UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021September 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                   
Commission file number: 001-31321
NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)
Washington 94-3002667
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
17750 S.E. 6th Way
Vancouver, Washington 98683
(Address of principal executive offices, including zip code)

(360) 859-2900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
 Common Stock, no par valueNLSNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer[ ]Accelerated Filer[x]Non-accelerated filer[ ]Smaller reporting companyEmerging 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 FebruaryNovember 4, 2022 was 31,248,29831,719,490 shares.



NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2021SEPTEMBER 30, 2022
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.




Table of Contents
PART I.    FINANCIAL INFORMATION
    
Item 1.     Financial Statements

NAUTILUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
 As of
 December 31, 2021March 31, 2021
Assets
Cash and cash equivalents$18,402 $38,441 
Restricted cash1,339 1,339 
Available-for-sale securities— 73,448 
Trade receivables, net of allowances of $657 and $1,17793,611 88,657 
Inventories128,113 68,085 
Prepaids and other current assets10,981 25,840 
Income taxes receivable8,103 — 
Total current assets260,549 295,810 
Property, plant and equipment, net30,976 24,496 
Operating lease right-of-use assets24,534 19,108 
Goodwill24,510 — 
Other intangible assets, net9,319 9,365 
Deferred income tax assets, non-current4,554 2,144 
Income taxes receivable, non-current5,673 — 
Other assets - restricted, non-current3,887 — 
Other assets2,963 3,307 
Total assets$366,965 $354,230 
Liabilities and Shareholders' Equity
Trade payables$61,850 $98,878 
Accrued liabilities25,232 19,627 
Operating lease liabilities, current portion4,653 3,384 
Financing lease liabilities, current portion119 — 
Warranty obligations, current portion5,724 7,243 
Income taxes payable, current portion914 5,709 
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $832,217 3,000 
Total current liabilities100,709 137,841 
Operating lease liabilities, non-current21,855 17,875 
Financing lease liabilities, non-current423 — 
Warranty obligations, non-current1,401 1,408 
Income taxes payable, non-current3,997 3,657 
Other non-current liabilities4,301 607 
Debt payable, non-current, net of unamortized debt issuance costs of $173 and $23653,594 10,297 
Total liabilities186,280 171,685 
Commitments and contingencies (Note 16)00
Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 31,245 and 30,576 shares issued and outstanding4,879 2,176 
Retained earnings176,307 180,524 
Accumulated other comprehensive loss(501)(155)
Total shareholders' equity180,685 182,545 
Total liabilities and shareholders' equity$366,965 $354,230 

 As of
 September 30, 2022March 31, 2022
(unaudited)
Assets
Cash and cash equivalents$5,805 $12,872 
Restricted cash946 1,339 
Trade receivables, net of allowances of $728 and $59833,662 61,454 
Inventories99,210 111,190 
Prepaids and other current assets10,124 14,546 
Other current assets - restricted, current3,887 3,887 
Income taxes receivable1,658 1,998 
Total current assets155,292 207,286 
Property, plant and equipment, net34,182 32,129 
Operating lease right-of-use assets21,085 23,620 
Goodwill— 24,510 
Other intangible assets, net6,818 9,304 
Deferred income tax assets, non-current758 8,760 
Income taxes receivable, non-current5,673 5,673 
Other assets2,705 2,763 
Total assets$226,513 $314,045 
Liabilities and Shareholders' Equity
Trade payables$36,542 $53,165 
Accrued liabilities19,957 29,386 
Operating lease liabilities, current portion4,057 4,494 
Financing lease liabilities, current portion121 119 
Warranty obligations, current portion3,450 4,968 
Income taxes payable, current portion536 839 
Debt payable, current portion, net of unamortized debt issuance costs of $57 and $572,243 2,243 
Total current liabilities66,906 95,214 
Operating lease liabilities, non-current18,619 20,926 
Financing lease liabilities, non-current339 395 
Warranty obligations, non-current900 1,248 
Income taxes payable, non-current1,943 4,029 
Deferred income tax liabilities, non-current313 — 
Other non-current liabilities1,081 1,071 
Debt payable, non-current, net of unamortized debt issuance costs of $175 and $20444,793 27,113 
Total liabilities134,894 149,996 
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 31,714 and 31,268 shares issued and outstanding9,513 6,483 
Retained earnings84,713 158,093 
Accumulated other comprehensive loss(2,607)(527)
Total shareholders' equity91,619 164,049 
Total liabilities and shareholders' equity$226,513 $314,045 
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended September 30,Six-Months Ended September 30,
2021202020212020 2022202120222021
Net salesNet sales$147,258 $189,259 $469,810 $458,838 Net sales$65,458 $137,959 $120,275 $322,552 
Cost of salesCost of sales117,342 111,388 342,336 265,633 Cost of sales54,000 95,906 101,859 224,994 
Gross profitGross profit29,916 77,871 127,474 193,205 Gross profit11,458 42,053 18,416 97,558 
Operating expenses:Operating expenses:Operating expenses:
Selling and marketingSelling and marketing32,395 21,998 75,634 53,651 Selling and marketing9,400 21,939 22,290 43,239 
General and administrativeGeneral and administrative11,456 10,364 39,355 28,520 General and administrative10,995 16,376 23,458 27,899 
Research and developmentResearch and development5,379 4,029 15,882 11,997 Research and development5,405 5,688 11,229 10,503 
Loss on disposal group— — — 20,668 
Goodwill and intangible impairment chargeGoodwill and intangible impairment charge— — 26,965 — 
Total operating expensesTotal operating expenses49,230 36,391 130,871 114,836 Total operating expenses25,800 44,003 83,942 81,641 
Operating (loss) incomeOperating (loss) income(19,314)41,480 (3,397)78,369 Operating (loss) income(14,342)(1,950)(65,526)15,917 
Other expense:Other expense:Other expense:
Interest incomeInterest income34 Interest income12 33 
Interest expenseInterest expense(354)(280)(1,149)(871)Interest expense(595)(481)(971)(795)
Other, netOther, net(789)(3,367)(815)(3,628)Other, net(224)94 (739)(26)
Total other expense, netTotal other expense, net(1,142)(3,640)(1,930)(4,490)Total other expense, net(815)(375)(1,705)(788)
(Loss) income from continuing operations before income taxes(Loss) income from continuing operations before income taxes(20,456)37,840 (5,327)73,879 (Loss) income from continuing operations before income taxes(15,157)(2,325)(67,231)15,129 
Income tax (benefit) expense(7,001)8,588 (1,321)15,644 
Income tax expenseIncome tax expense156 2,242 8,251 5,680 
(Loss) income from continuing operations(Loss) income from continuing operations(13,455)29,252 (4,006)58,235 (Loss) income from continuing operations(15,313)(4,567)(75,482)9,449 
Discontinued operations:Discontinued operations:Discontinued operations:
Loss from discontinued operations before income taxes(118)(65)(195)(128)
Income tax (benefit) expense of discontinued operations(74)251 16 443 
Loss from discontinued operations(44)(316)(211)(571)
Net (loss) income$(13,499)$28,936 $(4,217)$57,664 
(Loss) gain from discontinued operations before income taxes(Loss) gain from discontinued operations before income taxes(32)49 (32)(77)
Income tax (benefit) expense benefit of discontinued operationsIncome tax (benefit) expense benefit of discontinued operations(2,142)84 (2,134)90 
Income (loss) from discontinued operationsIncome (loss) from discontinued operations2,110 (35)2,102 (167)
Net lossNet loss$(13,203)$(4,602)$(73,380)$9,282 
Basic (loss) income per share from continuing operationsBasic (loss) income per share from continuing operations$(0.43)$0.97 $(0.13)$1.94 Basic (loss) income per share from continuing operations$(0.48)$(0.15)$(2.40)$0.31 
Basic loss per share from discontinued operations— (0.01)(0.01)(0.02)
Basic income (loss) per share from discontinued operationsBasic income (loss) per share from discontinued operations0.07 — 0.07 (0.01)
Basic net (loss) income per shareBasic net (loss) income per share$(0.43)$0.96 $(0.14)$1.92 Basic net (loss) income per share$(0.41)$(0.15)$(2.33)$0.30 
Diluted (loss) income per share from continuing operationsDiluted (loss) income per share from continuing operations$(0.43)$0.90 $(0.13)$1.80 Diluted (loss) income per share from continuing operations$(0.48)$(0.15)$(2.40)$0.29 
Diluted loss per share from discontinued operations— (0.01)(0.01)(0.02)
Diluted income per share from discontinued operationsDiluted income per share from discontinued operations0.07 — 0.07 — 
Diluted net (loss) income per shareDiluted net (loss) income per share$(0.43)$0.89 $(0.14)$1.78 Diluted net (loss) income per share$(0.41)$(0.15)$(2.33)$0.29 
Shares used in per share calculations:Shares used in per share calculations:Shares used in per share calculations:
BasicBasic31,199 30,284 30,955 30,077 Basic31,585 30,968 31,496 30,833 
DilutedDiluted31,199 32,633 30,955 32,336 Diluted31,585 30,968 31,496 32,437 




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

Table of Contents
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME
(Unaudited and in thousands)
 
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
 2021202020212020
Net (loss) income$(13,499)$28,936 $(4,217)$57,664 
Other comprehensive income:
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 $(2), $(10), $2 and $(4)(148)760 (342)1,330 
Other comprehensive (loss) income(148)756 (346)1,326 
Comprehensive (loss) income$(13,647)$29,692 $(4,563)$58,990 
Three-Months Ended September 30,Six-Months Ended September 30,
 2022202120222021
Net (loss) income$(13,203)$(4,602)$(73,380)$9,282 
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of income tax expense of $—, $7, $— and $—— (4)— (4)
Foreign currency translation, net of income tax (expense) benefit of $(56), $(21), $(85) and $(8)(1,221)(411)(2,080)(194)
Other comprehensive loss(1,221)(415)(2,080)(198)
Comprehensive (loss) income$(14,424)$(5,017)$(75,460)$9,084 

See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited and in thousands)
Common StockRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Shareholders' EquityCommon StockRetained EarningsAccumulated Other Comprehensive LossTotal Shareholders' Equity
SharesAmountSharesAmount
Balance, March 31, 202130,576 $2,176 $180,524 $(155)$182,545 
Net income— — 13,884 — 13,884 
Unrealized loss on marketable securities, net of income tax benefit of $7— — — — — 
Balance, March 31, 2022Balance, March 31, 202231,268 $6,483 $158,093 $(527)$164,049 
Net lossNet loss— — (60,177)— (60,177)
Foreign currency translation adjustment,
net of income tax benefit of $13
— — — 217 217 
Foreign currency translation adjustment,
net of income tax expense of $29
Foreign currency translation adjustment,
net of income tax expense of $29
— — — (859)(859)
Stock-based compensation expenseStock-based compensation expense— 1,225 — — 1,225 Stock-based compensation expense— 1,979 — — 1,979 
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
205 (270)— — (270)
Common stock issued under employee stock purchase planCommon stock issued under employee stock purchase plan17 269 — — 269 Common stock issued under employee stock purchase plan— 125 — — 125 
Balance, June 30, 202130,794 2,411 194,408 62 196,881 
Net loss— — (4,602)— (4,602)
Unrealized loss on marketable securities, net of income tax expense of $7— — — (4)(4)
Foreign currency translation adjustment,
net of income tax expense of $21
— — — (411)(411)
Stock-based compensation expense— 1,540 — — 1,540 
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— — — — — 
Balance, September 30, 202131,159 3,058 189,806 (353)192,511 
Balance, June 30, 2022Balance, June 30, 202231,473 8,317 97,916 (1,386)104,847 
Net lossNet loss— — (13,499)— (13,499)Net loss— — (13,203)— (13,203)
Foreign currency translation adjustment,
net of income tax expense of $2
— — — (148)(148)
Foreign currency translation adjustment,
net of income tax expense of $56
Foreign currency translation adjustment,
net of income tax expense of $56
— — — (1,221)(1,221)
Stock-based compensation expenseStock-based compensation expense— 1,846 — — 1,846 Stock-based compensation expense— 1,367 — — 1,367 
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 equity
compensation plan, net of shares withheld
for tax payments
241 (171)— — (171)
Common stock issued under employee stock purchase plan29 217 — — 217 
Balance, December 31, 202131,245 $4,879 $176,307 $(501)$180,685 
Balance, September 30, 2022Balance, September 30, 202231,714 $9,513 $84,713 $(2,607)$91,619 
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Table of Contents
Common StockRetained EarningsAccumulated Other Comprehensive LossTotal Shareholders' EquityCommon StockRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Shareholders' Equity
SharesAmountSharesAmount
Balance, March 31, 202029,817 $1,781 $92,456 $(1,312)$92,925 
Net loss— — (5,110)— (5,110)
Balance, March 31, 2021Balance, March 31, 202130,576 $2,176 $180,524 $(155)$182,545 
Net incomeNet income— — 13,884 — 13,884 
Foreign currency translation adjustment,
net of income tax benefit of $15
— — — 353 353 
Foreign currency translation adjustment,
net of income tax benefit of $13
Foreign currency translation adjustment,
net of income tax benefit of $13
— — — 217 217 
Stock-based compensation expenseStock-based compensation expense— 865 — — 865 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
87 — — — — 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 planCommon stock issued under employee stock purchase plan63 83 — — 83 Common stock issued under employee stock purchase plan17 269 — — 269 
Balance, June 30, 202029,967 2,729 87,346 (959)89,116 
Net income— — 33,838 — 33,838 
Balance, June 30, 2021Balance, June 30, 202130,794 2,411 194,408 62 196,881 
Net lossNet loss— — (4,602)— (4,602)
Unrealized loss on marketable securities, net of income tax expense of $7Unrealized loss on marketable securities, net of income tax expense of $7— — — (4)(4)
Foreign currency translation adjustment,
net of income tax expense of $13
— — — 217 217 
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 expenseStock-based compensation expense— 1,071 — — 1,071 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
290 (796)— — (796)Common stock issued under equity
compensation plan, net of shares withheld
for tax payments
365 (893)— — (893)
Balance, September 30, 202030,257 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)
Balance, September 30, 2021Balance, September 30, 202131,159 $3,058 $189,806 $(353)$192,511 
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 plan31 173 — — 173 
Balance, December 31, 202030,330 $3,061 $150,120 $14 $153,195 

See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Nine-Months Ended December 31,Six-Months Ended September 30,
2021 2020 2022 2021
Cash flows from operating activities:Cash flows from operating activities:Cash flows from operating activities:
(Loss) income from continuing operations(Loss) income from continuing operations$(4,006) $58,235 (Loss) income from continuing operations$(75,482) $9,449 
Loss from discontinued operations(211) (571)
Gain (loss) from discontinued operationsGain (loss) from discontinued operations2,102  (167)
Net (loss) incomeNet (loss) income(4,217) 57,664 Net (loss) income(73,380) 9,282 
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Adjustments to reconcile net loss to cash used in operating activities:Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortizationDepreciation and amortization5,987  6,638 Depreciation and amortization4,786  3,979 
Benefit for allowance for doubtful accounts(468) (42)
Recovery (provision) for allowance for doubtful accountsRecovery (provision) for allowance for doubtful accounts585  (179)
Inventory lower of cost or net realizable valueInventory lower of cost or net realizable value291 1,409 Inventory lower of cost or net realizable value1,832 — 
Stock-based compensation expenseStock-based compensation expense4,611  3,170 Stock-based compensation expense3,346  2,765 
Deferred income taxes, net of valuation allowancesDeferred income taxes, net of valuation allowances(2,938) (8,037)Deferred income taxes, net of valuation allowances8,167  (1,336)
Goodwill and intangible impairment changeGoodwill and intangible impairment change26,965 — 
OtherOther610 (1,160)Other(1,276)1,361 
Loss on asset dispositions— 709 
Loss on disposal group— 20,668 
Loss on other investment in non-controlled affiliates impairment— 2,500 
Changes in operating assets and liabilities:Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Trade receivablesTrade receivables(4,298) (61,830)Trade receivables28,363  213 
InventoriesInventories(59,258) (28,529)Inventories13,299  (94,107)
Prepaids and other assetsPrepaids and other assets10,059  (8,616)Prepaids and other assets7,164  7,256 
Income taxes receivableIncome taxes receivable(13,774) 6,128 Income taxes receivable354  (8,080)
Trade payablesTrade payables(36,366) 62,090 Trade payables(13,731) 16,182 
Accrued liabilities and other liabilities, including warranty obligationsAccrued liabilities and other liabilities, including warranty obligations8,178  12,573 Accrued liabilities and other liabilities, including warranty obligations(16,070) 5,910 
Net cash (used in) provided by operating activities(91,583) 65,335 
Net cash used in operating activitiesNet cash used in operating activities(9,596) (56,754)
Cash flows from investing activities:Cash flows from investing activities: Cash flows from investing activities: 
Proceeds from sales and maturities of available-for-sale securitiesProceeds from sales and maturities of available-for-sale securities73,448 — Proceeds from sales and maturities of available-for-sale securities— 73,448 
Acquisition of business, net of cash acquiredAcquisition of business, net of cash acquired(26,012)— Acquisition of business, net of cash acquired— (26,759)
Purchases of property, plant and equipmentPurchases of property, plant and equipment(9,136) (8,033)Purchases of property, plant and equipment(7,511) (4,985)
Purchases of available-for-sale securities— (36,199)
Proceeds from the sale of disposal group— 21,410 
Net cash provided by (used in) investing activitiesNet cash provided by (used in) investing activities38,300  (22,822)Net cash provided by (used in) investing activities(7,511) 41,704 
Cash flows from financing activities:Cash flows from financing activities: Cash flows from financing activities: 
Proceeds from long-term debtProceeds from long-term debt63,652 1,616 Proceeds from long-term debt36,280 7,025 
Payments on long-term debtPayments on long-term debt(22,477)(14,815)Payments on long-term debt(19,399)(3,556)
Payment of debt issuance costs(577)(19)
Payments on finance lease liabilitiesPayments on finance lease liabilities(30)— Payments on finance lease liabilities(60)— 
Proceeds from employee stock purchasesProceeds from employee stock purchases486 256 Proceeds from employee stock purchases125 269 
Proceeds from exercise of stock optionsProceeds from exercise of stock options472 50 Proceeds from exercise of stock options— 470 
Tax payments related to stock award issuancesTax payments related to stock award issuances(2,866)(2,196)Tax payments related to stock award issuances(430)(2,623)
Net cash provided by (used in) financing activities38,660  (15,108)
Net cash provided by financing activitiesNet cash provided by financing activities16,516  1,585 
Effect of exchange rate changesEffect of exchange rate changes(1,529) 4,059 Effect of exchange rate changes(6,869) (910)
Net (decrease) increase in cash, cash equivalents and restricted cash(16,152)31,464 
Net decrease in cash, cash equivalents and restricted cashNet decrease in cash, cash equivalents and restricted cash(7,460)(14,375)
Cash, cash equivalents and restricted cash at beginning of periodCash, cash equivalents and restricted cash at beginning of period39,780  26,456 Cash, cash equivalents and restricted cash at beginning of period18,098  39,780 
Cash, cash equivalents and restricted cash at end of periodCash, cash equivalents and restricted cash at end of period$23,628  $57,920 Cash, cash equivalents and restricted cash at end of period$10,638  $25,405 
Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information: Supplemental disclosure of cash flow information: 
Cash paid for interestCash paid for interest$639 $651 Cash paid for interest$770 $323 
Cash paid for income taxes, net19,857  17,257 
Cash (received from) paid for income taxes, netCash (received from) paid for income taxes, net(47) 19,960 
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 paidCapital expenditures incurred but not yet paid$333 $908 Capital expenditures incurred but not yet paid$787 $1,052 
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:
December 31,Six-Months Ended September 30,
2021 20202022 2021
Cash and cash equivalentsCash and cash equivalents$18,402 $56,581 Cash and cash equivalents$5,805 $20,179 
Restricted cashRestricted cash1,339 1,339 Restricted cash946 1,339 
Other assets - restricted, non-current3,887 — 
Other current assets - restricted, currentOther current assets - restricted, current3,887 3,887 
Total cash, cash equivalents and restricted cashTotal cash, cash equivalents and restricted cash$23,628 $57,920 Total cash, cash equivalents and restricted cash$10,638 $25,405 
See accompanying Notes to Condensed Consolidated Financial Statements.
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NAUTILUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

On December 30, 2020, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. This document reflects our third fiscal quarter, which ended 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 fiscal year ended DecemberMarch 31, 20202022 (the “2020“2022 Form 10-K”).

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results could differ from those estimates. These uncertainties will be heightened by the COVID-19 pandemic, as we may be unable to accurately predict the impact of COVID-19 going forward and as a result our estimates may change in the near term. Further information regarding significant estimates can be found in our 20202022 Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of December 31, 2021September 30, 2022 and March 31, 2021,2022, and our results of operations, comprehensive (loss) income and shareholders' equity for the three and nine-monthsix-month periods ended December 31,September 30, 2022 and 2021 and 2020 and our cash flows for the nine-month periodsix-month periods ended December 31, 2021September 30, 2022 and 2020.2021. Interim results are not necessarily indicative of results for a full year. Our revenues typically vary seasonally, and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.

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

Update 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.

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
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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 FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We doThe adoption of ASU 2020-01 in the first quarter of the fiscal year ending March 31, 2023 ("fiscal 2023") did not expecthave any effect on our financial position, results of operations or cash flows.
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ASU 2020-04 and ASU 2021-01
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use London Inter-bank Offered Rate (“LIBOR”) as a reference rate, which is effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. The adoption of this guidance would have ahad no material impact on our financial position, results of operations andor cash flows.

Recently Issued Pronouncements Not Yet Adopted

ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November 2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
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(2) BUSINESS ACQUISITIONDISCONTINUED OPERATIONS

On September 17, 2021,Results from discontinued operations relate to the disposal of our former Nautilus Commercial business, which was completed in April 2011. Although we acquired VAY AG (“VAY”) forreached substantial completion of asset liquidation at December 31, 2012, we continued to accrue interest associated with an aggregate purchase considerationuncertain tax position on discontinued international operations, and incurred an immaterial amount of approximately $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.product liability expenses associated with products previously sold into the Commercial channel.

We accounted forIn the transaction assecond quarter of fiscal 2023, we completed the tax deregistration of 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 asforeign entity that was part of the transactiondiscontinued operations. As a result, the previously unrecognized tax benefit and wereassociated accrued interest and penalty in the amount of $2.1 million was released and recorded at estimated fair value.as a component of income taxes from discontinued operations during the quarter ended September 30, 2022.

Total acquisition costs incurred through the nine-months ended December 31, 2021 were $1.0 million 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 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 of $3.9 million will be paid to the former owners of VAY upon achievement of these milestones and 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
The purchase price allocation was determined based on the fair values of the assets and liabilities identified as of the acquisition date and may be adjusted, within a period of no more than 12 months from the acquisition date, if the final 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.

The following table summarizes the preliminary fair values of the net assets acquired and liabilities assumed and measurement period adjustments since September 17, 2021, the acquisition date (in thousands):
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Preliminary valuation at September 17, 2021Measurement period adjustmentsAdjusted valuation at December 31, 2021
Cash$230 $637 $867 
Accounts receivable— 
Prepaid expenses15 (2)13 
Deferred tax assets58 59 
Developed technology (included in property, plant and equipment)3,000 — 3,000 
  Identifiable assets acquired3,312 636 3,948 
Accrued liabilities187 745 932 
Unearned revenue53 56 
Deferred tax liabilities, non-current591 — 591 
   Total liabilities assumed831 748 1,579 
Net identifiable assets acquired2,481 (112)2,369 
Goodwill24,508 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
December 31,
Nine-Months Ended
December 31,
Three-Months Ended September 30,Six-Months Ended September 30,
20212020202120202022202120222021
Product salesProduct sales$141,885 $183,642 $454,822 $444,876 Product sales$60,107 $133,126 $109,703 $312,937 
Extended warranties and servicesExtended warranties and services1,841 2,852 4,985 6,222 Extended warranties and services938 1,388 1,980 3,144 
Other(1)
Other(1)
3,532 2,765 10,003 7,740 
Other(1)
4,413 3,445 8,592 6,471 
Net salesNet sales$147,258 $189,259 $469,810 $458,838 Net sales$65,458 $137,959 $120,275 $322,552 
(1) Other revenue is primarily subscription revenue, freight and delivery and royalty income.

Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied. Revenue generated from subscriptions is recorded in our Direct segment.
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We also offer free trials of subscriptions that are bundled with product offerings (e.g., subscription for premium content). For these types of transactions that involve multiple performance obligations, the transaction price requires allocations to the distinct performance obligation because the free trial provides a material right. The transaction price is then allocated to each performance obligation based on stand-alone selling price. We determine stand-alone selling price based on prices charged to customers. Breakage is factored into the determination of the stand-alone selling price of a subscription. Breakage or activation rate, is defined as a percentage of those purchasers that never activate a free-trial offering.

Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended September 30,Six-Months Ended September 30,
20212020202120202022202120222021
United StatesUnited States$110,870 $153,919 $360,540 $381,571 United States$53,440 $102,521 $99,521 $249,670 
CanadaCanada22,912 17,955 60,126 36,947 Canada8,388 17,852 14,195 37,214 
Europe, the Middle East and AfricaEurope, the Middle East and Africa9,874 14,024 37,456 31,022 Europe, the Middle East and Africa2,340 13,140 4,179 27,582 
All otherAll other3,602 3,361 11,688 9,298 All other1,290 4,446 2,380 8,086 
Net salesNet sales$147,258 $189,259 $469,810 $458,838 Net sales$65,458 $137,959 $120,275 $322,552 

As of December 31, 2021,September 30, 2022, estimated revenue expected to be recognized in the future totaled $53.0$32.9 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. Retail orders were $32.6 million and Direct orders were $0.3 million as of September 30, 2022 compared to Retail orders of $82.9 million and Direct orders of $8.8 million and Retail orders of $44.2 million comprised our backlog as of December 31, 2021, compared to Direct orders of $46.5 million and Retail orders of $208.7$1.1 million as of December 31, 2020.September 30, 2021. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers, and net of current promotional programs and sales discounts for our Direct customers.

The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue for which advance consideration is received prior to the transfer of control.control or the performance obligation is not satisfied. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature, and were recorded onrecognized over the condensed consolidated balance sheets as accrued liabilities.next twelve months. Significant changes in contract liabilities balances, including revenue recognized in the reporting period that was included in opening contract liabilities, are shown below (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended September 30,Six-Months Ended September 30,
20212020202120202022202120222021
Balance, beginning of periodBalance, beginning of period$3,453 $3,639 $5,551 $2,050 Balance, beginning of period$6,582 $1,757 $6,285 $5,551 
Cash additionsCash additions4,203 3,496 8,749 7,049 Cash additions265 3,457 2,796 4,546 
Revenue recognitionRevenue recognition(1,378)(743)(8,022)(2,707)Revenue recognition(2,654)(1,761)(4,888)(6,644)
Balance, end of periodBalance, end of period$6,278 $6,392 $6,278 $6,392 Balance, end of period$4,193 $3,453 $4,193 $3,453 

(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.
 
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Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
December 31, 2021September 30, 2022
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:Assets:Assets:
DerivativesDerivativesDerivatives
Foreign currency forward contractsForeign currency forward contracts$— $19 $— $19 Foreign currency forward contracts$— $25 $— $25 
Total assets measured at fair valueTotal assets measured at fair value$— $19 $— $19 Total assets measured at fair value$— $25 $— $25 
Liabilities:Liabilities:Liabilities:
DerivativesDerivativesDerivatives
Foreign currency forward contractsForeign currency forward contracts$— $36 $— $36 Foreign currency forward contracts$— $754 $— $754 
Total liabilities measured at fair valueTotal liabilities measured at fair value$— $36 $— $36 Total liabilities measured at fair value$— $754 $— $754 
March 31, 2021
Level 1Level 2Level 3Total
Assets:
Cash Equivalents
Money market funds$9,679 $— $— $9,679 
Total cash equivalents9,679 — — 9,679 
Available-for-Sale Securities
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 
Total assets measured at fair value$9,679 $73,448 $— $83,127 
Liabilities:
Derivatives
Foreign currency forward contracts$— $672 $— $672 
Total liabilities measured at fair value$— $672 $— $672 
March 31, 2022
Level 1Level 2Level 3Total
Liabilities:
Derivatives
Foreign currency forward contracts$— $128 $— $128 
Total liabilities measured at fair value$— $128 $— $128 

For our assets measured at fair value on a recurring basis, we recognize transfers between levels at the actual date of the event or change in circumstance that caused the transfer. There were no transfers between levels during the nine-monthsix-month period ended December 31, 2021,September 30, 2022, nor for the fiscal year ended March 31, 2021.

We classify2022 ("fiscal 2022"). Additionally, we did not have any changes to 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 indicationvaluation techniques during either 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.these periods.

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 nine-month period ended December 31, 2021, nor for the year ended March 31, 2021.

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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. Other than our annual goodwill and indefinite-lived trade names impairment assessments and valuations, we did not perform any assessments or valuations on assets or liabilities that are valued at fair value on a nonrecurring basis.

As of 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.

During the six-month period ended September 30, 2022, we evaluated the fair value of our goodwill and intangible assets because triggering events were identified. See Note 8for additional information.

(5) DERIVATIVES

From time to time, we enter into interest rate swaps to fix a portion of our interest expense, and foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. We do not enter into derivative instruments for any purpose other than to manage interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments.

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 December 31, 2021,September 30, 2022, total outstanding contract notional amounts were $30.2$20.0 million and had maturities of 109112 days or less.

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The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):
Balance Sheet ClassificationAs ofBalance Sheet ClassificationAs of
December 31, 2021March 31, 2021September 30, 2022March 31, 2022
Derivative instruments not designated as cash flow hedges:Derivative instruments not designated as cash flow hedges:Derivative instruments not designated as cash flow hedges:
Foreign currency forward contractsForeign currency forward contractsPrepaids and other current assets$19 $— Foreign currency forward contractsPrepaids and other current assets$25 $— 
Foreign currency forward contractsForeign currency forward contractsAccrued liabilities36 672 Foreign currency forward contractsAccrued liabilities754 128 

The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
Statement of Operations ClassificationThree-Months Ended
December 31,
Nine-Months Ended
December 31,
2021202020212020
Derivative instruments not designated as cash flow hedges:
Income (loss) recognized in earningsOther, net$797 $(1,981)$(163)$(2,406)
Income tax (benefit) expenseIncome tax (benefit) expense(194)488 40 594 
Statement of Operations ClassificationThree-Months Ended September 30,Six-Months Ended September 30,
2022202120222021
Derivative instruments not designated as cash flow hedges:
Loss recognized in earningsOther, net$(685)$(943)$(589)$(960)
Income tax expense (benefit)Income tax expense (benefit)(170)238 (146)234 

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(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
December 31, 2021March 31, 2021
Finished goods (1)
$121,073 $63,918 
Parts and components7,040 4,167 
Total inventories$128,113 $68,085 
(1) The increase in finished goods was driven by the strategic decision to increase on-hand inventory levels ahead of the fitness season given continued disruption in global logistics.
As of
September 30, 2022March 31, 2022
Finished goods$94,146 $104,988 
Parts and components5,064 6,202 
Total inventories$99,210 $111,190 

(7) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):
Estimated
Useful Life
(in years)
As ofEstimated
Useful Life
(in years)
As of
December 31, 2021March 31, 2021Estimated
Useful Life
(in years)
September 30, 2022March 31, 2022
AutomobilesAutomobiles5$23 $23 Automobiles5$23 $23 
Leasehold improvementsLeasehold improvements4to203,150 3,059 Leasehold improvements4to203,945 3,150 
Computer software and equipmentComputer software and equipment2to742,231 36,956 Computer software and equipment2to745,054 44,852 
Machinery and equipmentMachinery and equipment3to516,466 15,699 Machinery and equipment3to515,653 16,447 
Furniture and fixturesFurniture and fixtures5to202,635 2,586 Furniture and fixtures5to202,558 2,634 
Work in progress(1)
Work in progress(1)
N/A7,430 1,314 
Work in progress(1)
N/A12,110 6,678 
Total costTotal cost71,935 59,637 Total cost79,343 73,784 
Accumulated depreciationAccumulated depreciation(40,959)(35,141)Accumulated depreciation(45,161)(41,655)
Total property, plant and equipment, netTotal property, plant and equipment, net$30,976 $24,496 Total property, plant and equipment, net$34,182 $32,129 
(1) Work in progress includes information technology assets and production tooling.
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Depreciation expense was as follows (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
2021202020212020
Depreciation expense$1,993 $2,114 $5,941 $5,772 
Three-Months Ended September 30,Six-Months Ended September 30,
2022202120222021
Depreciation expense$2,464 $1,909 $4,755 $3,948 

(8) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill
The roll forward of goodwill was as follows (in thousands):
Total
Balance, April 1, 2021March 31, 2022$24,510 
Business acquisition (Note 2)Goodwill impairment24,508 (24,510)
Balance, September 30, 202124,508 
Business acquisition (Note 2) - measurement period adjustments
Balance, December 31, 20212022$24,510 

In accordance with ASC 350 — Intangibles — Goodwill and Other, we perform our goodwill and indefinite-lived trade names impairment valuations annually, on March 31,or sooner if triggering events are identified. While our stock price and related market capitalization remained abovethe fair value of our reporting unitunits exceeded their respective carrying values as of DecemberMarch 31, 2021,2022, we are observingobserved continued market volatility including significant declines in our market capitalization during the three-month period ended June 30, 2022, identified as a triggering event. Our trailing 30-day average market capitalization was approximately $137 million at March 31, 2022 compared to $66 million, the trailing 30-day average, as of June 30, 2022. We performed an interim evaluation and a market capitalization reconciliation during the first quarter of fiscal 2023, which resulted in a non-cash goodwill impairment charge of $24.5 million. During the three-month period ended September 30, 2022, we observed continued market volatility including declines in our market capitalization subsequent to December 31, 2021September 30, 2022, which in part could increase the possibility of a future impairment charge. Based on our analysis, including
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our market capitalization during the period, we determined there were no triggering events during the quarter ended December 31, 2021.September 30, 2022.

ShouldWe assigned assets and liabilities to each reporting unit based on either specific identification or by using judgment for the factsremaining assets and circumstances surrounding our assumptions change, our goodwill impairment analysis may fail. Assumptions and estimatesliabilities that are not specific 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 isreporting unit. We determined to be indicative of a reduction inthe fair value one or more of our reporting units in Step 1 of the ASC 350 analysis using the market approach. In addition, we may be requireddetermined the fair value by adding a control premium observed from recent transactions of comparable companies to record futuredetermine the reasonableness of that assumption and the fair values of the reporting units estimated in Step 1. Significant unobservable inputs and assumptions inherent in the valuation methodologies from Level 3 inputs were employed and include, but were not limited to, prospective financial information, growth rates, terminal value, royalty rates, discount rates, and comparable multiples from publicly traded companies in our industry. We compared the carrying amount of each reporting unit to its respective fair value. We reconciled the aggregate fair values of the reporting units determined in Step 1 (as described above) to the enterprise market capitalization plus a reasonable control premium. This total value was compared to a trailing 30-day average market capitalization of approximately $66 million as of June 30, 2022. As a result, the market capitalization reconciliation analysis identified that the Direct reporting unit's fair value was significantly lower than its carrying value, resulting in a non-cash goodwill impairment charges for goodwill. An impairment could have a material effect on our consolidated balance sheet and resultscharge of operations$24.5 million.

Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
Estimated
Useful Life
(in years)
As ofEstimated
Useful Life
(in years)
As of
December 31, 2021March 31, 2021Estimated
Useful Life
(in years)
September 30, 2022March 31, 2022
Indefinite-lived trademarks(1)Indefinite-lived trademarks(1)N/A$9,052 $9,052 Indefinite-lived trademarks(1)N/A$6,597 $9,052 
PatentsPatents7to241,443 1,443 Patents7to241,043 1,043 
10,495 10,495 7,640 10,095 
Accumulated amortization - definite-lived intangible assetsAccumulated amortization - definite-lived intangible assets(1,176)(1,130)Accumulated amortization - definite-lived intangible assets(822)(791)
Other intangible assets, netOther intangible assets, net$9,319 $9,365 Other intangible assets, net$6,818 $9,304 

(1) During the first quarter of fiscal 2023, we identified impairment indicators with our indefinite-lived trademarks resulting in a $2.5 million non-cash intangible impairment charge.
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Amortization expense was as follows (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
2021202020212020
Amortization expense$15 $25 $46 $866 
Three-Months Ended September 30,Six-Months Ended September 30,
2022202120222021
Amortization expense$16 $16 $31 $31 

Future amortization of definite-lived intangible assets is as follows (in thousands):
2022$15 
202361 
Remainder of fiscal 2023Remainder of fiscal 2023$31 
2024202461 202461 
2025202561 202561 
2026202647 202647 
20272027
ThereafterThereafter22 Thereafter18 
$267 $221 

(9) LEASES

We have several non-cancellable operating leases, primarily for office space, that expire at various dates over the next nineeight years. These leases generally contain renewal options to extend for 1one 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.


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Lease expense was as follows (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended September 30,Six-Months Ended September 30,
20212020202120202022202120222021
Operating lease expenseOperating lease expense$1,465 $1,072 $4,397 $3,269 Operating lease expense$1,527 $1,466 $3,060 $2,932 
Amortization of finance lease assetsAmortization of finance lease assets29 — 29 — Amortization of finance lease assets29 — 57 — 
Total lease expenseTotal lease expense$1,494 $1,072 $4,426 $3,269 Total lease expense$1,556 $1,466 $3,117 $2,932 

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
December 31, 2021March 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 liabilities21,855 17,875 
Operating lease liabilities, net of current portion4,653 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 portion119 — 
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 leases30 — 
Additional lease information:
ROU assets obtained in exchange for operating lease obligations$1,032 $— 
ROU assets obtained in exchange for finance lease obligations569 — 
Reductions to ROU assets resulting from reductions to operating lease obligations329 268 
Weighted Average Remaining Lease Term:
Operating leases5.896.94
Finance leases4.75
Weighted Average Discount Rate:
Operating leases5.00%4.95%
Finance leases2.08%—%
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As of
September 30, 2022March 31, 2022
Supplemental cash flow information related to leases was as follows:
Operating leases:
Operating lease right-of-use-assets$21,085 $23,620 
Operating lease liabilities, non-current$18,619 $20,926 
Operating lease liabilities, current portion4,057 4,494 
Total operating lease liabilities$22,676 $25,420 
Finance leases:
Property, plant and equipment, at cost$512 $569 
Accumulated depreciation(57)(57)
Property, plant and equipment, net$455 $512 
Finance lease obligations, non-current$339 $395 
Finance lease obligations, current portion121 119 
Total finance lease liabilities$460 $514 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases$3,617 $6,485 
Finance cash flows from finance leases60 60 
Additional lease information:
ROU assets obtained in exchange for operating lease obligations$— $10,323 
ROU assets obtained in exchange for finance lease obligations— 569 
Reductions to ROU assets resulting from reductions to operating lease obligations615 1,358 
Weighted Average Remaining Lease Term:
Operating leases2.6 years3.1 years
Finance leases4.0 years4.5 years
Weighted Average Discount Rate:
Operating leases4.65%4.65%
Finance leases2.14%2.14%

We determined the discount rate for leases using a portfolio approach to determine an incremental borrowing rate to calculate the right-of-use assets and lease liabilities.
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Maturities of lease liabilities under non-cancellable leases were as follows (in thousands):
As of
December 31, 2021
Operating leasesFinance leases
2022$1,344 $120 
20235,859 120 
20245,422 120 
20255,584 120 
20264,520 90 
Thereafter8,158 — 
Total undiscounted lease payments30,887 570 
Less imputed interest(4,379)(28)
Total lease liabilities$26,508 $542 
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As of September 30, 2022
Operating leasesFinance leases
Remainder of fiscal 2023$2,370 $60 
20245,515 120 
20255,585 120 
20264,503 120 
20272,348 60 
Thereafter5,796 — 
Total undiscounted lease payments26,117 480 
Less imputed interest(3,441)(20)
Total lease liabilities$22,676 $460 

(10) ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):
As ofAs of
December 31, 2021March 31, 2021September 30, 2022March 31, 2022
Payroll and related liabilitiesPayroll and related liabilities$10,390 $10,405 
Deferred revenueDeferred revenue$6,278 $5,551 Deferred revenue4,194 6,285 
Reserves (1)
5,230 2,624 
Payroll and related liabilities4,818 6,616 
Legal settlement (2)
Legal settlement (2)
4,250 — 
Legal settlement (2)
287 4,250 
OtherOther4,656 4,836 Other4,127 4,013 
Reserves (1)
Reserves (1)
959 4,433 
Total accrued liabilities Total accrued liabilities$25,232 $19,627  Total accrued liabilities$19,957 $29,386 
(1) Reserves primarily consists of inventory, sales return, 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 16,17, 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.

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Changes in our product warranty obligations were as follows (in thousands):
Nine-Months Ended December 31,
 20212020
Balance, beginning of period$8,651 $6,250 
Accruals4,416 2,791 
Payments(5,942)(3,843)
Balance, end of period$7,125 $5,198 
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Six-Months Ended September 30,
 20222021
Balance, beginning of period$6,216 $9,782 
Accruals (1)
1,882 (551)
Payments(3,748)(1,865)
Balance, end of period$4,350 $7,366 
(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.

(12) ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables set forth the changes in accumulated other comprehensive loss, net of tax (in thousands):
Unrealized Loss on Available-for-Sale SecuritiesForeign Currency Translation AdjustmentsAccumulated 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)
Foreign Currency Translation AdjustmentsAccumulated Other Comprehensive Loss
Unrealized Loss on Available-for-Sale SecuritiesForeign Currency Translation AdjustmentsAccumulated Other Comprehensive Loss
Balance, September 30, 2021$(12)$(341)$(353)
Balance, March 31, 2022Balance, March 31, 2022$(527)$(527)
Current period other comprehensive loss before reclassificationsCurrent period other comprehensive loss before reclassifications— (148)(148)Current period other comprehensive loss before reclassifications(2,080)(2,080)
Net other comprehensive loss during periodNet other comprehensive loss during period— (148)(148)Net other comprehensive loss during period(2,080)(2,080)
Balance, December 31, 2021$(12)$(489)$(501)
Balance, September 30, 2022Balance, September 30, 2022$(2,607)$(2,607)

Unrealized Loss on Available-for-Sale SecuritiesForeign Currency Translation AdjustmentsAccumulated 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 $14 
Foreign Currency Translation AdjustmentsAccumulated Other Comprehensive Loss
Balance, June 30, 2022$(1,386)$(1,386)
Current period other comprehensive loss before reclassifications(1,221)(1,221)
Net other comprehensive loss during period(1,221)(1,221)
Balance, September 30, 2022$(2,607)$(2,607)

Unrealized Loss on Available-for-Sale SecuritiesForeign Currency Translation AdjustmentsAccumulated Other Comprehensive (Loss) Income
Balance, September 30, 2020$— $(742)$(742)
Current period other comprehensive (loss) income before reclassifications(4)760 756 
Net other comprehensive income during period(4)760 756 
Balance, December 31, 2020$(4)$18 $14 


Unrealized Loss on Available-for-Sale SecuritiesForeign Currency Translation AdjustmentsAccumulated Other Comprehensive (Loss) Income
Balance, March 31, 2021$(8)$(147)$(155)
Current period other comprehensive income before reclassifications(4)(194)(198)
Net other comprehensive income during period(4)(194)(198)
Balance, September 30, 2021$(12)$(341)$(353)

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Unrealized Loss on Available-for-Sale SecuritiesForeign Currency Translation AdjustmentsAccumulated Other Comprehensive (Loss) Income
Balance, June 30, 2021$(8)$70 $62 
Current period other comprehensive income before reclassifications(4)(411)(415)
Net other comprehensive income during period(4)(411)(415)
Balance, September 30, 2021$(12)$(341)$(353)

(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
December 31,
Nine-Months Ended
December 31,
Three-Months Ended September 30,Six-Months Ended September 30,
20212020202120202022202120222021
Shares used to calculate basic income per shareShares used to calculate basic income per share31,199 30,284 30,955 30,077 Shares used to calculate basic income per share31,585 30,968 31,496 30,833 
Dilutive effect of outstanding stock options, performance stock units and restricted stock unitsDilutive effect of outstanding stock options, performance stock units and restricted stock units— 2,349 — 2,259 Dilutive effect of outstanding stock options, performance stock units and restricted stock units— — — 1,604 
Shares used to calculate diluted income per shareShares used to calculate diluted income per share31,199 32,633 30,955 32,336 Shares used to calculate diluted income per share31,585 30,968 31,496 32,437 

Dilutive Shares
The weighted average numbers of shares outstanding listed in the table below were anti-dilutivedilutive and are excluded from the computation of diluted per share due towhen there is a loss from continuing operations, as such, the exercise or conversion of any potential shares would increase the number of shares in the denominator and resultresults in a lower lossincome (loss) per shareshare.
These shares may be dilutive potential common shares in the future (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended
September 30,
Six-Months Ended
September 30,
20212020202120202022202120222021
Restricted stock unitsRestricted stock units673 — 1,024 — Restricted stock units136 894 241 — 
Stock optionsStock options357 — 504 — Stock options51 526 107 — 
Total potential dilutive shares excluded due to net lossTotal potential dilutive shares excluded due to net loss187 1,420 348 — 

Anti-dilutive Shares
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income (loss) per share. In the case of restricted stock units, this is because unrecognized compensation expense exceeds the current value of the awards (i.e., grant date market value was higher than current average market price). In the case of stock options, this is because the average market price did not exceed the exercise price.

These shares may be anti-dilutive potential common shares in the future (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
2021202020212020
Restricted stock units1,168 31 333 15 
Stock options— 
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Three-Months Ended
September 30,
Six-Months Ended
September 30,
2022202120222021
Stock options1,696 407 1,473 295 
RSUs174 88 
Total anti-dilutive shares excluded1,870 409 1,561 297 

(14) SEGMENT AND ENTERPRISE-WIDE INFORMATION

We have 2two operating segments, Direct and Retail. There were no changes in our operating segments during the nine-monthssix-months ended December 31, 2021.September 30, 2022.

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

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Following is summary information by reportable segment (in thousands):
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended
September 30,
Six-Months Ended
September 30,
20212020202120202022202120222021
Net sales:Net sales:Net sales:
DirectDirect$60,705 $82,158 $161,954 $193,785 Direct$24,480 $37,853 $50,957 $101,249 
RetailRetail85,701 106,320 305,338 262,423 Retail39,905 99,153 67,348 219,637 
RoyaltyRoyalty852 781 2,518 2,630 Royalty1,073 953 1,970 1,666 
Consolidated net salesConsolidated net sales$147,258 $189,259 $469,810 $458,838 Consolidated net sales$65,458 $137,959 $120,275 $322,552 
Contribution:Contribution:Contribution:
DirectDirect$(8,980)$23,584 $(4,056)$58,167 Direct$(7,887)$(1,835)$(17,780)$4,924 
RetailRetail3,270 25,338 44,101 60,393 Retail966 18,741 (4,442)40,831 
RoyaltyRoyalty852 781 2,518 2,630 Royalty1,073 953 1,970 1,666 
Consolidated contributionConsolidated contribution$(4,858)$49,703 $42,563 $121,190 Consolidated contribution$(5,848)$17,859 $(20,252)$47,421 
Reconciliation of consolidated contribution to (loss) income from continuing operations:Reconciliation of consolidated contribution to (loss) income from continuing operations:Reconciliation of consolidated contribution to (loss) income from continuing operations:
Consolidated contributionConsolidated contribution$(4,858)$49,703 $42,563 $121,190 Consolidated contribution$(5,848)$17,859 $(20,252)$47,421 
Amounts not directly related to segments:Amounts not directly related to segments:Amounts not directly related to segments:
Operating expenses(1)Operating expenses(1)(14,456)(8,223)(45,960)(42,821)Operating expenses(1)(8,493)(19,809)(45,274)(31,504)
Other expense, netOther expense, net(1,142)(3,640)(1,930)(4,490)Other expense, net(816)(375)(1,704)(788)
Income tax benefit (expense)7,001 (8,588)1,321 (15,644)
Income tax expenseIncome tax expense(156)(2,242)(8,252)(5,680)
(Loss) income from continuing operations(Loss) income from continuing operations$(13,455)$29,252 $(4,006)$58,235 (Loss) income from continuing operations$(15,313)$(4,567)$(75,482)$9,449 
(1) Included in unallocated Operating expenses is $25.4 million of Goodwill and intangible impairment charge related to the Direct segment and $1.6 million of intangible impairment charge related to the Retail segment that is not included in the contribution performance measured by the chief operating decision maker.
(1) Included in unallocated Operating expenses is $25.4 million of Goodwill and intangible impairment charge related to the Direct segment and $1.6 million of intangible impairment charge related to the Retail segment that is not included in the contribution performance measured by the chief operating decision maker.

As ofAs of
December 31, 2021March 31, 2021September 30, 2022March 31, 2022
Assets:Assets:Assets:
DirectDirect$50,585 $47,002 Direct$63,675 $93,554 
RetailRetail198,791 146,001 Retail108,477 144,683 
Unallocated corporateUnallocated corporate117,589 161,227 Unallocated corporate54,361 75,808 
Total assetsTotal assets$366,965 $354,230 Total assets$226,513 $314,045 

The following customers accounted for 10% or more of total net sales as follows:
Three-Months Ended
December 31,
Nine-Months Ended
December 31,
Three-Months Ended
September 30,
Six-Months Ended
September 30,
20212020202120202022202120222021
Amazon.comAmazon.com*13.5%14.4%17.8%Amazon.com33.7%15.4%31.7%16.8%
Best BuyBest Buy14.0%*16.6%*Best Buy*18.6%*17.8%
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.

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(15) BORROWINGS

Wells Fargo Bank Credit Agreement

On October 29, 2021, we amended our Credit Agreement dated May 13, 2021 which amended our original Credit Agreement, dated January 31, 2020 (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”"Lenders”), pursuant to which the. 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 tois $100.0 million (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 Facility was $11.5 million, as of the effective date of the amendment, and will amortizemillion. The Credit Facility matures on a new 60-month straight line basis to coincide with the extended maturity date. In connection with the October 29, 2021 credit amendment we recorded $0.6 million in new financing costs as Other assets on our Condensed Consolidated Balance Sheet. The2026 and repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principalassets, with principal and interest amounts are required to be paid as scheduled.

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,September 30, 2022, outstanding borrowings totaled $56.1$47.3 million, with $10.9$9.2 million and $45.2$38.1 million under our Term Loan Facility and Revolver, respectively. As of December 31, 2021,September 30, 2022, we were in compliance with the financial covenants of the Credit Agreement and $54.9$22.2 million was available for borrowing under the ABL Revolving Facility.

Interest on the Revolver will accrue at the Secured Overnight Financing Rate (“SOFR”("SOFR") plus a margin of 1.86% to 2.36% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at SOFR plus 4.50%4.61%. As of December 31, 2021,September 30, 2022, our interest rate was 1.97%4.86% for the Revolver and 4.60%7.61% for the Term Loan Facility.

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.

(16) INCOME TAXES

Valuation Allowance

Under ASC Topic 740, Accounting for Income Taxes, we must periodically evaluate deferred tax assets to determine if it is more-likely-than-not that the future tax benefits will be realized. If the negative evidence outweighs the positive, a valuation allowance must be recognized to reduce the net carrying amount of the deferred tax assets to the amount more-likely-than-not to be realized.

Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified. We generally consider the following, but are not limited to, objectively verified evidence to determine the likelihood of realization of the deferred tax assets:

Our current financial position and our historical results of operations for recent years. We generally consider cumulative pre-tax losses in the three-year period ending with the current quarter or a projected three-year cumulative loss position within the next 12 months following the current quarter to be significant negative evidence.
A pattern of objectively-measured historical and current financial reporting loss trend is heavily weighted as a source of negative evidence.
Sources of taxable income of the appropriate character. Future realization of deferred tax assets is dependent on projected taxable income of the appropriate character. Future reversals of existing temporary differences are heavily weighted sources of objectively verifiable evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and current financial trends and can be reasonably estimated.
Carry-back and carry-forward periods available. The carry-back and carry-forward periods permitted under the tax law are objectively verified evidence.
Tax planning strategies. Tax planning strategies can be, depending on their nature, heavily-weighted sources of objectively verifiable positive evidence when the strategies are available and can be reasonably executed. We consider tax planning strategies only if they are feasible and justifiable considering our
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current operations and our strategic plan. Tax planning strategies, if executed, may accelerate the recovery of a deferred tax asset so the tax benefit of the deferred tax asset can be carried back.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. In the first quarter of fiscal 2023, a significant new piece of objective negative evidence evaluated was the third year of cumulative losses projected within the next twelve months. Such objective evidence limits our ability to consider other subjective evidence, such as our projections for future growth.

Based on this evaluation in the first quarter of fiscal 2023, Management concluded that it was no longer more likely than not that the tax benefits from the existing U.S deferred tax assets would be realized. Management sustains the same position in the current quarter hence we continue to recognize a valuation allowance to reduce its U.S deferred tax assets to an anticipated realizable value. We recognized a $3.6 million and a $17.8 million valuation allowance in the three and six months ended September 30, 2022, respectively, against our domestic uncovered net deferred tax assets.

Unrecognized Tax Benefits

We recognize a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities. We also recognize interest and penalties related to income tax matters in Income tax expense.

In September 2022, we effectively completed a tax deregistration of a foreign entity that was part of our former Commercial business. We had $0.1 million of unrecognized tax benefits from an uncertain tax position outstanding related to this foreign entity. Further we had a $2.0 million cumulative liability for interest and penalties associated with the uncertain tax position. As a result of the completion of the tax deregistration, we released this $2.1 million of corresponding liability as a component of income taxes from discontinued operations in the second quarter of fiscal 2023.


(17) COMMITMENTS AND CONTINGENCIES

Operating leases
We lease property and equipment under non-cancellable operating leases which, in the aggregate, extend through 2029. Many of these leases contain renewal options and provide for rent escalations and payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties.

For additional information related to leases, see Note 9Leases.

Guarantees, Commitments and Off-Balance Sheet Arrangements
As of December 31, 2021,September 30, 2022, we had standby letters of credit of $0.9 million.

We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of December 31, 2021,September 30, 2022, we had approximately $59.2$25.3 million compared to $216.3$39.8 million as of March 31, 20212022 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
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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
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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 December 31, 2021.September 30, 2022.

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

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

During the second quarter of fiscal 2022, we recorded a $4.7 million loss contingency related to a legal settlement involving a class action lawsuit related to advertisement of our treadmills. The settlement includesincluded damages, a one-year free membership to JRNY®, and administrative fees and was included as a component of General and administrative on our Condensed Consolidated Statements of Operations. AsWe paid the settlement damages and related administrative fees during the second fiscal quarter of December 31, 2021, $4.3 million remained accrued and was reflected in Accrued liabilities and Other long-term liabilities on our Condensed Consolidated Balance Sheets.fiscal 2023.






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

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended DecemberMarch 31, 20202022 (the “2020“2022 Form 10-K”). All references to the thirdsecond quarters and six-months ended of fiscal 2023 and fiscal 2022 and 2021 to mean the for the three and nine-monthsix-month periods ended December 31,September 30, 2022 and 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 continue decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace or the availability from retailers of heavily discounted competitive products, an adverse change in the availability of credit for our customers who finance their purchases, our ability to pass along vendor raw material price increases and other cost pressures, including increased shipping costs and unfavorable foreign currency exchange rates, tariffs, risks associated with current and potential delays, work stoppages, or supply chain disruptions caused by the coronavirus pandemic, our ability to hire and retain key management personnel, our ability to effectively develop, market and sell future products, the availability and timing of capital for financing our strategic initiatives, including being able to raise capital on favorable terms or at all; changes in the financial markets, including changes in credit markets and interest rates that affect our ability to access those markets on favorable terms, the impact of any future impairments, our ability to protect our intellectual property, the introduction of competing products, and our ability to get foreign-sourced product through customs in a timely manner. Additional assumptions, risks and uncertainties are described in Part I, Item 1A, “Risk Factors,” in our 20202022 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.

Overview
We empower healthier living through individualized connected fitness experiences 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.
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As previously disclosed, we changed our fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31.

Our results for the three and nine-monthssix-months ended December 31, 2021,September 30, 2022, 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.

On September 26, 2022, we announced the launch of our comprehensive review of strategic alternatives to identify opportunities to accelerate our digital transformation under our previously announced North Star plan and enhance shareholder value. That process continues, but we have not set a timetable for the conclusion of the process and there can be no assurance that the review will result in any transaction or other strategic change.

At the center of health and well-being is fitness and the market has so far behaved largely as we expected. The market size more than doubled over the past 2 years, is regulating from its peak with more normal seasonality, and we expect will settle at a “new normal” significantly above pre-pandemic levels (but below the pandemic peak) based on a profoundan ongoing 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.pre-pandemic periods. This results in stronger opportunity for our industry and Nautilus.

For fiscal 2023, we expect to return to a more typical pre-pandemic seasonality, with the second half of the fiscal year contributing more of the full year's revenue. Additionally, to gauge sales growth and progress against more "normalized," or pre-pandemic results, we will rely more heavily on measuring performance of fiscal 2023 sales growth versus the pre-pandemic twelve-month period ended March 31, 2020 ("fiscal 2020") to guide business strategy, rather than measuring performance against the atypical, outsized results that occurred during the pandemic.

Comparison for the Three-Months Ended December 31, 2021September 30, 2022 to the Three-Months ended December 31, 2020Ended September 30, 2021

Net sales were $147.3$65.5 million, for the three-months ended December 31, 2021, compared to $189.3$138.0 million, a decline of 22.2%52.6% versus forlast year. Net sales are up 24%, or 7% Compound Annual Growth Rate ("CAGR"), when compared to the three-months ended December 31,same period in fiscal 2020, or down 21.7%, excluding sales related to the Octane brand, which was sold in October 2020. LowerThe sales decline versus last year is driven primarily by the return to pre-pandemic seasonal demand ofand pre-pandemic sales discounting practices, as our cardio productstypical sales discounts were partially offset by sales of SelectTech® weights and benches compared tolargely unnecessary during the same period in 2020.pandemic period.

Net sales of our Direct segment decreased by $21.5$13.4 million, or 26.1%35.3%, for the three-months ended December 31, 2021,September 30, 2022, compared to the three-months ended December 31, 2020.September 30, 2021. Net sales were up 51%, or a 15% CAGR, compared to the same period in fiscal 2020. The net sales decrease compared to last year was primarily driven by lower cardiothe return to pre-pandemic seasonal demand and pre-pandemic sales and higher sales discounting.discounting practices.

Net sales of our Retail segment decreased by $20.6$59.2 million, or 19.4%59.8%, for the three-months ended December 31, 2021,September 30, 2022, compared to the three-months ended December 31, 2020. ExcludingSeptember 30, 2021. Net sales were up 11%, or a 3% CAGR, compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in 2020, net sales were down 18.5%. The decrease in sales iscompared to last year was primarily driven by lower cardio sales and higher sales discounting, partially offset by strong sales of SelectTech® weights and benches.as retailers work through higher-than-normal inventory levels.

Royalty income for the three-months ended December 31, 2021September 30, 2022 increased by $0.1 million compared to the three-months ended December 31, 2020.September 30, 2021.

Gross profit was $29.9$11.5 million, for the three-months ended December 31, 2021, compared to gross profit of $77.9$42.1 million for the three-months ended December 31, 2020.last year. Gross profit margins were 20.3% for the three-months ended December 31, 202117.5% compared to 41.1% for the three-months ended December 31, 2020.30.5% last year. The 20.813.0 ppt decrease in gross margins was primarily due to:to increased product costs,discounting (-4 ppts), unfavorable logistics and discounting (-18overhead absorption (-4 ppts) and, increased investments in JRNY® (-3 ppts), a prior year release of a special warranty reserve (-2 ppts), and an increase in inventory adjustments (-2 ppts), partially offset by improvement in other costs (+2 ppts).

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Operating expenses were $49.2$25.8 million for the three-months ended December 31, 2021, an increasecompared to $44.0 million last year. The decrease of $12.8$18.2 million, or 35.3%41.4%, compared to operating expenses of $36.4 million for the three-months ended December 31, 2020,was primarily due to $11.0$9.3 million morelower media spending, a $4.7 million prior year loss contingency related to a legal settlement, a decrease of $3.0 million due to other cost savings, and a $2.7 million decrease in advertisingother variable selling and $3.6marketing expenses due to decreased sales, offset by a $1.5 million increase in JRNY® investments. Total advertising expenses were $21.5$3.1 million for the three-months ended December 31, 2021 versus $10.5$12.4 million for the three-months ended December 31, 2020.last year.

Operating loss was $19.3$14.3 million or a negative 13.1%21.8% operating margin, for the three-months ended December 31, 2021, compared to an operating incomeloss of $41.5$2.0 million for the three-months ended December 31, 2020,last year, primarily due todriven by lower gross profits and higher operating expenses.profit.

Income tax expense was $0.2 million this year compared to $2.2 million last year. The income tax expense this quarter was primarily a result of a U.S. deferred tax asset valuation allowance in the amount of $3.6 million recorded in the second quarter of fiscal 2023.

Loss from continuing operations was $13.5$15.3 million, or $(0.43)$0.48 per diluted share, for the three-months ended December 31, 2021, compared to income from continuing operations of $29.3$4.6 million, or $0.90$0.15 per diluted share, last year.

Net loss was $13.2 million, or $0.41 per diluted share, compared to net loss of $4.6 million or $0.15 per diluted share, last year.

Comparison for the three-monthsSix-Months Ended September 30, 2022 to the Six-Months Ended September 30, 2021

Net sales were $120.3 million, compared to $322.6 million, a decline of 62.7% versus last year. Net sales are up 17%, or 5% CAGR, when compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in October 2020. The sales decline versus last year is driven primarily by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices, as our typical sales discounts were largely unnecessary during the pandemic period.

Net sales of our Direct segment decreased by $50.3 million, or 49.7%, for the six-months ended December 31,September 30, 2022, compared to the six-month period ended September 30, 2021. Net sales were up 38% or a 11% CAGR, compared to the same period in fiscal 2020. The net sales decrease compared to last year is primarily driven by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices.

Net sales of our Retail segment decreased by $152.3 million, or 69.3%, for the six-months ended September 30, 2022, compared to the six-month period ended September 30, 2021. Net sales were up 5%, or a 2% CAGR, compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in 2020. The net sales decrease compared to last year is primarily driven by lower cardio sales and higher sales discounting as retailers work through higher-than-normal inventory levels.

Royalty income for the six-months ended September 30, 2022 increased by $0.3 million compared to the six-month period ended September 30, 2021.

Gross profit was $18.4 million, compared to $97.6 million last year. Gross profit margins were 15.3% compared to 30.3% last year. The 15.0 ppt decrease in gross margins was primarily due to increased discounting (-7 ppts), unfavorable logistics overhead absorption (-6 ppts), increased investments in JRNY® (-3 ppts), an increase in inventory adjustments (-2 ppts), partially offset by improvements in other costs (+3 ppts).

Operating expenses were $83.9 million compared to $81.6 million last year. The increase of $2.3 million, or 2.8%, was primarily due to a goodwill and intangible impairment charge of $27.0 million and a $5.0 million increase in JRNY® investments, offset by a $15.2 million decrease in media spending, a $5.2 million decrease in other variable selling and marketing expenses due to decreased sales, a decrease of $4.6 million due to savings in other operating expenses, and a $4.7 million prior year loss contingency for a legal settlement. Total advertising expenses were $8.8 million versus $24.0 million last year.

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NetOperating loss was $13.5$65.5 million for the three-months ended December 31, 2021,or a negative 54.5% operating margin, compared to netoperating income of $28.9$15.9 million forlast year, primarily driven by a goodwill and intangible impairment charge of $27.0 million and lower gross profit associated with lower sales demand during the three-months ended December 31, 2020.period.

The effectiveIncome tax rates were 34.2% for the three-months ended December 31, 2021 and 22.7% for the three-months ended December 31, 2020, primarily due to the impact of lower income.

Comparison for the Nine-Months Ended December 31, 2021 to the Nine-Months Ended December 31, 2020

Net sales were $469.8expense was $8.3 million up 2.4% for the nine-months ended December 31, 2021this year compared to net sales of $458.8$5.7 million forlast year. The income tax expense in the nine-months ended December 31, 2020. Excluding sales related to the Octane brand, net sales were up 6.8% compared to the nine-months ended December 31, 2020. The sales increase compared to the same period in 2020 was driven primarily by robust sales of our popular SelectTech® weights and benches.
Gross profit was $127.5 million for the nine-months ended December 31, 2021, compared to gross profit of $193.2 million for the nine-months ended December 31, 2020. Gross profit margins were 27.1% for the nine-months ended December 31, 2021, compared to 42.1% for the nine-months ended December 31, 2020. The 15 ppts decrease in gross marginscurrent year was primarily due to: increased product costs, logistics and discounting (-13 ppts) and increased investmentsa result of a U.S. deferred tax asset valuation allowance in JRNY® (-2 ppts).the amount of $17.8 million recorded against our domestic uncovered net deferred tax assets to reduce our deferred tax assets to an anticipated realizable value.

Operating expenses were $130.9 million, an increase of $16.0Loss from continuing operations was $75.5 million, or 14.0% for the nine-months ended December 31, 2021,$2.40 per diluted share, compared to operating expenses of $114.8 million for the nine-months ended December 31, 2020, primarily due to a $23.5 million more in advertising, increased JRNY® investments of $9.5 million, a legal settlement of $4.7 million, and acquisition expenses of $1.7 million, partially offset by the $20.7 million Octane Loss on Disposal Group for the nine-months ended December 31, 2020. Total advertising expenses were $44.3 million for the nine-months ended December 31, 2021, compared to $20.9 million for the nine-months ended December 31, 2020.

Operating loss was $3.4 million for the nine-months ended December 31, 2021, compared to operating income of $78.4$9.4 million, for the nine-months ended December 31, 2020. The decrease was primarily due to lower gross profit and higher operating expenses, partially offset by the Octane Loss on Disposal Group.or $0.29 per diluted share, last year.

Net loss was $4.2$73.4 million, for the nine-months ended December 31, 2021,or $2.33 per diluted share, compared to net income of $57.7$9.3 million for the nine-months ended December 31, 2020.or $0.29 per diluted share, last year.

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.North Star Strategy Update

JRNY® UpdateDigital Platform

Nautilus Inc. continues to enhance the JRNY®platform creatingthrough many unique features including the expansion of differentiated visual connected-fitness experiences for JRNY® Members.

As of September 30, 2022, members of JRNY®, Nautilus’ personalized connected fitness platform, reached 396,000,representing approximately 116% growth versus the same quarter last year. Of these members, 142,000 were Subscribers, representing approximately 258% growth over the same period. We define JRNY® Members as all individuals who have a JRNY® account and/or subscription, which includes Subscribers, their members.respective associated users, and users who consume free content. We define Subscribers as a person or household who paid for a Subscription, are in a trial, or have requested a "pause"' to their subscriptions for up to three months.

Additionally, we made great strides over the last two years, expanding the number of products featuring JRNY® connectivity. In fiscal 2022, approximately 80% of total units sold were JRNY® compatible, compared to only 22% in the pre-pandemic fiscal 2020. The trend of approximately 80% of total units sold being JRNY® compatible continued in the first two quarters of fiscal 2023.

In the third quarter,last two months, we’ve expanded our cardio offerings to include the Company expandedBowflex® BXT8J treadmill, along with the Schwinn® 190 upright bike and 290 recumbent bike. Prioritizing quality and compelling features at an affordable price point, all three products offer high-performance cardio combined with digital connectivity to the JRNY® enabled product line, adding the Bowflexadaptive fitness platform, paired via a user’s device® .

Max TotalNautilus' integration of VAY's motion-tracking capabilities into ® 16 and Bowflex® SelectTech® 552 and 1090 dumbbells. The attachment of JRNY® towill further advance and accelerate personalized strength workout options, including the Bowflex®addition of rep counting and form coaching for SelectTech® modalities has been a significant growth driver of the users, which we believe will drive JRNY® member base, which reached nearly 250k membersmembership growth during the back-half of fiscal 2023.

Key Trends and Drivers of Performance

The following forward-looking statements reflect our full fiscal year 2023 expectations as of December 31, 2021.November 9, 2022, and are subject to risks and uncertainties.

Second Half and Fiscal 2023

Given the impact of elevated inventory levels at our retail partners, we expect the second half of fiscal 2023 to represent approximately 65% of full year sales, slightly higher than pre-pandemic second half seasonality of approximately 60%.

Gross margins for the second half of the year are expected to be in the range of 24% to 27%. Sequential improvements in gross margin are expected to be driven by lower in-bound freight, the elimination of detention and demurrage fees, and the reduction in our logistics facilities footprint. The company closed one of its
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distribution centers at lease expiration in October of 2022 and will not be renewing the leases of some storage locations.

The Company extended We continue to expect JRNY® members 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.exceed 500,000 at March 31, 2023.

The Company began offering 12-month complimentary trials in late September, offering customersWe expect inventory levels to continue to decrease over the opportunity to create lasting habits with the platform and provide feedback on their experience over a longer term.next six months.

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

Second Half Fiscal 2022

Given the effect of the COVID-19 pandemic on last year’s 2nd Half sales and to gauge growth and progress against more “normalized” results, the Company will be measuring this 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 the impact of increased logistics, product costs, and discounting to decline operating margins by 15 to 16 percentage points, 3 to 4 percentage points worse than previous guidance. The change is primarily due to the more promotional environment as mentioned above.

The Company expects 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.

As previously guided, for the second half of Fiscal 2022, the Company expects operating margin loss in the mid-teens.

For the second half of Fiscal 2022, the Company expects adjusted EBITDA loss in the low-teens.

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

The Company expects the number of JRNY® members at year-end to cross 300,000 slightly above the mid-point of our previous guidance.

Longer term view, beyond Fiscal 2022

The Company expects to return to positive adjusted EBITDA in fiscal year 2023 and are on track to achieve operating margins of 15% by FYE 2025, with margins expanding to high teens by FYE 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
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sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the U.S. and Canada. The COVID-19 pandemic has created a heightened need for home-fitness products at an unplanned rate. We are unableunprecedented rate and as the pandemic lessened there was a return to estimate the length of time that the short-term increases in demand for many of our home-fitness products will outpace supply and we are accelerating the manufacturing and delivery of key products.a more normal seasonality. We cannot predict with certainty the longer-term impacts of the COVID-19 pandemic and the change to consumer habits and sentiments and therefore, the impact on our results of operations is uncertain.

Our gross margins are being impacted by, fluctuationsamong other things:
Increased product costs, primarily driven by our increasing use of more expensive components in our products, which now include our connected fitness JRNY® platform.
Fluctuations in the availability, and as a result the costs, or availability of materials used to manufacture our products, tariffs,products.
Tariffs and expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations
Fluctuations in cost associated with the acquisition or license of products and technologies, product warranty costs, the cost ofclaims, fuel, foreign currency exchange rates, and changes in costs of other distribution or manufacturing-related services.
Costs relating to the addition of a new distribution facility in Southern California prior to the anticipated exit from our Portland distribution facility.
The efficiency and effectiveness of our organization and operations.
A return to product discounting practices in place prior to the pandemic, which were temporarily suspended in part during the pandemic.
Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, websites and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.

As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of risk factors located at Part I, Item 1A of our 20202022 Form 10-K as supplemented by our quarterly reports on Form 10-Q.

Discontinued Operations

Results from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation as of December 31, 2012. Although there was no revenue related to the former Commercial business in either the 2021fiscal 2022 or 2020year-to-date fiscal 2023 periods, we continuecontinued to incur product liability and other legal expenses associated with product previously sold into the Commercial channel.

In the second quarter of fiscal 2023, we completed the tax deregistration of a foreign entity which was part of the discontinued operations. As a result, the previously unrecognized tax benefit and associated accrued interest and
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penalties in the amount of $2.1 million was released and recorded as a component of income taxes from discontinued operations in the quarter.


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RESULTS OF OPERATIONS
Results of operations information was as follows (dollars in(in thousands):
Three-Months Ended
December 31,
Change Three-Months Ended
September 30,
Change
20212020$%20222021$%
Net salesNet sales$147,258 $189,259 $(42,001)(22.2)%Net sales$65,458 $137,959 $(72,501)(52.6)%
Cost of salesCost of sales117,342 111,388 5,954 5.3 %Cost of sales54,000 95,906 (41,906)(43.7)%
Gross profitGross profit29,916 77,871 (47,955)(61.6)%Gross profit11,458 42,053 (30,595)(72.8)%
Operating expenses:Operating expenses:Operating expenses:
Selling and marketingSelling and marketing32,395 21,998 10,397 47.3 %Selling and marketing9,400 21,939 (12,539)(57.2)%
General and administrativeGeneral and administrative11,456 10,364 1,092 10.5 %General and administrative10,995 16,376 (5,381)(32.9)%
Research and developmentResearch and development5,379 4,029 1,350 33.5 %Research and development5,405 5,688 (283)(5.0)%
Total operating expensesTotal operating expenses49,230 36,391 12,839 35.3 %Total operating expenses25,800 44,003 (18,203)(41.4)%
Operating (loss) income(19,314)41,480 (60,794)(146.6)%
Operating lossOperating loss(14,342)(1,950)(12,392)635.5 %
Other expense:Other expense:Other expense:
Interest incomeInterest income(6)Interest income12 (8)
Interest expenseInterest expense(354)(280)(74)Interest expense(595)(481)(114)
Other, netOther, net(789)(3,367)2,578 Other, net(224)94 (318)
Total other expense, netTotal other expense, net(1,142)(3,640)2,498 Total other expense, net(815)(375)(440)
(Loss) income from continuing operations before income taxes(20,456)37,840 (58,296)
Income tax (benefit) expense(7,001)8,588 (15,589)
(Loss) income from continuing operations(13,455)29,252 (42,707)
Loss from discontinued operations, net of taxes(44)(316)272 
Net (loss) income$(13,499)$28,936 $(42,435)
Loss from continuing operations before income taxesLoss from continuing operations before income taxes(15,157)(2,325)(12,832)
Income tax expenseIncome tax expense156 2,242 (2,086)
Loss from continuing operationsLoss from continuing operations(15,313)(4,567)(10,746)
Income (loss) from discontinued operations, net of taxesIncome (loss) from discontinued operations, net of taxes2,110 (35)2,145 
Net lossNet loss$(13,203)$(4,602)$(8,601)

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 Nine-Months Ended
December 31,
Change
2021 2020$%
Net sales$469,810  $458,838 $10,972 2.4 %
Cost of sales342,336  265,633 76,703 28.9 %
Gross profit127,474 193,205 (65,731)(34.0)%
Operating expenses: 
Selling and marketing75,634  53,651 21,983 41.0 %
General and administrative39,355  28,520 10,835 38.0 %
Research and development15,882  11,997 3,885 32.4 %
Loss on disposal group— 20,668 (20,668)(100.0)%
Total operating expenses130,871 114,836 16,035 14.0 %
Operating (loss) income(3,397) 78,369 (81,766)(104.3)%
Other expense: 
Interest income34  25 
Interest expense(1,149) (871)(278)
Other, net(815) (3,628)2,813 
Total other expense, net(1,930) (4,490)2,560 
(Loss) income from continuing operations before income taxes(5,327) 73,879 (79,206)
Income tax (benefit) expense(1,321) 15,644 (16,965)
(Loss) income from continuing operations(4,006) 58,235 (62,241)
Loss from discontinued operations, net of taxes(211) (571)360 
Net (loss) income$(4,217) $57,664 $(61,881)





 Six-Months Ended
September 30,
Change
2022 2021$%
Net sales$120,275 $322,552 $(202,277)(62.7)%
Cost of sales101,859 224,994 (123,135)(54.7)%
Gross profit18,416 97,558 (79,142)(81.1)%
Operating expenses: 
Selling and marketing22,290 43,239 (20,949)(48.4)%
General and administrative23,458 27,899 (4,441)(15.9)%
Research and development11,229 10,503 726 6.9 %
Goodwill and intangible impairment charge26,965 — 26,965 NM
Total operating expenses83,942 81,641 2,301 2.8 %
Operating (loss) income(65,526) 15,917 (81,443)(511.7)%
Other expense: 
Interest income33 (28)
Interest expense(971)(795)(176)
Other, net(739)(26)(713)
Total other expense, net(1,705) (788)(917)
(Loss) income from continuing operations before income taxes(67,231) 15,129 (82,360)
Income tax expense8,251  5,680 2,571 
(Loss) income from continuing operations(75,482) 9,449 (84,931)
Income (loss) from discontinued operations, net of taxes2,102  (167)2,269 
Net (loss) income$(73,380) $9,282 $(82,662)
NM = Not meaningful






















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Results of operations information by segment and major product lines was as follows (dollars in thousands):
Three-Months Ended
December 31,
 Change Three-Months Ended
September 30,
 Change
2021 2020 $ %2022 2021 $ %
Net sales:Net sales:   Net sales:   
Direct net sales:Direct net sales:Direct net sales:
Cardio products(1)
Cardio products(1)
$35,558 $52,876 $(17,318)(32.8)%
Cardio products(1)
$16,493 $22,406 $(5,913)(26.4)%
Strength products(2)
Strength products(2)
25,147 29,282 (4,135)(14.1)%
Strength products(2)
7,987 15,447 (7,460)(48.3)%
DirectDirect60,705 82,158 (21,453)(26.1)%Direct24,480 37,853 (13,373)(35.3)%
Retail net sales: Retail net sales: Retail net sales:
Cardio products(1)
Cardio products(1)
$37,199 $78,255 (41,056)(52.5)%
Cardio products(1)
$14,554 $58,848 $(44,294)(75.3)%
Strength products(2)
Strength products(2)
48,502 28,065 20,437 72.8 %
Strength products(2)
25,351 40,305 (14,954)(37.1)%
RetailRetail85,701 106,320 (20,619)(19.4)%Retail39,905 99,153 (59,248)(59.8)%
RoyaltyRoyalty852  781  71  9.1 %Royalty1,073  953  120  12.6 %
$147,258 $189,259 $(42,001) (22.2)%$65,458 $137,959 $(72,501) (52.6)%
Cost of sales:Cost of sales:Cost of sales:
DirectDirect$42,597  $38,155  $4,442  11.6 %Direct$21,379  $23,877  $(2,498) (10.5)%
RetailRetail74,745  73,233  1,512  2.1 %Retail32,621  72,029  (39,408) (54.7)%
$117,342  $111,388  $5,954  5.3 %$54,000  $95,906  $(41,906) (43.7)%
Gross profit:Gross profit:   Gross profit:   
DirectDirect$18,108  $44,003  $(25,895) (58.8)%Direct$3,101  $13,976  $(10,875) (77.8)%
RetailRetail10,956  33,087  (22,131) (66.9)%Retail7,284  27,124  (19,840) (73.1)%
RoyaltyRoyalty852  781  71  9.1 %Royalty1,073  953  120  12.6 %
$29,916 $77,871  $(47,955) (61.6)%$11,458 $42,053  $(30,595) (72.8)%
Gross profit margin:Gross profit margin:   Gross profit margin:   
DirectDirect29.8 % 53.6 % (2,380)basis pointsDirect12.7 % 36.9 % (24)ppts
RetailRetail12.8 % 31.1 % (1,830)basis pointsRetail18.3 % 27.4 % (9)ppts
Contribution:Contribution:Contribution:
DirectDirect$(8,980)$23,584 (32,564)(138.1)%Direct$(7,887)$(1,835)$(6,052)329.8 %
RetailRetail3,270 25,338 (22,068)(87.1)%Retail966 18,741 (17,775)(94.8)%
Contribution rate:Contribution rate:Contribution rate:
DirectDirect(14.8)%28.7 %(4,350)basis pointsDirect(32.2)%(4.8)%(27)ppts
RetailRetail3.8 %23.8 %(2,000)basis pointsRetail2.4 %18.9 %(17)ppts
(1) Cardio products include: connected-fitness bikes, the Bowflex® C6, VeloCore®, Schwinn® IC4, Max Trainer®,connected-fitness treadmills, other exercise bikes, ellipticals andsubscription services.
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories.
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 Nine-Months Ended
December 31,
 Change
2021 2020 $ %
Net sales:   
Direct net sales:
Cardio products(1)
$89,394 $142,739 $(53,345)(37.4)%
Strength products(2)
72,560 51,046 21,514 42.1 %
Direct161,954 193,785 (31,831)(16.4)%
Retail net sales:
Cardio products(1)
185,971 199,190 (13,219)(6.6)%
Strength products(2)
119,367 63,233 56,134 88.8 %
Retail305,338 262,423 42,915 16.4 %
Royalty2,518  2,630  (112) (4.3)%
$469,810 $458,838 $10,972  2.4 %
Cost of sales:
Direct$105,356  $87,269  $18,087  20.7 %
Retail236,980  178,364  58,616  32.9 %
$342,336  $265,633  $76,703  28.9 %
Gross profit:   
Direct$56,598  $106,516  $(49,918) (46.9)%
Retail68,358  84,059  (15,701) (18.7)%
Royalty2,518  2,630  (112) (4.3)%
$127,474  $193,205  $(65,731) (34.0)%
Gross profit margin:   
Direct34.9 % 55.0 % (2,010)basis points
Retail22.4 % 32.0 % (960)basis points
Contribution:
Direct$(4,056)$58,167 $(62,223)(107.0)%
Retail44,101 60,393 (16,292)(27.0)%
Contribution rate:
Direct(2.5)%30.0 %(3,250)basis points
Retail14.4 %23.0 %(860)basis points
(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.



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 Six-Months Ended
September 30,
 Change
20222021 $ %
Net sales:   
Direct net sales:
 Cardio products(1)
$33,626 $53,836 $(20,210)(37.5)%
 Strength products(2)
17,331 47,413 (30,082)(63.4)%
Direct50,957 101,249 (50,292)(49.7)%
  Retail net sales:
Cardio products(1)
$26,397 $148,772 $(122,375)(82.3)%
Strength products(2)
40,951 70,865 (29,914)(42.2)%
Retail67,348 219,637 (152,289)(69.3)%
Royalty1,970 1,666  304  18.2 %
$120,275 $322,552 $(202,277) (62.7)%
Cost of sales:
Direct$43,293 $62,759  $(19,466) (31.0)%
Retail58,566 162,235  (103,669) (63.9)%
$101,859  $224,994  $(123,135) (54.7)%
Gross profit:   
Direct$7,665 $38,490  $(30,825) (80.1)%
Retail8,781 57,402  (48,621) (84.7)%
Royalty1,970 1,666  304  18.2 %
$18,416 $97,558  $(79,142) (81.1)%
Gross profit margin:   
Direct15.0 % 38.0 % (23)ppts
Retail13.0 % 26.1 % (13)ppts
Contribution:
Direct$(17,780)$4,924 $(22,704)(461.1)%
Retail(4,442)40,831 (45,273)(110.9)%
Contribution rate:
Direct(34.9)%4.9 %(40)ppts
Retail(6.6)%18.6 %(25)ppts
(1) Cardio products include: connected-fitness bikes, the Bowflex® C6, VeloCore®, Schwinn® IC4, Max Trainer®,connected-fitness treadmills, other exercise bikes, ellipticals andsubscription services.
(2) Strength products include: Bowflex® Home Gyms, Bowflex® SelectTech® dumbbells, kettlebell and barbell weights, and accessories.

Sales and Gross Profit

Direct Segment

Comparison of Segment Results for the Three-Month Period Ended December 31, 2021September 30, 2022 to the Three-Month Period Ended December 31, 2020September 30, 2021

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Net sales were $60.7$24.5 million for the three-month period ended December 31, 2021,September 30, 2022, compared to $82.2$37.9 million, a decline of 26.1%35.3%, versus the same period in 2021, and up 51.1% compared to the same period in fiscal 2020. Net sales decrease was primarily driven by lower cardiothe return to pre-pandemic seasonal demand and pre-pandemic sales and higher discounting.discounting practices.

Cardio sales declined 32.8%26.4% versus the same period in 2021, and were up 32.7% compared to the same period in fiscal 2020. Lower cardio sales this quarter were primarily driven by lower bike demand. Strength product sales declined 14.1%48.3% versus the same period in 2021, and increased 112.1% compared to the same period in fiscal 2020. Lower strength sales this quarter were primarily driven by lower sales of Bowflex® Home Gyms, partially offset by increased sales ofdemand for SelectTech® weights and benches.weights.

The Direct segment ended the quarter with $8.8$0.3 million of backlog as of December 31, 2021, the first quarter with meaningful backlog since March 31, 2021. These amounts representSeptember 30, 2022. This amount represents unfulfilled consumer orders net of current promotional programs and sales discounts.

Gross profit margin was 29.8%12.7% for the three-month period ended December 31, 2021September 30, 2022 versus 53.6%36.9% for the same period in 2020.2021. The 23.824.2 ppt decrease in gross margin was primarily driven by:increased product costs, logistics and discounting (-20(-7 ppts) and, increased investments in JRNY® (-5 ppts), a prior year release of a special warranty reserve (-4 ppts), unfavorable logistics overhead absorption (-4 ppts), and increase in other costs (-4 ppts). Gross profit was $18.1$3.1 million, down 58.8%a decrease of 77.8% versus the same period in 2020.2021.

Segment contribution loss was $9.0$7.9 million for the three-month period ended December 31, 2021,September 30, 2022, compared to incomesegment contribution loss of $23.6$1.8 million for the same period in 2020.2021. The decline was primarily driven by lower gross profit, and increased investments inas explained above, offset by decreased media and JRNY®.spend. Advertising expenses were $16.1$2.6 million compared to $10.5$6.8 million for the same period in 2020.2021.

Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the three-month period ended December 31, 2021second quarter of 2022 were 60.3%50.8%, compared to 52.0%56.1% for the same period in 2020.2021. The increasedecrease in approvals reflects higher credit quality applications.

Comparison of Segment Results for the Nine-Month Period Ended December 31, 2021 to the Nine-Month Period Ended December 31, 2020

Net sales for the nine-month period ended December 31, 2021 were $162.0 million, down 16.4% versus the same period in 2020. Decreased sales were driven primarily by cardio products, which declined by 37.4% versus the same period in 2020, due to lower sales of bikes. Strength products sales grew 42.1% versus the same period in 2020 driven by SelectTech® weights and benches.

Gross profit margin for the nine-month period ended December 31, 2021 was 34.9%, down from 55.0% for the same period in 2020. The 20.1 ppt decrease in gross profit margin was primarily driven by: increased product costs, logistics and discounting (-17 ppts) and increased investments in JRNY® (-3 ppts). Gross profit was $56.6 million, a decrease of 46.9% versus the same period in 2020.

Segment contribution loss for the nine-month period ended December 31, 2021 was $4.1 million, compared to income of $58.2 million for the same period in 2020. The decline was primarily driven by lower gross profit, including increased media spend and investments in 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, 2021September 30, 2022 to the Three-Month Period Ended December 31, 2020September 30, 2021

Net sales for the three-month period ended December 31, 2021September 30, 2022 were $85.7$39.9 million, down 19.4%59.8%, from $106.3$99.2 million for the same period in 2020. Excluding2021. Net sales were up 10.6% compared to the same period in fiscal 2020, excluding sales related to the Octane net sales were down 18.5% compared to last year.brand. Retail segment sales outside the United States and Canada were down 22%80.0% versus last year. The net sales decrease compared to last year is primarily driven by lower cardio sales as retailers work through higher than normal inventory levels.

Cardio sales for the three-month period ended September 30, 2022 decreased by 75.3%. Excluding sales related to Octane, cardio sales were down 45.7% compared to the same period in fiscal 2020. Lower sales this quarter were primarily driven by lower bike demand. Strength product sales declined by 37.1% versus last year. Lower sales this quarter were primarily driven by lower demand for SelectTech® weights. Strength sales were up 172.2% compared to the same period in fiscal 2020, led by the popular SelectTech® weights. Lower sales this quarter were primarily driven by lower demand for SelectTech® weights.

As of September 30, 2022, the Retail segment's backlog totaled $32.6 million. This amount represents customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers.

Gross profit margins were 18.3% for the three-month period ended September 30, 2022, down from 27.4% for the same period in 2021. The 9.1 ppt decrease in gross margin was primarily due to increase in inventory adjustments (-4 ppts), increased discounting (-3 ppts), and unfavorable logistics overhead absorption (-3 ppts), partially offset by improvement in other costs (+1 ppt). Gross profit was $7.3 million, a decrease of 73.1% versus the same period in 2021.

Segment contribution loss for the three-month period ended September 30, 2022 was $1.0 million, or 20% excluding Octane.2.4% of sales, compared to segment contribution income of $18.7 million, or 18.9% of sales for the same period in 2021, primarily driven by lower gross profit as explained above.
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The decrease in sales is primarily driven by lower demand for our bikes and higher sales discounting, partially offset by strong sales of SelectTech® weights and benches.

Cardio sales for the three-month period ended December 31, 2021 decreased by 52.5%. Excluding sales related to Octane, net sales were down 51.7%, compared to the same period in 2020. Lower sales were primarily driven by lower bikes sales. Strength product sales grew by 72.8%, led by the popular SelectTech® weights and benches.

Gross profit margins were 12.8% for the three-month period ended December 31, 2021, down from 31.1% for the same period in 2020. The 18.3 ppt decrease in gross margin was primarily driven by: increased product costs, logistics and discounting (-17 ppts) and increased investments in JRNY® (-1 ppt). Gross profit was $11.0 million, a decrease of 66.9% versus the same period in 2020.

Segment contribution income for the three-month period ended December 31, 2021 was $3.3 million, or 3.8% of sales, compared to $25.3 million, or 23.8% of sales for the same period in 2020, primarily driven by lower gross profit.

Comparison of Segment Results for the Nine-Month Period Ended December 31, 2021 to the Nine-Month Period Ended December 31, 2020

Net sales for the nine-month period ended December 31, 2021 were $305.3 million, up 16.4% as compared to $262.4 million for the same period in 2020. Excluding sales related to Octane, net sales were up 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 down 6.6% compared to the same period in 2020, driven primarily by bikes. Strength sales were up 88.8% compared to the same period in 2020, driven primarily by SelectTech® weights.

Gross profit margin for the nine-month period ended December 31, 2021 was 22.4%, down from 32.0% for the same period in 2020. The 9.6 ppt decrease in gross profit margin was primarily driven by increased product costs, logistics and discounting. Gross profit was $68.4 million, a decrease of 18.7% versus the same period in 2020.

Segment contribution income for the nine-month period ended December 31, 2021 was $44.1 million compared to $60.4 million, or 14.4% of sales for the nine-month period ended December 31, 2020, primarily driven by lower gross profit.

Royalty

Royalty income increased by $0.1 million, or 9.1%12.6%, to $0.9$1.1 million for the three-month period ended December 31, 2021,September 30, 2022, compared to the same period of 2020,2021, primarily due to royalty settlements.

Royalty income decreased by $0.1 million, or 4.3%,Sales and Gross Profit

Direct Segment

Comparison of Segment Results for the Six-Month Period Ended September 30, 2022 to $2.5the Six-Month Period Ended September 30, 2021

Net sales were $51.0 million for the nine-monthsix-month period ended December 31,September 30, 2022, compared to $101.2 million, a decline of 49.7% versus the same period in 2021, and up 37.6% compared to the same period in fiscal 2020. The net sales decrease compared to last year was primarily driven by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices.

Cardio sales declined 37.5% versus the same period in 2021, and were up 17.9% compared to the same period in fiscal 2020. Lower cardio sales were primarily driven by lower bike demand. Strength product sales declined 63.4% versus the same period in 2021, and increased 103.5% compared to the same period in fiscal 2020. Lower strength sales this year were primarily driven by lower demand for SelectTech® weights.

Gross profit margin was 15.0% for the six-month period ended September 30, 2022 versus 38.0% for the same period in 2021. The 23.0 ppt decrease in gross margin was primarily due to increased discounting (-8 ppts), increased investments in JRNY® (-6 ppts), unfavorable logistics overhead absorption (-6 ppts), a prior year release of a special warranty reserve (-2 ppts) and increased inventory reserves (-1 ppt). Gross profit was $7.7 million, down 80.1% versus the same period in 2021.

Segment contribution loss was $17.8 million for the six-month period ended September 30, 2022, compared to segment contribution income of $4.9 million for the same period in 2021. The decline was primarily driven by lower gross profit, as explained above, offset by decreased media spend. Advertising expenses were $7.8 million compared to $14.8 million for the same period in 2021.

Retail Segment

Comparison of Segment Results for the Six-Month Period Ended September 30, 2022 to the Six-Month Period Ended September 30, 2021

Net sales for the six-month period ended September 30, 2022 were $67.3 million, down 69.3%, from $219.6 million for the same period in 2021. Excluding sales related to Octane, net sales were up 5% compared to the same period in fiscal 2020. Retail segment sales outside the United States and Canada were down 81.7% versus last year. The decrease in sales compared to last year is primarily driven by lower cardio sales and higher sales discounting as retailers work through higher than normal inventory levels.

Cardio sales for the six-month period ended September 30, 2022 decreased by 82.3%. Excluding sales related to Octane, cardio sales were down 39.2% compared to the same period in fiscal 2020. Lower sales this year were primarily driven by lower bike demand. Strength product sales declined by 42.2% versus last year. Lower sales this year were primarily driven by lower demand for SelectTech® weights. Strength sales were up 97.6% compared to the same period in fiscal 2020, led by the popular SelectTech® weights.

Gross profit margins were 13.0% for the six-month period ended September 30, 2022, down from 26.1% for the same period in 2021. The 13.1 ppt decrease in gross margin was primarily due to increased discounting (-6 ppts), unfavorable logistics overhead absorption (-6 ppts) and increase in inventory adjustments (-3 ppts), partially offset by improvement in other costs (+2 ppts). Gross profit was $8.8 million, a decrease of 84.7% versus the same period in 2021.

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Segment contribution loss for the six-month period ended September 30, 2022 was $4.4 million, or 6.6% of sales, compared to segment contribution income of $40.8 million, or 18.6% of sales for the same period in 2021, primarily driven by lower gross profit as explained above.

Royalty

Royalty income increased by $0.3 million, or 18.2%, to $2.0 million for the six-month period ended September 30, 2022, compared to the same period of 2020,2021, primarily due to royalty settlements.

Selling and Marketing

Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, sales incentives related to our JRNY® platform and other programs.

Selling and marketing information was as follows (dollars in thousands):
Three-Months Ended
December 31,
 Change
2021 2020 $ %
Selling and marketing$32,395 $21,998 $10,397 47.3%
As % of net sales22.0 %11.6 %
Nine-Months Ended
December 31,
 Change
2021 2020 $ %
Selling and marketing$75,634 $53,651 $21,983 41.0%
As % of net sales16.1 %11.7 %
Three-Months Ended
September 30,
 Change
2022 2021 $ %
Selling and marketing$9,400 $21,939 $(12,539)(57.2)%
As % of net sales14.4 %15.9 %

Six-Months Ended
September 30,
 Change
2022 2021 $ %
Selling and marketing$22,290 $43,239 $(20,949)(48.4)%
As % of net sales18.5 %13.4 %

The increasedecrease in selling and marketing expenses for the three-month period ended December 31, 2021September 30, 2022 compared to the same period of 20202021 was primarily related to an increasea decrease of $5.6$9.3 million in media spend and $5.4a decrease of $2.7 million in brand advertising.other variable selling and marketing expenses due to decreased sales.

The increasedecrease in selling and marketing expenses for the nine-monthsix-month period ended December 31, 2021September 30, 2022 compared to the same period of 20202021 was primarily relateddue to an increase of $13.5a $15.2 million in brand advertising and $10.0 milliondecrease in media spend.spend and a $5.2 million decrease in other variable selling and marketing expenses due to decreased sales. We expect variable selling and marketing expenses to continue to fluctuate with sales.

Media advertising expense is the largest component of selling and marketing and was as follows (dollars in thousands):
Three-Months Ended
December 31,
 Change
2021 2020 $ %
Media advertising - Direct$16,052 $10,479 $5,573 53.2%
Media advertising - Brand5,415 — 5,415 *
  Total advertising$21,467 $10,479 $10,988 104.9%
*Not meaningful
Nine-Months Ended
December 31,
 Change
2021 2020 $ %
Media advertising - Direct$30,844 $20,881 $9,963 47.7%
Media advertising - Brand13,502 — 13,502 *
  Total advertising$44,346 $20,881 $23,465 112.4%
*Not meaningful
Three-Months Ended
September 30,
 Change
2022 2021 $ %
Total advertising$3,103 $12,439 $(9,336)(75.1)%

Six-Months Ended
September 30,
 Change
2022 2021 $ %
Total advertising$8,815 $24,041 $(15,226)(63.3)%
The increases$9.3 million decrease in media advertising for Directexpense for the three and nine-month periodsthree-month period ended December 31, 2021,September 30, 2022, as compared to the same periodsperiod of 2020 were primarily due to increased media spending as we2021 reflects a return to more historical, pre-pandemic levels of advertising support to drive demand and preserve market share.share and control costs. Advertising as a percentage of selling and marketing for the three-month period ended September 30, 2022 was 33.0% as compared to 56.7% for the same quarter last year and 35.6% for the same period in fiscal 2020.

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The $15.2 million decrease in media advertising expense for the six-month period ended September 30, 2022, as compared to the same period of 2021 reflects a return to more historical, pre-pandemic levels of advertising support to preserve market share and control costs. Advertising as a percentage of selling and marketing for the six-month period ended September 30, 2022 was 39.5% as compared to 55.6% for the same quarter last year and 37.1% for the same period in fiscal 2020.

General and Administrative

General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with 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
December 31,
 ChangeThree-Months Ended
September 30,
 Change
2021 2020 $ %2022 2021 $ %
General and administrativeGeneral and administrative$11,456 $10,364 $1,092 10.5%General and administrative$10,995 $16,376 $(5,381)(32.9)%
As % of net salesAs % of net sales7.8 %5.5 %As % of net sales16.8 %11.9 %

Nine-Months Ended
December 31,
 ChangeSix-Months Ended
September 30,
 Change
2021 2020 $ %2022 2021 $ %
General and administrativeGeneral and administrative$39,355 $28,520 $10,835 38.0%General and administrative$23,458 $27,899 $(4,441)(15.9)%
As % of net salesAs % of net sales8.4 %6.2 %As % of net sales19.5 %8.6 %
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The increasedecrease in general and administrative expenses for the three-month period ended December 31, 2021September 30, 2022 compared to the same period of 20202021 was primarily due to increase in personnel expenses.a $4.7 million prior year loss contingency related to a legal settlement.

The increasedecrease in general and administrative expenses for the nine-monthsix-month period ended December 31, 2021September 30, 2022 compared to the same period of 20202021 was primarily due to a $4.7 million prior year loss contingency related to a legal settlement forand a class action lawsuit and increases$1.1 million decrease in personnellegal expenses, and acquisition costs.offset by an increase of $2.6 million of JRNY® related expenses.

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
2022 2021 $ %
Research and development$5,405 $5,688 $(283)(5.0)%
As % of net sales8.3 %4.1 %
Three-Months Ended
December 31,
 Change
2021 2020 $ %
Research and development$5,379 $4,029 $1,350 33.5%
As % of net sales3.7 %2.1 %
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Nine-Months Ended
December 31,
 ChangeSix-Months Ended
September 30,
 Change
2021 2020 $ %2022 2021 $ %
Research and developmentResearch and development$15,882 $11,997 $3,885 32.4%Research and development$11,229 $10,503 $726 6.9%
As % of net salesAs % of net sales3.4 %2.6 %As % of net sales9.3 %3.3 %

The increasesresearch and development expenses for the three-month period ended September 30, 2022, as compared to the same period of 2021, were relatively flat and represented a higher percentage of sales this quarter due to timing of technical projects and increased investments in JRNY®, our digital platform.

The increase in research and development expenses for the three and nine-month periodssix-month period ended December 31, 2021,September 30, 2022 as compared to the same periods of 2020, wereperiod in 2021 was driven primarily by increased investments in JRNY®, our digital platform.

Loss on Disposal GroupGoodwill and Intangible Impairment Charge
In accordance with ASC 350 — Intangibles — Goodwill and Other, we perform a goodwill and indefinite-lived asset impairment evaluation during the fourth quarter of each year. However, as a result of the decline in our market value relative to the market and our industry, which was identified as a triggering event, we performed an interim evaluation and a market capitalization reconciliation during the first quarter of fiscal 2023, which resulted in a non-cash goodwill and indefinite-lived intangible assets impairment charge of $27.0 million.

ASC 350 requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, growth rates and terminal value. The loss on disposal groupcash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also use market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses.

In accordance with ASC 360 — Property, Plant, and Equipment and other long-lived assets, we perform a test for recoverability when triggering events occur. No impairment was recognized in the nine-month periodquarter ended December 31, 2020September 30, 2022.

For additional information related to the disposal of our Octane Business in 2020.goodwill and intangible impairment charge, see Note 8.

Operating (Loss) Income
Operating loss for the three-months ended December 31, 2021September 30, 2022 was $19.3$14.3 million, a decreasean increase of $60.8$12.4 million, or 146.6%635.5%, as compared to an operating incomeloss of $41.5$2.0 million for the same period of 2020.2021. The decrease was primarily due todriven by lower gross profit associated with lower sales and increased operating expenses as discussed in more detail above.lower gross margins during the period.

Operating loss for the nine-monthssix-month period ended December 31, 2021September 30, 2022 was $3.4$65.5 million, a decreasean increase of $81.8$81.4 million, or 104.3%511.7%, as compared to an operating income of $78.4$15.9 million for the same period of 2020.2021. The decrease was primarily due todriven by a goodwill and intangible impairment charge of $27.0 million and lower gross profit associated with lower sales and increased operating expenses as discussed in more detail above.

lower gross margins during the period.

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 provisionexpense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.

Income tax (benefit) expense was as follows (dollars in(in thousands):

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Three-Months Ended
December 31,
 Change
2021 2020 $ %
Income tax (benefit) expense$(7,001)$8,588 $(15,589)(181.5)%
Effective tax rate34.2 %22.7 %
Nine-Months Ended
December 31,
 ChangeThree-Months Ended
September 30,
 Change
2021 2020 $ %2022 2021 $ %
Income tax (benefit) expense$(1,321)$15,644 $(16,965)(108.4)%
Income tax expenseIncome tax expense$156 $2,242 $(2,086)(93.0)%
Effective tax rateEffective tax rate24.8 %21.2 %Effective tax rate(1.0)%(96.4)%

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.
Six-Months Ended
September 30,
 Change
2022 2021 $ %
Income tax expense$8,251 $5,680 $2,571 45.3%
Effective tax rate(12.3)%37.5 %

Income tax expense for the three-months and nine-months ended December 31, 2020September 30, 2022 was primarily a result of the profit generated in the foreign jurisdictions. Income tax expense for the three and six-month periods ended September 30, 2022 included the recording of a U.S. deferred tax asset valuation allowance in the amount of $3.6 million and $17.8 million, respectively.

The effective tax rates from continuing operations for the three and six-month period ended September 30, 2022 were primarily as a result of the aforementioned U.S deferred tax asset valuation allowance to reduce the existing U.S. domestic deferred tax assets to their anticipated realizable value.

Income tax expenses and effective tax rates for the three and six-months ended September 30, 2021 were primarily due to the non-deductible GAAP book expenses that are not allowed for income tax purposes. Such expenses were incurred as a result of our acquisition of VAY AG, consequently increasing the effective tax rate for the period.

(Loss) Income from Continuing Operations
Loss from continuing operations was $13.5$15.3 million for the three-months ended December 31, 2021,September 30, 2022, or $0.43$0.48 per diluted share, compared to loss from continuing operations of $4.6 million, or $0.15 per diluted share, for the three-months ended September 30, 2021. The increase in loss from continuing operations was primarily due to lower gross profit and higher operating expenses as a percentage of sales as discussed in more detail above.

Loss from continuing operations was $75.5 million for the six-month period ended September 30, 2022, or $2.40 per diluted share, compared to income from continuing operations of $29.3$9.4 million, or $0.90$0.29 per diluted share, for the three-monthssix-months ended December 31, 2020.September 30, 2021. The decrease in income from continuing operations was primarily due to lower gross profit and higher operating expenses as discussed in more detail above.

Loss from continuing operations was $4.0 million for the nine-months ended December 31, 2021, or $0.13 per diluted share, compared to income from continuing operations of $58.2 million, or $1.80 per diluted share, for the nine-months ended 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 $13.5$13.2 million for the three-months ended December 31, 2021,September 30, 2022, compared to net incomeloss of $28.9$4.6 million for the three-months ended December 31, 2020.September 30, 2021. Net loss per diluted share was $0.43$0.41 for the three-months ended December 31, 2021,September 30, 2022, compared to net loss per diluted share of $0.15 for the three-months ended September 30, 2021.

Net loss was $73.4 million for the six-month period ended September 30, 2022, compared to net income of $9.3 million for the six-months ended September 30, 2021. Net loss per diluted share was $2.33 for the six-month period ended September 30, 2022, compared to net income per diluted share of $0.89$0.29 for the three-monthssix-months ended December 31, 2020.

Net loss was $4.2 million for the nine-months ended December 31, 2021, compared to net income of $57.7 million for the nine-months ended December 31, 2020. Net loss per diluted share was $0.14 for the nine-months ended December 31, 2021, compared to net income per diluted share of $1.78 for the nine-months ended December 31, 2020.September 30, 2021.
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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 December 31, 2021,September 30, 2022, we had $19.7$6.8 million of cash, cash equivalents and restricted cash, and $54.9$22.2 million was available for borrowing under the ABL Revolving Facility, compared to $113.2$14.2 million of cash, cash equivalents and restricted cash, and available-for-sale securities, and $54.4$65.8 million available for borrowing under the ABL Revolving Facility as of March 31, 2021.2022. We expect our cash, cash equivalents, restricted cash and amounts available for borrowing under our Credit Facility as of December 31, 2021,September 30, 2022, along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from December 31, 2021.September 30, 2022.

Cash used in operating activities was $91.6$9.6 million for the nine-monthsix-month period ended December 31, 2021,September 30, 2022, compared to cash providedused in operating activities of $65.3$56.8 million for the nine-monthsix-month period ended December 31, 2020.September 30, 2021. The decreaseimprovement in cash flows from operating activities for the nine-monthsix-month period ended December 31, 2021September 30, 2022 as compared to the same period of 20202021 was primarily due to changes in our operating assets and liabilities discussed below, as well as theoffset by a decrease in non-cash charges and net income.

Trade receivables increaseddecreased to $93.6$33.7 million as of December 31, 2021,September 30, 2022, compared to $88.7$61.5 million as of March 31, 2021,2022, primarily due to lower sales and the timing of customer payments.

Inventory was $128.1$99.2 million as of December 31, 2021,September 30, 2022, down 11% compared to $68.1$111.2 million as of March 31, 2022 and down 39% compared to $162.7 million as of September 30, 2021. The increasedecrease in inventory was driven by the strategic decisionsell-through and strong inventory management as we continued to increase on-handright-size inventory levels for the fitness season given continued disruption in global logistics.levels. About 15%11% of inventory as of December 31, 2021September 30, 2022 was in-transit.

Prepaid and other current assets decreased by $14.9$4.4 million to $11.0$10.1 million, compared to $25.8$14.5 million as of March 31, 2021,2022, primarily due to decreases in other short-term deposits for inventorya $1.4 million pre-payment redemption from a materials vendor and prepaid marketing.a $1.2 million deferred compensation amortization decrease.

Trade payables decreased by $37.0$16.6 million to $61.9$36.5 million as of December 31, 2021,September 30, 2022, compared to $98.9$53.2 million as of March 31, 2021,2022, primarily due to timing of payments for inventory.

Accrued liabilities increaseddecreased by $5.6$9.4 million to $25.2$20.0 million as of December 31, 2021,September 30, 2022, compared to $19.6$29.4 million as of March 31, 2021,2022, primarily due to ana $4.2 million legal settlement payment and decreases in accrued loss contingency related to a class action lawsuit legal settlement.off-site materials of $3.0 million.

Cash provided byused in investing activities of $38.3$7.5 million for the nine-monthsix-month period ended December 31, 2021September 30, 2022 was primarily due to proceeds from sales and maturities of available-for-sale securities partially offset by the $26.0 million acquisition of VAY.capital purchases related to our digital platform. We anticipate spending between $12.0 million and $14.0 million in fiscal 20222023 for digital platform enhancements, systems integration, and production tooling.

Cash provided by financing activities of $38.7$16.5 million for the nine-monthsix-month period ended December 31, 2021September 30, 2022 was primarily related to proceeds from long-term debt offset by payments on long-term debt.

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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 (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”Lenders”) (the “Credit Agreement”), pursuant to which the. 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 tois $100.0 million (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 Facility was $11.5 million, as of the effective date of the amendment, and will amortizemillion. The Credit Facility matures on a new 60-month straight line basis to coincide with the extended maturity date. In connection with the October 29, 2021 credit amendment we recorded $0.6 million in new financing costs as Other assets on our Condensed Consolidated Balance Sheet. The2026 and repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principalassets, with principal and interest amounts are required to be paid as scheduled.

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,September 30, 2022, outstanding borrowings totaled $56.1$47.3 million, with $10.9$9.2 million and $45.2$38.1 million under our Term Loan Facility and Revolver, respectively. As of December 31, 2021,September 30, 2022, we were in compliance with the financial covenants of the Credit Agreement and $54.9$22.2 million was available for borrowing under the ABL Revolving Facility.

Interest on the Revolver will accrue at the Secured Overnight Financing Rate (“SOFR”("SOFR") plus a margin of 1.86% to 2.36% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at SOFR plus 4.50%4.61%. As of December 31, 2021,September 30, 2022, our interest rate was 1.97%4.86% for the Revolver and 4.60%7.61% for the Term Loan Facility.

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 December 31, 2021,September 30, 2022, we had approximately $59.2approximately $25.3 million, compared to $216.3$39.8 million as of March 31, 20212022 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.seasonality.

In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.

The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications.
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Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at December 31, 2021.September 30, 2022.

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SEASONALITY

We expect our revenue from fitness equipment products to vary seasonally. Sales are typically strongest in theour fiscal third quarter ending December and fiscal fourth quarter ending March and are generally weakest in theour fiscal first quarter ending June and fiscal second quarter.quarter ending September. We believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment. 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 2020fiscal 2022 Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 for a discussion of recent accounting pronouncements.
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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Foreign Exchange Risk
Our exposure toThere have been no material changes in our market risk from changesas compared to the disclosures in interest rates relates primarily to our cash equivalents, derivative assets and variable-rate debt obligations. Our cash equivalents mature within three-months or less from the date of purchase. Marketable securities with original maturities of greater than three-months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. We have classified our marketable securities as available-for-sale and, therefore, we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instrumentsPart II, Item 7A in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affectAnnual Report on Form 10-K for the market price or liquidity of certain securities withinyear ended March 31, 2022, filed with the portfolio.

Our ABL Revolving Facility and Term Loan Facility generally charge interest basedSEC on a benchmark rate such as 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 December 31, 2021, the outstanding balances on our ABL Revolving Facility and Term Loan Facility totaled $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 December 31, 2021 were $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.June 3, 2022.

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 December 31, 2021,September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

































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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

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

During the second quarter of December 31, 2021,fiscal 2022, we accrued $4.3recorded a $4.7 million for a contingent loss contingency 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 liabilitieswas included as a component of General and Other long-term liabilitiesadministrative on our Condensed Consolidated Statements of Operations for the facefiscal year ended March 31, 2022.

On June 27, 2022, the Court approved the settlement and no appeals were filed. We paid the settlement damages and related administrative fees during the second fiscal quarter of our Consolidated Balance Sheets.fiscal 2023.

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

Item 1A.    Risk Factors

We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 20202022 Form 10-K are not the only risks and uncertainties to which we are subject, and there may be other risk and uncertainties that 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 20202022 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 20202022 Form 10-K.

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

None

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Item 6.    Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
Exhibit No.Description
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
* Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 NAUTILUS, INC.
(Registrant)
FebruaryNovember 9, 2022By:
/S/    James Barr IV
DateJames Barr IV
Chief Executive Officer

 NAUTILUS, INC.
(Registrant)
FebruaryNovember 9, 2022By:
/S/    Aina E. Konold
DateAina E. Konold
Chief Financial Officer

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