Royalty | 1,666 | | | 1,849 | | | (183) | | | (9.9) | % | Royalty | 2,518 | | | 2,630 | | | (112) | | | (4.3) | % |
| | $ | 322,552 | | | $ | 269,579 | | | $ | 52,973 | | | 19.7 | % | | $ | 469,810 | | | $ | 458,838 | | | $ | 10,972 | | | 2.4 | % |
Cost of sales: | Cost of sales: | | | | | | | Cost of sales: | | | | | | |
Direct | Direct | $ | 62,759 | | | $ | 49,114 | | | $ | 13,645 | | | 27.8 | % | Direct | $ | 105,356 | | | $ | 87,269 | | | $ | 18,087 | | | 20.7 | % |
Retail | Retail | 162,235 | | | 105,131 | | | 57,104 | | | 54.3 | % | Retail | 236,980 | | | 178,364 | | | 58,616 | | | 32.9 | % |
| | | $ | 224,994 | | | $ | 154,245 | | | $ | 70,749 | | | 45.9 | % | | $ | 342,336 | | | $ | 265,633 | | | $ | 76,703 | | | 28.9 | % |
Gross profit: | Gross profit: | | | | | | | | Gross profit: | | | | | | | |
Direct | Direct | $ | 38,490 | | | $ | 62,513 | | | $ | (24,023) | | | (38.4) | % | Direct | $ | 56,598 | | | $ | 106,516 | | | $ | (49,918) | | | (46.9) | % |
Retail | Retail | 57,402 | | | 50,972 | | | 6,430 | | | 12.6 | % | Retail | 68,358 | | | 84,059 | | | (15,701) | | | (18.7) | % |
Royalty | Royalty | 1,666 | | | 1,849 | | | (183) | | | (9.9) | % | Royalty | 2,518 | | | 2,630 | | | (112) | | | (4.3) | % |
| | $ | 97,558 | | | $ | 115,334 | | | $ | (17,776) | | | (15.4) | % | | $ | 127,474 | | | $ | 193,205 | | | $ | (65,731) | | | (34.0) | % |
| Gross profit margin: | Gross profit margin: | | | | | | | | Gross profit margin: | | | | | | | |
Direct | Direct | 38.0 | % | | 56.0 | % | | (1,800) | | basis points | Direct | 34.9 | % | | 55.0 | % | | (2,010) | | basis points |
Retail | Retail | 26.1 | % | | 32.7 | % | | (660) | | basis points | Retail | 22.4 | % | | 32.0 | % | | (960) | | basis points |
| Contribution: | Contribution: | | Contribution: | |
Direct | Direct | $ | 4,924 | | | $ | 34,583 | | | $ | (29,659) | | | (85.8) | % | Direct | $ | (4,056) | | | $ | 58,167 | | | $ | (62,223) | | | (107.0) | % |
Retail | Retail | 40,831 | | | 35,055 | | | 5,776 | | | 16.5 | % | Retail | 44,101 | | | 60,393 | | | (16,292) | | | (27.0) | % |
| Contribution rate: | Contribution rate: | | Contribution rate: | |
Direct | Direct | 4.9 | % | | 31.0 | % | | (2,610) | | basis points | Direct | (2.5) | % | | 30.0 | % | | (3,250) | | basis points |
Retail | Retail | 18.6 | % | | 22.5 | % | | (390) | | basis points | Retail | 14.4 | % | | 23.0 | % | | (860) | | 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 and subscription 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 December 31, 2021 to the Three-Month Period Ended December 31, 2020
Net sales were $37.9$60.7 million for the three-month period ended September 30,December 31, 2021, compared to $61.2$82.2 million, a decline of 38.1%26.1%, versus the same period in 2020. Demand trendsNet sales decrease was primarily driven by lower cardio sales and sales results for the quarter were more in line with pre-pandemic seasonality.higher discounting.
Cardio sales declined 49.4%32.8% versus the same period in 2020. Lower sales were primarily driven by lower bike sales, partially offset by increased sales of treadmills and the Max M9, which was the Direct segment’s best-selling model.demand. Strength product sales declined 8.7%14.1% versus the same period in 2020. Lower sales were primarily driven by lower sales of Bowflex® Home Gyms, partially offset by increased sales of SelectTech® weights.weights and benches.
Given the improvement in the Company’s inventory position and the ability to fulfill orders withinThe Direct segment ended the quarter the Direct segment'swith $8.8 million of backlog as of September 30,December 31, 2021, is down to $1.1 million compared to $26.5 million as ofthe first quarter with meaningful backlog since March 31, 2021. These amounts represent unfulfilled consumer orders net of current promotional programs and sales discounts.
Gross profit margins were 36.9%margin was 29.8% for the three-month period ended September 30,December 31, 2021 versus 57.2%53.6% for the same period in 2020. The 20.323.8 ppt decrease in gross margin was primarily driven by:increased product costs, logistics (-13and discounting (-20 ppts), and increased investments in JRNY® (-5 ppts) and commodities, components, and foreign exchange (-2(-4 ppts). Gross profit was $14.0$18.1 million, down 60.1%58.8% versus the same period in 2020.
Segment contribution loss was $1.8$9.0 million for the three-month period ended September 30,December 31, 2021, compared to income of $17.6$23.6 million for the same period in 2020. The decline was primarily driven by lower gross profit includingand increased investments in media and JRNY®, partially offset by decreased media spend.. Advertising expenses were $6.8$16.1 million compared to $8.0$10.5 million for the same period in 2020.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the three-month period ended December 31, 2021 were 60.3%, compared to 52.0% for the same period in 2020. The increase in approvals reflects higher credit quality applications.
Comparison of Segment Results for the Six-MonthNine-Month Period Ended September 30,December 31, 2021 to the Six-MonthNine-Month Period Ended September 30,December 31, 2020
Net sales for the six-monthnine-month period ended September 30,December 31, 2021 were $101.2$162.0 million, down 9.3%16.4% versus the same period in 2020. Decreased sales were driven primarily by cardio products, which declined by 40.1%37.4% versus the same period in 2020, due to lower sales of bikes and partially offset by increased sales of treadmills and max trainers.bikes. Strength products sales grew 117.9%42.1% versus the same period in 2020 driven by SelectTech® weights and benches.
Gross profit margin for the six-monthnine-month period ended September 30,December 31, 2021 were 38.0%was 34.9%, down from 56.0%55.0% for the same period in 2020. The 18.020.1 ppt decrease in gross profit margin was primarily driven by: increased product costs, logistics (-12 ppts), commodities, components, and foreign exchange (-3discounting (-17 ppts) and increased investments in JRNY® (-3 ppts). Gross profit was $38.5$56.6 million, a decrease of 38.4%46.9% versus the same period in 2020.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providersSegment contribution loss for the second quarter ofnine-month period ended December 31, 2021 were 56.1%,was $4.1 million, compared to 48.5%income of $58.2 million for the same period in 2020. The increasedecline was primarily driven by lower gross profit, including increased media spend and investments in approvals reflects higher credit quality applications.JRNY®. Advertising expenses were $30.8 million compared to $20.9 million for the same period in 2020.
Retail Segment
Comparison of Segment Results for the Three-Month Period Ended December 31, 2021 to the Three-Month Period Ended December 31, 2020
Net sales for the three-month period ended September 30,December 31, 2021 were $99.2$85.7 million, up 6.4%down 19.4%, from $93.2$106.3 million for the same period in 2020, or 18.6% excluding2020. Excluding sales related to the Octane, brand.net sales were down 18.5% compared to last year. Retail segment sales outside the United States and Canada grew 42%were down 22%, or 57%20% excluding Octane. Due to the severe shortage
The decrease in revenue, did not ship as planned in late September. 56%sales is primarily driven by lower demand for our bikes and higher sales discounting, partially offset by strong sales of those orders shipped in October.SelectTech® weights and benches.
Cardio sales for the three-month period ended September 30,December 31, 2021 decreased by 18.2%, excluding52.5%. Excluding sales related to Octane, net sales were down 5.6%51.7%, compared to the same period in 2020. Lower sales were primarily driven by lower bikes and ellipticals.sales. Strength product sales grew by 89.8%72.8%, led by the popular SelectTech® weights and benches.
Gross profit margins were 27.4%12.8% for the three-month period ended September 30,December 31, 2021, down from 34.3%31.1% for the same period in 2020. The 6.918.3 ppt decrease in gross margin was primarily driven by: commodities, components,increased product costs, logistics and foreign exchange (-4discounting (-17 ppts) and logistics (-3 ppts)increased investments in JRNY® (-1 ppt). Gross profit was $27.1$11.0 million, a decrease of 15.0%66.9% versus the same period in 2020.
Segment contribution income for the three-month period ended September 30,December 31, 2021 was $18.7$3.3 million, or 18.9%3.8% of sales, compared to $23.4$25.3 million, or 25.2%23.8% of sales for the same period in 2020, primarily driven by lower gross profit.
Comparison of Segment Results for the Six-MonthNine-Month Period Ended September 30,December 31, 2021 to the Six-MonthNine-Month Period Ended September 30,December 31, 2020
Net sales for the six-monthnine-month period ended September 30,December 31, 2021 were $219.6$305.3 million, up 40.7%16.4% as compared to $156.1$262.4 million for the same period in 2020. Excluding sales related to Octane, net sales were up 58.9%25.5% versus the same period in 2020. Retail segment sales outside the United States and Canada were up 22% versus same period in 2020. Excluding sales related to Octane, net sales outside the United States and Canada were up 33% versus same period in 2020.
Cardio sales were up 23.0%down 6.6% compared to the same period in 2020, driven primarily by bikes
and treadmills. Excluding sales related to Octane, cardio sales were up 44.4% versus the same period in 2020.bikes. Strength sales were up 101.5%88.8% compared to the same period in 2020, driven primarily by SelectTech® weights.
Gross profit margin for the six-monthnine-month period ended September 30,December 31, 2021 were 26.1%was 22.4%, down from 32.7%32.0% for the same period in 2020. The 6.69.6 ppt decrease in gross profit margin was primarily driven by: commodities, components,by increased product costs, logistics and foreign exchange (-4 ppts) and logistics (-3 ppts).discounting. Gross profit was $57.4$68.4 million, an increasea decrease of 12.6%18.7% versus the same period in 2020.
Segment contribution income for the six-monthnine-month period ended September 30,December 31, 2021 was $40.8$44.1 million compared to $35.1$60.4 million, or 18.6%14.4% of sales for the six-monthnine-month period ended September 30,December 31, 2020, primarily driven by higherlower gross profit.
Royalty
Royalty income decreasedincreased by $0.1 million, or 8.5%9.1%, to $1.0$0.9 million for the three-month period ended September 30,December 31, 2021, compared to the same period of 2020, primarily due to royalty settlements.
Royalty income decreased by $0.2$0.1 million, or 9.9%4.3%, to $1.7$2.5 million for the six-monthnine-month period ended September 30,December 31, 2021, compared to the same period of 2020, 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 our JRNY® platform and other programs.
Selling and marketing information was as follows (dollars in thousands):
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| Three-Months Ended December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Selling and marketing | $ | 32,395 | | | $ | 21,998 | | | $ | 10,397 | | | 47.3% |
As % of net sales | 22.0 | % | | 11.6 | % | | | | |
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| Nine-Months Ended December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Selling and marketing | $ | 75,634 | | | $ | 53,651 | | | $ | 21,983 | | | 41.0% |
As % of net sales | 16.1 | % | | 11.7 | % | | | | |
The increase in selling and marketing expenses for the three-month period ended December 31, 2021 compared to the same period of 2020 was primarily related to an increase of $5.6 million in media spend and $5.4 million in brand advertising. | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Months Ended September 30, | | Change |
| 2021 | | 2020 | | $ | | % |
Selling and marketing | $ | 21,939 | | | $ | 19,207 | | | $ | 2,732 | | | 14.2% |
As % of net sales | 15.9 | % | | 12.4 | % | | | | |
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| Six-Months Ended September 30, | | Change |
| 2021 | | 2020 | | $ | | % |
Selling and marketing | $ | 43,239 | | | $ | 31,653 | | | $ | 11,586 | | | 36.6% |
As % of net sales | 13.4 | % | | 11.7 | % | | | | |
The increase in selling and marketing expenses for the three-monthnine-month period ended September 30,December 31, 2021 compared to the same period of 2020 was primarily related to $5.3an increase of $13.5 million in brand advertising. The increase in sellingadvertising and marketing expenses for the six-month period ended September 30, 2021 compared to the same period of 2020 was primarily related to $8.1$10.0 million in brand advertising.media spend.
Media advertising expense is the largest component of selling and marketing and was as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Months Ended September 30, | | Change |
| 2021 | | 2020 | | $ | | % |
Media advertising - Direct | $ | 6,776 | | | $ | 8,017 | | | $ | (1,241) | | | (15.5)% |
Media advertising - Brand | 5,279 | | | — | | | 5,279 | | | * |
Total advertising | $ | 12,055 | | | $ | 8,017 | | | $ | 4,038 | | | 50.4% |
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| Three-Months Ended December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Media advertising - Direct | $ | 16,052 | | | $ | 10,479 | | | $ | 5,573 | | | 53.2% |
Media advertising - Brand | 5,415 | | | — | | | 5,415 | | | * |
Total advertising | $ | 21,467 | | | $ | 10,479 | | | $ | 10,988 | | | 104.9% |
*Not meaningful
| | | Six-Months Ended September 30, | | Change | | Nine-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Media advertising - Direct | Media advertising - Direct | $ | 14,792 | | | $ | 10,402 | | | $ | 4,390 | | | 42.2% | Media advertising - Direct | $ | 30,844 | | | $ | 20,881 | | | $ | 9,963 | | | 47.7% |
Media advertising - Brand | Media advertising - Brand | 8,087 | | | — | | | 8,087 | | | * | Media advertising - Brand | 13,502 | | | — | | | 13,502 | | | * |
Total advertising | Total advertising | $ | 22,879 | | | $ | 10,402 | | | $ | 12,477 | | | 119.9% | Total advertising | $ | 44,346 | | | $ | 20,881 | | | $ | 23,465 | | | 112.4% |
*Not meaningful
The decreaseincreases in media advertising for Direct for the three-month periodthree and nine-month periods ended September 30,December 31, 2021, as compared to the same periodperiods of 2020 was primarily due the launch of the Bowflex® VeloCore® bike last year. The increase in media advertising for Direct for the six-month period ended September 30, 2021 compared to the same period of 2020 waswere primarily due to theincreased media spending as we return to normalizedmore historical levels of media spend.advertising support to drive demand and preserve market share.
General and Administrative
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, acquisition costs and other administrative fees.
General and administrative was as follows (dollars in thousands):
| | | Three-Months Ended September 30, | | Change | | Three-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
General and administrative | General and administrative | $ | 16,376 | | | $ | 8,841 | | | $ | 7,535 | | | 85.2% | General and administrative | $ | 11,456 | | | $ | 10,364 | | | $ | 1,092 | | | 10.5% |
As % of net sales | As % of net sales | 11.9 | % | | 5.7 | % | | As % of net sales | 7.8 | % | | 5.5 | % | |
| | | Six-Months Ended September 30, | | Change | | Nine-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
General and administrative | General and administrative | $ | 27,899 | | | $ | 18,156 | | | $ | 9,743 | | | 53.7% | General and administrative | $ | 39,355 | | | $ | 28,520 | | | $ | 10,835 | | | 38.0% |
As % of net sales | As % of net sales | 8.6 | % | | 6.7 | % | | As % of net sales | 8.4 | % | | 6.2 | % | |
The increase in general and administrative expenses for the three-month period ended September 30,December 31, 2021 compared to the same period of 2020 was primarily due to increase in personnel expenses.
The increase in general and administrative expenses for the nine-month period ended December 31, 2021 compared to the same period of 2020 was primarily due to a $4.7 million loss contingency related to a legal settlement for a class action lawsuit $1.7 million increaseand increases in personnel expenses and acquisition costs of $0.8 million.costs.
The increase in general and administrative expenses for the six-month period ended September 30, 2021 compared to the same period of 2020 was primarily due to a $4.7 million loss contingency related to a legal settlement for a class action lawsuit, $3.4 million increase in personnel expenses and acquisition costs of $1.0 million.
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 was as follows (dollars in thousands):
| | | Three-Months Ended September 30, | | Change | | Three-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Research and development | Research and development | $ | 5,688 | | | $ | 4,240 | | | $ | 1,448 | | | 34.2% | Research and development | $ | 5,379 | | | $ | 4,029 | | | $ | 1,350 | | | 33.5% |
As % of net sales | As % of net sales | 4.1 | % | | 2.7 | % | | As % of net sales | 3.7 | % | | 2.1 | % | |
| | | Six-Months Ended September 30, | | Change | | Nine-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Research and development | Research and development | $ | 10,503 | | | $ | 7,968 | | | $ | 2,535 | | | 31.8% | Research and development | $ | 15,882 | | | $ | 11,997 | | | $ | 3,885 | | | 32.4% |
As % of net sales | As % of net sales | 3.3 | % | | 3.0 | % | | As % of net sales | 3.4 | % | | 2.6 | % | |
The increases in research and development expenses for the three and six-monthnine-month periods ended September 30,December 31, 2021, as compared to the same periods of 2020, were driven primarily by increased investments in JRNY®, our digital platform.
(Gain) Loss on Disposal Group
The (gain) loss on disposal group for the three and six-month periodsnine-month period ended September 30,December 31, 2020 related to the disposal of our Octane Business in 2020.
Operating (Loss) Income
Operating loss for the three-months ended September 30,December 31, 2021 was $2.0$19.3 million, a decrease of $46.0$60.8 million, or 104.4%146.6%, as compared to an operating income of $44.0$41.5 million compared tofor the same period of 2020. The decrease was primarily due to lower gross profit and increased operating expenses as discussed in more detail above.
Operating incomeloss for the six-monthsnine-months ended September 30,December 31, 2021 was $15.9$3.4 million, a decrease of $21.0$81.8 million, or 56.9%104.3%, as compared to an operating income of $36.9$78.4 million compared tofor the same period of 2020. The decrease was primarily due to lower gross profit and increased operating expenses as discussed in more detail above.
Other, Net
Other, net relates to the effect of exchange rate fluctuations with the U.S. and our foreign subsidiaries.
Income Tax (Benefit) Expense
Income tax provision includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.
Income tax (benefit) expense was as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Months Ended September 30, | | Change |
| 2021 | | 2020 | | $ | | % |
Income tax expense | $ | 2,242 | | | $ | 9,398 | | | $ | (7,156) | | | (76.1)% |
Effective tax rate | (96.4) | % | | 21.7 | % | | | | |
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| | | Six-Months Ended September 30, | | Change | | Three-Months Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Income tax expense (benefit) | $ | 5,680 | | | $ | 7,056 | | | $ | (1,376) | | | (19.5)% | |
Income tax (benefit) expense | | Income tax (benefit) expense | $ | (7,001) | | | $ | 8,588 | | | $ | (15,589) | | | (181.5)% |
Effective tax rate | Effective tax rate | 37.5 | % | | 19.6 | % | | Effective tax rate | 34.2 | % | | 22.7 | % | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| Nine-Months Ended December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Income tax (benefit) expense | $ | (1,321) | | | $ | 15,644 | | | $ | (16,965) | | | (108.4)% |
Effective tax rate | 24.8 | % | | 21.2 | % | | | | |
Income tax benefit for the three-months and nine-months ended December 31, 2021 was primarily due to the loss generated in the U.S.
Income tax expense for the three-months and nine-months ended September 30, 2021 was primarily due to the non-deductible GAAP book expenses that are not allowed for income tax purposes. Such expenses were incurred in the second quarter as a result of our acquisition of VAY, consequently increasing the effective tax rate for the same period. Income tax expense for the three-months ended September 30,December 31, 2020 was as a result of the profit generated in U.S.
Income tax expense for the six-months ended September 30, 2021 was primarily a result of the profit generated in the U.S combined with the aforementioned non-deductible GAAP book expenses incurred during the second quarter. The lower effective tax rate from continuing operations for the six-months ended September 30, 2020 was primarily due to the 14% rate benefit of net operating loss carry-backs as a result of the enactment of the CARES Act.U.S.
(Loss) Income from Continuing Operations
Loss from continuing operations was $4.6$13.5 million for the three-months ended September 30,December 31, 2021, or -$0.15$0.43 per diluted share, compared to income from continuing operations of $34.0$29.3 million, or $1.05$0.90 per diluted share, for the three-months ended September 30,December 31, 2020. The decrease in income from continuing operations was primarily due to lower gross profit and higher operating expenses as discussed in more detail above.
IncomeLoss from continuing operations was $9.4$4.0 million for the six-monthsnine-months ended September 30,December 31, 2021, or $0.29$0.13 per diluted share, compared to $29.0income from continuing operations of $58.2 million, or $0.90$1.80 per diluted share, for the six-monthsnine-months ended September 30,December 31, 2020. The decrease was primarily due to lower gross profit and increased operating expenses as discussed in more detail above.
Net (Loss) Income
Net loss was $4.6$13.5 million for the three-months ended September 30,December 31, 2021, compared to net income of $33.8$28.9 million for the three-months ended September 30,December 31, 2020. Net loss per diluted share was -$0.15$0.43 for the three-months ended September 30,December 31, 2021, compared to net income per diluted share of $1.04$0.89 for the three-months ended September 30,December 31, 2020.
Net incomeloss was $9.3$4.2 million for the six-monthsnine-months ended September 30,December 31, 2021, compared to net income of $28.7$57.7 million for the six-monthsnine-months ended September 30,December 31, 2020. Net incomeloss per diluted share was $0.29$0.14 for the six-monthsnine-months ended September 30,December 31, 2021, compared to net income per diluted share of $0.90$1.78 for the six-monthsnine-months ended September 30,December 31, 2020.
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 September 30,December 31, 2021, we had $21.5$19.7 million of cash, cash equivalents and restricted cash, and $49.0$54.9 million was available for borrowing under the ABL Revolving Facility, compared to $113.2 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $54.4 million available for borrowing under the ABL Revolving Facility as of March 31, 2021. We expect our cash, cash equivalents, restricted cash and amounts available for borrowing under our Credit Facility as of September 30,December 31, 2021, along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from September 30,December 31, 2021.
Cash used in operating activities was $91.6 million for the nine-month period ended December 31, 2021, compared to cash provided in operating activities of $65.3 million for the nine-month period ended December 31, 2020. The decrease in cash flows from operating activities for the nine-month period ended December 31, 2021 as compared to the same period of 2020 was primarily due to changes in our operating assets and liabilities discussed below, as well as the decrease in net income.
Trade receivables increased to $93.6 million as of December 31, 2021, compared to $88.7 million as of March 31, 2021, primarily due to timing of customer payments.
Inventory was $128.1 million as of December 31, 2021, compared to $68.1 million as of March 31, 2021. The increase in inventory was driven by the strategic decision to increase on-hand inventory levels for the fitness season given continued disruption in global logistics. About 15% of inventory as of December 31, 2021 was in-transit.
Prepaid and other current assets decreased by $14.9 million to $11.0 million, compared to $25.8 million as of March 31, 2021, primarily due to decreases in other short-term deposits for inventory and prepaid marketing.
Trade payables decreased by $37.0 million to $61.9 million as of December 31, 2021, compared to $98.9 million as of March 31, 2021, primarily due to timing of payments for inventory.
Accrued liabilities increased by $5.6 million to $25.2 million as of December 31, 2021, compared to $19.6 million as of March 31, 2021, primarily due to an accrued loss contingency related to a class action lawsuit legal settlement.
Cash provided by investing activities of $38.3 million for the nine-month period ended December 31, 2021 was primarily due to proceeds from sales and maturities of available-for-sale securities partially offset by the $26.0 million acquisition of VAY. We anticipate spending between $12.0 million and $14.0 million in fiscal 2022 for digital platform enhancements, systems integration, and production tooling.
Cash provided by financing activities of $38.7 million for the nine-month period ended December 31, 2021 was primarily related to proceeds from long-term debt offset by payments on long-term debt.
Financing Arrangements
On October 29, 2021, we amended our Credit Agreement dated May 13, 2021 which amended our original Credit Agreement, dated January 31, 2020, with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Credit Facility”), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The amendment increased the aggregate principal amount available under the ABL Revolving Facility from $55.0 million to $100.0 million (“Revolver”(the “Revolver”), subject to a borrowing base. The maturity date of the Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million, as of the effective date of the Amendment,amendment, and will amortize on a new 60-month straight line basis to coincide with the extended maturity date.
Cash used in operating activities was $56.8 million for In connection with the six-month period ended September 30, 2021, compared to cash provided in operating activities of $63.6 million for the six-month period ended September 30, 2020. The decrease in cash flows from operating activities for the six-month period ended September 30, 2021 as compared to the same period of 2020 was primarily due to changes in our operating assets and liabilities discussed below, as well as the decrease in net income.
Trade receivables were basically flat at $88.7 million as of September 30, 2021 and March 31, 2021, primarily due to timing of customer payments on decreased sales.
Inventory was $162.7 million as of September 30, 2021, compared to $68.1 million as of March 31, 2021. The increase in inventory was driven by the strategic decision to increase on-hand inventory levels for the holiday season given continued disruption in global logistics. About 40% of inventory as of September 30, 2021 was in-transit.
Prepaid and other current assets decreased by $12.7 million to $13.1 million, compared to $25.8 million as of March 31, 2021, primarily related to other short-term deposits for inventory.
Trade payables increased by $16.4 million to $115.2 million as of September 30, 2021, compared to $98.9 million as of March 31, 2021, primarily due to timing of payments for inventory.
Accrued liabilities increased by $2.8 million to $22.4 million as of September 30, 2021, compared to $19.6 million as of March 31, 2021, primarily due to an accrued loss contingency related to a class action lawsuit legal settlement.
Cash provided by investing activities of $41.7 million for the six-month period ended September 30, 2021 was primarily due to proceeds from sales and maturities of available-for-sale securities partially offset by the $26.8 million acquisition of VAY. We anticipate spending between $12.0 million and $14.0 million in fiscal 2022 for digital platform enhancements, systems integration, and production tooling.
Cash provided by financing activities was $1.6 million for the six-month period ended September 30, 2021 was primarily related to proceeds from long-term debt.
Financing Arrangements
On October 29, 2021 credit amendment we amendedrecorded $0.6 million in new financing costs as Other assets on our Credit Agreement.Condensed Consolidated Balance Sheet. The amendment increased the aggregate principal amount availablerepayment of obligations under the ABL Revolving Facility from $55.0 millionCredit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to $100.0 million ("Revolver"), subject to a borrowing base. The maturity date of the Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million,be paid as of the effective date of the Amendment, and will amortize on a new 60-month straight line basis to coincide with the extended maturity date.scheduled.
Other structural improvements to the Credit Agreement include amending the definition of Springing Trigger Event to mean the greater of (i) 10.0% of the lesser of (a) the Revolver Commitment and (b) the Borrowing Base as of such date of determination and (ii) $7.5 million. The Springing Trigger Event pertains to the period in which a Fixed Charge Coverage Ratio test will apply and be tested. Consistent with the Credit Agreement before the Amendment,amendment, there continues to be no additional financial maintenance covenants. Additionally, the borrowing base definitions were favorably amended to change the eligible in-transit inventory sublimit from $10.0 million to $22.5 million and the total inventory sublimit from $35.0 million to $65.0 million.
On May 13,As of December 31, 2021, outstanding borrowings totaled $56.1 million, with $10.9 million and $45.2 million under our Term Loan Facility and Revolver, respectively. As of December 31, 2021, we amendedwere in compliance with the January 31, 2020financial covenants of the Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make$54.9 million was available to us an asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to afor 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 withunder the ABL Revolving Facility, the “Credit Facility"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. Facility.
Several key features have been beneficially amended including permanently removing the $7.5 million minimum liquidity covenant and minimum EBITDA covenant that was scheduled to commence February 1, 2022. The Credit Facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than the greater of $6.0 million and 12.5% of the Loan Cap, as defined in the Credit Agreement. Various borrowing base definitions and limits were also amended that will result in improved availability under the asset-based revolver. In addition to the above structural improvements, the interest rate
Interest on the Term Loan Facility was reduced to LIBOR plus 4.50% versus 5.00%. The Term Loan Facility continues to contain amortization as originally scheduled. The repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.Interest on the ABL Revolving FacilityRevolver will accrue at LIBORSecured 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%. As of September 30,December 31, 2021, our interest rate was 1.83%1.97% for the ABL Revolving FacilityRevolver and 4.58%4.60% for the Term Loan Facility.
As of September 30, 2021, outstanding borrowings totaled $17.5 million, with $11.5 million and $6.0 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of September 30, 2021, we were in compliance with the financial covenants of the Credit Agreement and $49.0 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 September 30,December 31, 2021, we had approximately $78.0ately $59.2 million,, compared to $216.3 million as of March 31, 2021 in non-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 receipt of inventory ordered for the holiday and fitness season.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements
with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications.
Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at September 30,December 31, 2021.
SEASONALITY
We expect our revenue from fitness equipment products to vary seasonally. Sales are typically strongest in the fourth quarter and are generally weakest in the second quarter. We believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not changed other than goodwill from those discussed in our 2020 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 recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Exchange Risk
Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents, 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 instruments in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affect the market price or liquidity of certain securities within the portfolio.
Our ABL Revolving Facility and Term Loan Facility generally charge interest based on a benchmark rate such as LIBOR.Secured Overnight Financing Rate. Fluctuations in short-term interest rates may cause interest payments on term loan principal and drawn amounts on the revolving line to increase or decrease. As of September 30,December 31, 2021, the outstanding balances on our ABL Revolving Facility and Term Loan Facility totaled $17.5 million.$56.1 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 September 30,December 31, 2021 were $42.3$30.2 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Principal Executive Officer, 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, 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 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 September 30,December 31, 2021, 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. As of September 30,December 31, 2021, we accrued $4.7$4.3 million for a contingent loss related to a legal settlement involving a class action lawsuit related to the advertisement of our treadmills. The settlement includes damages, a one-year free membership to JRNY®, and administrative fees and is reflected in Accrued liabilities and Other long-term liabilities on the face of our Consolidated Balance Sheets.
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 2020 Form 10-K are not the only risks and uncertainties to which we are subject, and there may be other risk and uncertainties that are not currently considered material or are not known to us that could impair our business or operations. If any of the risks described in our 2020 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There have been no material changes to the risk factors as set forth in our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 6. Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
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| | 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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NovemberFebruary 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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NovemberFebruary 9, 20212022 | | By: | /S/ Aina E. Konold |
Date | | | Aina E. Konold |
| | | Chief Financial Officer
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