UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM			10-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, 2021~~September 30, 2022


☐			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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	NLS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

~~[ ]~~☐

Accelerated Filer

~~[x]~~☒

Non-accelerated filer

~~[ ]~~☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No [x]

~~Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:~~

The number of shares outstanding of the registrant's common stock as of ~~February~~November 4, 2022 was ~~31,248,298~~31,719,490 shares.

NAUTILUS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~DECEMBER 31, 2021~~SEPTEMBER 30, 2022


	PART I
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2322
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4041
Item 4.	Controls and Procedures	4041

	PART II
Item 1.	Legal Proceedings	4142
Item 1A.	Risk Factors	4142

Item 6.	Exhibits	4243
Signatures		4344

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, 2021 March 31, 2021
Assets
Cash and cash equivalents $ 18,402 $ 38,441
Restricted cash 1,339 1,339
Available-for-sale securities — 73,448
Trade receivables, net of allowances of $657 and $1,177 93,611 88,657
Inventories 128,113 68,085
Prepaids and other current assets 10,981 25,840
Income taxes receivable 8,103 —
Total current assets 260,549 295,810
Property, plant and equipment, net 30,976 24,496
Operating lease right-of-use assets 24,534 19,108
Goodwill 24,510 —
Other intangible assets, net 9,319 9,365
Deferred income tax assets, non-current 4,554 2,144
Income taxes receivable, non-current 5,673 —
Other assets - restricted, non-current 3,887 —
Other assets 2,963 3,307
Total assets $ 366,965 $ 354,230
Liabilities and Shareholders' Equity
Trade payables $ 61,850 $ 98,878
Accrued liabilities 25,232 19,627
Operating lease liabilities, current portion 4,653 3,384
Financing lease liabilities, current portion 119 —
Warranty obligations, current portion 5,724 7,243
Income taxes payable, current portion 914 5,709
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $83 2,217 3,000
Total current liabilities 100,709 137,841
Operating lease liabilities, non-current 21,855 17,875
Financing lease liabilities, non-current 423 —
Warranty obligations, non-current 1,401 1,408
Income taxes payable, non-current 3,997 3,657
Other non-current liabilities 4,301 607
Debt payable, non-current, net of unamortized debt issuance costs of $173 and $236 53,594 10,297
Total liabilities 186,280 171,685
Commitments and contingencies (Note 16) 0 0
Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 31,245 and 30,576 shares issued and outstanding 4,879 2,176
Retained earnings 176,307 180,524
Accumulated other comprehensive loss (501) (155)
Total shareholders' equity 180,685 182,545
Total liabilities and shareholders' equity $ 366,965 $ 354,230


	As of
	September 30, 2022		March 31, 2022
	(unaudited)
Assets
Cash and cash equivalents	$	5,805	$	12,872
Restricted cash	946		1,339

Trade receivables, net of allowances of $728 and $598	33,662		61,454
Inventories	99,210		111,190
Prepaids and other current assets	10,124		14,546
Other current assets - restricted, current	3,887		3,887
Income taxes receivable	1,658		1,998


Total current assets	155,292		207,286
Property, plant and equipment, net	34,182		32,129
Operating lease right-of-use assets	21,085		23,620
Goodwill	—		24,510
Other intangible assets, net	6,818		9,304
Deferred income tax assets, non-current	758		8,760
Income taxes receivable, non-current	5,673		5,673

Other assets	2,705		2,763
Total assets	$	226,513	$	314,045
Liabilities and Shareholders' Equity
Trade payables	$	36,542	$	53,165
Accrued liabilities	19,957		29,386
Operating lease liabilities, current portion	4,057		4,494
Financing lease liabilities, current portion	121		119
Warranty obligations, current portion	3,450		4,968
Income taxes payable, current portion	536		839
Debt payable, current portion, net of unamortized debt issuance costs of $57 and $57	2,243		2,243

Total current liabilities	66,906		95,214
Operating lease liabilities, non-current	18,619		20,926
Financing lease liabilities, non-current	339		395
Warranty obligations, non-current	900		1,248
Income taxes payable, non-current	1,943		4,029
Deferred income tax liabilities, non-current	313		—
Other non-current liabilities	1,081		1,071
Debt payable, non-current, net of unamortized debt issuance costs of $175 and $204	44,793		27,113
Total liabilities	134,894		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 outstanding	9,513		6,483
Retained earnings	84,713		158,093

Accumulated other comprehensive loss	(2,607)		(527)
Total shareholders' equity	91,619		164,049
Total liabilities and shareholders' equity	$	226,513	$	314,045

See accompanying Notes to Condensed Consolidated Financial Statements.

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,
		2021		2020		2021		2020			2022		2021		2022		2021
Net sales	Net sales	$	147,258	$	189,259	$	469,810	$	458,838	Net sales	$	65,458	$	137,959	$	120,275	$	322,552
Cost of sales	Cost of sales	117,342		111,388		342,336		265,633		Cost of sales	54,000		95,906		101,859		224,994
Gross profit	Gross profit	29,916		77,871		127,474		193,205		Gross profit	11,458		42,053		18,416		97,558
Operating expenses:	Operating expenses:									Operating expenses:
Selling and marketing	Selling and marketing	32,395		21,998		75,634		53,651		Selling and marketing	9,400		21,939		22,290		43,239
General and administrative	General and administrative	11,456		10,364		39,355		28,520		General and administrative	10,995		16,376		23,458		27,899
Research and development	Research and development	5,379		4,029		15,882		11,997		Research and development	5,405		5,688		11,229		10,503
Loss on disposal group		—		—		—		20,668
Goodwill and intangible impairment charge										Goodwill and intangible impairment charge	—		—		26,965		—

Total operating expenses	Total operating expenses	49,230		36,391		130,871		114,836		Total operating expenses	25,800		44,003		83,942		81,641
Operating (loss) income	Operating (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 income	Interest income	1		7		34		9		Interest income	4		12		5		33
Interest expense	Interest expense	(354)		(280)		(1,149)		(871)		Interest expense	(595)		(481)		(971)		(795)
Other, net	Other, net	(789)		(3,367)		(815)		(3,628)		Other, net	(224)		94		(739)		(26)
Total other expense, net	Total 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 expense										Income tax expense	156		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 operations										Income tax (benefit) expense benefit of discontinued operations	(2,142)		84		(2,134)		90
Income (loss) from discontinued operations										Income (loss) from discontinued operations	2,110		(35)		2,102		(167)
Net loss										Net loss	$	(13,203)	$	(4,602)	$	(73,380)	$	9,282

Basic (loss) income per share from continuing operations	Basic (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 operations										Basic income (loss) per share from discontinued operations	0.07		—		0.07		(0.01)
Basic net (loss) income per share	Basic 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 operations	Diluted (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 operations										Diluted income per share from discontinued operations	0.07		—		0.07		—
Diluted net (loss) income per share	Diluted 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:
Basic	Basic	31,199		30,284		30,955		30,077		Basic	31,585		30,968		31,496		30,833
Diluted	Diluted	31,199		32,633		30,955		32,336		Diluted	31,585		30,968		31,496		32,437

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

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,
2021 2020 2021 2020
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,
	2022		2021		2022		2021
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.

Table of Contents

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited and in thousands)


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

Balance, March 31, 2021		30,576	$	2,176			$	180,524			$	(155)					$	182,545
Net income		—	—		13,884				—					13,884
Unrealized loss on marketable securities, net of income tax benefit of $7		—	—		—				—					—
Balance, March 31, 2022																Balance, March 31, 2022	31,268		$	6,483		$	158,093		$	(527)		$	164,049
Net loss																Net 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 expense	Stock-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 plan	Common stock issued under employee stock purchase plan	17	269		—				—					269		Common stock issued under employee stock purchase plan	—		125		—			—			125

Balance, June 30, 2021		30,794	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, 2021		31,159	3,058		189,806				(353)					192,511
Balance, June 30, 2022																Balance, June 30, 2022	31,473		8,317		97,916			(1,386)			104,847
Net loss	Net 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 expense	Stock-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 plan		29	217		—				—					217

Balance, December 31, 2021		31,245	$	4,879	$	176,307			$	(501)				$	180,685

Balance, September 30, 2022																Balance, September 30, 2022	31,714		$	9,513	$	84,713		$	(2,607)		$	91,619

~~Table of Contents~~


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

Balance, March 31, 2020		29,817	$	1,781			$	92,456			$	(1,312)					$	92,925
Net loss		—	—		(5,110)				—					(5,110)
Balance, March 31, 2021																Balance, March 31, 2021	30,576		$	2,176		$	180,524		$	(155)		$	182,545
Net income																Net income	—		—		13,884			—			13,884

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 expense	Stock-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 plan	Common stock issued under employee stock purchase plan	63	83		—				—					83		Common stock issued under employee stock purchase plan	17		269		—			—			269

Balance, June 30, 2020		29,967	2,729		87,346				(959)					89,116
Net income		—	—		33,838				—					33,838
Balance, June 30, 2021																Balance, June 30, 2021	30,794		2,411		194,408			62			196,881
Net loss																Net loss	—		—		(4,602)			—			(4,602)
Unrealized loss on marketable securities, net of income tax expense of $7																Unrealized loss on marketable securities, net of income tax expense of $7	—		—		—			(4)			(4)

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 expense	Stock-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, 2020		30,257	3,004		121,184				(742)					123,446
Net income		—	—		28,936				—					28,936
Unrealized gain on marketable securities, net of income tax expense of $—		—	—		—				(4)					(4)
Balance, September 30, 2021																Balance, September 30, 2021	31,159		$	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 plan		31	173		—				—					173

Balance, December 31, 2020		30,330	$	3,061	$	150,120			$	14				$	153,195

See accompanying Notes to Condensed Consolidated Financial Statements.

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 operations						Gain (loss) from discontinued operations	2,102		(167)
Net (loss) income	Net (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 amortization	Depreciation and amortization	5,987		6,638		Depreciation and amortization	4,786		3,979
Benefit for allowance for doubtful accounts		(468)		(42)
Recovery (provision) for allowance for doubtful accounts						Recovery (provision) for allowance for doubtful accounts	585		(179)
Inventory lower of cost or net realizable value	Inventory lower of cost or net realizable value	291		1,409		Inventory lower of cost or net realizable value	1,832		—
Stock-based compensation expense	Stock-based compensation expense	4,611		3,170		Stock-based compensation expense	3,346		2,765
Deferred income taxes, net of valuation allowances	Deferred income taxes, net of valuation allowances	(2,938)		(8,037)		Deferred income taxes, net of valuation allowances	8,167		(1,336)
Goodwill and intangible impairment change						Goodwill and intangible impairment change	26,965		—
Other	Other	610		(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 receivables	Trade receivables	(4,298)		(61,830)		Trade receivables	28,363		213
Inventories	Inventories	(59,258)		(28,529)		Inventories	13,299		(94,107)
Prepaids and other assets	Prepaids and other assets	10,059		(8,616)		Prepaids and other assets	7,164		7,256
Income taxes receivable	Income taxes receivable	(13,774)		6,128		Income taxes receivable	354		(8,080)
Trade payables	Trade payables	(36,366)		62,090		Trade payables	(13,731)		16,182
Accrued liabilities and other liabilities, including warranty obligations	Accrued liabilities and other liabilities, including warranty obligations	8,178		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 activities						Net 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 securities	Proceeds from sales and maturities of available-for-sale securities	73,448		—		Proceeds from sales and maturities of available-for-sale securities	—		73,448
Acquisition of business, net of cash acquired	Acquisition of business, net of cash acquired	(26,012)		—		Acquisition of business, net of cash acquired	—		(26,759)

Purchases of property, plant and equipment	Purchases 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 activities	Net cash provided by (used in) investing activities	38,300		(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 debt	Proceeds from long-term debt	63,652		1,616		Proceeds from long-term debt	36,280		7,025
Payments on long-term debt	Payments 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 liabilities	Payments on finance lease liabilities	(30)		—		Payments on finance lease liabilities	(60)		—
Proceeds from employee stock purchases	Proceeds from employee stock purchases	486		256		Proceeds from employee stock purchases	125		269
Proceeds from exercise of stock options	Proceeds from exercise of stock options	472		50		Proceeds from exercise of stock options	—		470
Tax payments related to stock award issuances	Tax 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 activities		38,660		(15,108)
Net cash provided by financing activities						Net cash provided by financing activities	16,516		1,585
Effect of exchange rate changes	Effect 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 cash						Net decrease in cash, cash equivalents and restricted cash	(7,460)		(14,375)

Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	39,780		26,456		Cash, cash equivalents and restricted cash at beginning of period	18,098		39,780
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	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 interest	Cash paid for interest	$	639	$	651	Cash paid for interest	$	770	$	323
Cash paid for income taxes, net		19,857		17,257
Cash (received from) paid for income taxes, net						Cash (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 paid	Capital 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		2020			2022		2021
Cash and cash equivalents	Cash and cash equivalents	$	18,402	$	56,581	Cash and cash equivalents	$	5,805	$	20,179
Restricted cash	Restricted cash	1,339		1,339		Restricted cash	946		1,339
Other assets - restricted, non-current		3,887		—
Other current assets - restricted, current						Other current assets - restricted, current	3,887		3,887
Total cash, cash equivalents and restricted cash	Total 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 ~~December~~March 31, ~~2020~~2022 (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 ~~2020~~2022 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, 2021~~September 30, 2022 and March 31, ~~2021,~~2022, and our results of operations, comprehensive (loss) income and shareholders' equity for the three and ~~nine-month~~six-month periods ended ~~December 31,~~September 30, 2022 and 2021 ~~and 2020~~ and our cash flows for the ~~nine-month period~~six-month periods ended ~~December 31, 2021~~September 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 ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting 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 do~~The adoption of ASU 2020-01 in the first quarter of the fiscal year ending March 31, 2023 ("fiscal 2023") did not ~~expect~~have 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 a~~had no material impact on our financial position, results of operations ~~and~~or 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 ACQUISITION~~DISCONTINUED 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”) for~~reached substantial completion of asset liquidation at December 31, 2012, we continued to accrue interest associated with an ~~aggregate purchase consideration~~uncertain 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 for~~In the ~~transaction as~~second 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 ~~transaction~~discontinued operations. As a result, the previously unrecognized tax benefit and ~~were~~associated 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, 2021 Measurement period adjustments Adjusted valuation at December 31, 2021
Cash $ 230 $ 637 $ 867
Accounts receivable 9 — 9
Prepaid expenses 15 (2) 13
Deferred tax assets 58 1 59
Developed technology (included in property, plant and equipment) 3,000 — 3,000
Identifiable assets acquired 3,312 636 3,948
Accrued liabilities 187 745 932
Unearned revenue 53 3 56
Deferred tax liabilities, non-current 591 — 591
Total liabilities assumed 831 748 1,579
Net identifiable assets acquired 2,481 (112) 2,369
Goodwill 24,508 2 24,510
Total assets acquired $ 26,989 $ (110) $ 26,879

The allocation of the purchase price is preliminary and is based upon valuation information available and estimates and assumptions made as of December 31, 2021. We are still in the process of verifying data and finalizing information including valuation and recording of the assets acquired and liabilities assumed, and the resulting amount of recognized goodwill

This acquisition is not material to our net sales, results of operations or total assets during any period presented. Accordingly, our consolidated results from operations do not differ materially from historical performance as a result of this acquisition, and, therefore, pro forma results are not presented.

(3) REVENUES

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


		Three-Months Ended December 31,				Nine-Months Ended December 31,					Three-Months Ended September 30,				Six-Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Product sales	Product sales	$	141,885	$	183,642	$	454,822	$	444,876	Product sales	$	60,107	$	133,126	$	109,703	$	312,937
Extended warranties and services	Extended warranties and services	1,841		2,852		4,985		6,222		Extended warranties and services	938		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 sales	Net 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,
		2021		2020		2021		2020			2022		2021		2022		2021
United States	United States	$	110,870	$	153,919	$	360,540	$	381,571	United States	$	53,440	$	102,521	$	99,521	$	249,670
Canada	Canada	22,912		17,955		60,126		36,947		Canada	8,388		17,852		14,195		37,214
Europe, the Middle East and Africa	Europe, the Middle East and Africa	9,874		14,024		37,456		31,022		Europe, the Middle East and Africa	2,340		13,140		4,179		27,582
All other	All other	3,602		3,361		11,688		9,298		All other	1,290		4,446		2,380		8,086
Net sales	Net 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 on~~recognized 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,
		2021		2020		2021		2020			2022		2021		2022		2021
Balance, beginning of period	Balance, beginning of period	$	3,453	$	3,639	$	5,551	$	2,050	Balance, beginning of period	$	6,582	$	1,757	$	6,285	$	5,551
Cash additions	Cash additions	4,203		3,496		8,749		7,049		Cash additions	265		3,457		2,796		4,546
Revenue recognition	Revenue recognition	(1,378)		(743)		(8,022)		(2,707)		Revenue recognition	(2,654)		(1,761)		(4,888)		(6,644)
Balance, end of period	Balance, 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, 2021									September 30, 2022
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets:	Assets:									Assets:

Derivatives	Derivatives									Derivatives

Foreign currency forward contracts	Foreign currency forward contracts	$	—	$	19	$	—	$	19	Foreign currency forward contracts	$	—	$	25	$	—	$	25

Total assets measured at fair value	Total assets measured at fair value	$	—	$	19	$	—	$	19	Total assets measured at fair value	$	—	$	25	$	—	$	25

Liabilities:	Liabilities:									Liabilities:
Derivatives	Derivatives									Derivatives

Foreign currency forward contracts	Foreign currency forward contracts	$	—	$	36	$	—	$	36	Foreign currency forward contracts	$	—	$	754	$	—	$	754
Total liabilities measured at fair value	Total liabilities measured at fair value	$	—	$	36	$	—	$	36	Total liabilities measured at fair value	$	—	$	754	$	—	$	754

March 31, 2021
Level 1 Level 2 Level 3 Total
Assets:
Cash Equivalents
Money market funds $ 9,679 $ — $ — $ 9,679
Total cash equivalents 9,679 — — 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 1		Level 2		Level 3		Total
Liabilities:
Derivatives

Foreign currency forward contracts	$	—	$	128	$	—	$	128
Total liabilities measured at fair value	$	—	$	128	$	—	$	128

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

~~We classify~~2022 ("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 ~~109~~112 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 Classification

As of

Balance Sheet Classification

As of

December 31, 2021

March 31, 2021

September 30, 2022

March 31, 2022

Derivative instruments not designated as cash flow hedges:

Foreign currency forward contracts

Prepaids and other current assets

—

Foreign currency forward contracts

Prepaids and other current assets

—

Foreign currency forward contracts

Accrued liabilities

672

Foreign currency forward contracts

Accrued liabilities

754

128

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

Statement of Operations Classification Three-Months Ended
December 31, Nine-Months Ended
December 31,
2021 2020 2021 2020
Derivative instruments not designated as cash flow hedges:
Income (loss) recognized in earnings Other, net $ 797 $ (1,981) $ (163) $ (2,406)
Income tax (benefit) expense Income tax (benefit) expense (194) 488 40 594


	Statement of Operations Classification	Three-Months Ended September 30,				Six-Months Ended September 30,
		2022		2021		2022		2021





Derivative instruments not designated as cash flow hedges:
Loss recognized in earnings	Other, 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, 2021 March 31, 2021
Finished goods (1)
$ 121,073 $ 63,918
Parts and components 7,040 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, 2022		March 31, 2022
Finished goods	$	94,146	$	104,988
Parts and components	5,064		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 of							Estimated Useful Life (in years)								As of
					December 31, 2021			March 31, 2021				Estimated Useful Life (in years)									September 30, 2022			March 31, 2022
Automobiles	Automobiles		5					$	23					$	23						Automobiles		5			$	23			$	23
Leasehold improvements	Leasehold improvements	4	to	20		3,150				3,059						Leasehold improvements		4		to		20			3,945				3,150
Computer software and equipment	Computer software and equipment	2	to	7		42,231				36,956					Computer software and equipment		2		to		7			45,054				44,852
Machinery and equipment	Machinery and equipment	3	to	5		16,466				15,699					Machinery and equipment		3		to		5			15,653				16,447
Furniture and fixtures	Furniture and fixtures	5	to	20		2,635				2,586					Furniture and fixtures		5		to		20			2,558				2,634
Work in progress(1)	Work in progress(1)	N/A				7,430				1,314					Work in progress(1)		N/A							12,110				6,678
Total cost	Total cost					71,935				59,637					Total cost									79,343				73,784
Accumulated depreciation	Accumulated depreciation					(40,959)				(35,141)					Accumulated depreciation									(45,161)				(41,655)
Total property, plant and equipment, net	Total 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,
2021 2020 2021 2020
Depreciation expense $ 1,993 $ 2,114 $ 5,941 $ 5,772


	Three-Months Ended September 30,				Six-Months Ended September 30,
	2022		2021		2022		2021
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, 2021~~March 31, 2022

—24,510

~~Business acquisition (Note 2)~~Goodwill impairment

~~24,508~~ (24,510)

Balance, September 30, ~~2021~~

~~24,508~~

~~Business acquisition (Note 2) - measurement period adjustments~~

~~Balance, December 31, 2021~~2022

~~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 above~~the fair value of our reporting ~~unit~~units exceeded their respective carrying values as of ~~December~~March 31, ~~2021,~~2022, we ~~are observing~~observed continued market volatility including significant declines in our market capitalization during the three-month period ended June 30, 2022, identified as a triggering event. Our trailing 30-day average market capitalization was approximately $137 million at March 31, 2022 compared to $66 million, the trailing 30-day average, as of June 30, 2022. We performed an interim evaluation and a market capitalization reconciliation during the first quarter of fiscal 2023, which resulted in 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, 2021~~September 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.

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

Other Intangible Assets

Other intangible assets consisted of the following (in thousands):


		Estimated Useful Life (in years)				As of							Estimated Useful Life (in years)						As of
					December 31, 2021			March 31, 2021				Estimated Useful Life (in years)							September 30, 2022			March 31, 2022
Indefinite-lived trademarks(1)	Indefinite-lived trademarks(1)		N/A					$	9,052					$	9,052				Indefinite-lived trademarks(1)		N/A			$	6,597			$	9,052

Patents	Patents	7	to	24		1,443				1,443						Patents	7	to		24			1,043				1,043

						10,495				10,495												7,640				10,095
Accumulated amortization - definite-lived intangible assets	Accumulated amortization - definite-lived intangible assets					(1,176)				(1,130)					Accumulated amortization - definite-lived intangible assets							(822)				(791)
Other intangible assets, net	Other 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,
2021 2020 2021 2020
Amortization expense $ 15 $ 25 $ 46 $ 866


	Three-Months Ended September 30,				Six-Months Ended September 30,
	2022		2021		2022		2021
Amortization expense	$	16	$	16	$	31	$	31

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


2022		$	15
2023		61
Remainder of fiscal 2023				Remainder of fiscal 2023	$	31
2024	2024	61		2024	61
2025	2025	61		2025	61
2026	2026	47		2026	47
2027				2027	3
Thereafter	Thereafter	22		Thereafter	18
		$	267		$	221

(9) LEASES

We have several non-cancellable operating leases, primarily for office space, that expire at various dates over the next ~~nine~~eight 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,
		2021		2020		2021		2020			2022		2021		2022		2021
Operating lease expense	Operating 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 assets	Amortization of finance lease assets	29		—		29		—		Amortization of finance lease assets	29		—		57		—

Total lease expense	Total 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, 2021 March 31, 2021
Supplemental cash flow information related to leases was as follows:
Operating leases:
Operating lease right-of-use-assets $ 24,534 $ 19,108
Operating lease liabilities 21,855 17,875
Operating lease liabilities, net of current portion 4,653 3,384
Total operating lease liabilities $ 26,508 $ 21,259
Finance leases:
Property, plant and equipment, at cost $ 569 $ —
Accumulated depreciation (29) —
Property, plant and equipment, net $ 540 $ —
Finance lease obligations $ 423 $ —
Finance lease obligations, net of current portion 119 —
Total finance lease liabilities $ 542 $ —
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases $ 1,724 $ 1,076
Finance cash flows from finance leases 30 —
Additional lease information:
ROU assets obtained in exchange for operating lease obligations $ 1,032 $ —
ROU assets obtained in exchange for finance lease obligations 569 —
Reductions to ROU assets resulting from reductions to operating lease obligations 329 268
Weighted Average Remaining Lease Term:
Operating leases 5.89 6.94
Finance leases 4.75 —
Weighted Average Discount Rate:
Operating leases 5.00% 4.95%
Finance leases 2.08% —%

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	As of
	September 30, 2022		March 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 portion	4,057		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 portion	121		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 leases	60		60

Additional lease information:
ROU assets obtained in exchange for operating lease obligations	$	—	$	10,323
ROU assets obtained in exchange for finance lease obligations	—		569
Reductions to ROU assets resulting from reductions to operating lease obligations	615		1,358


Weighted Average Remaining Lease Term:
Operating leases	2.6 years		3.1 years
Finance leases	4.0 years		4.5 years

Weighted Average Discount Rate:
Operating leases	4.65%		4.65%
Finance leases	2.14%		2.14%

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

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Maturities of lease liabilities under non-cancellable leases were as follows (in thousands):

As of
December 31, 2021
Operating leases Finance leases
2022 $ 1,344 $ 120
2023 5,859 120
2024 5,422 120
2025 5,584 120
2026 4,520 90
Thereafter 8,158 —
Total undiscounted lease payments 30,887 570
Less imputed interest (4,379) (28)
Total lease liabilities $ 26,508 $ 542

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	As of September 30, 2022
	Operating leases		Finance leases
Remainder of fiscal 2023	$	2,370	$	60
2024	5,515		120
2025	5,585		120
2026	4,503		120
2027	2,348		60
Thereafter	5,796		—
Total undiscounted lease payments	26,117		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 of				As of
		December 31, 2021		March 31, 2021				September 30, 2022		March 31, 2022

Payroll and related liabilities							Payroll and related liabilities	$	10,390	$	10,405
Deferred revenue	Deferred revenue	$	6,278	$	5,551		Deferred revenue	4,194		6,285
Reserves (1)		5,230		2,624
Payroll and related liabilities		4,818		6,616
Legal settlement (2)	Legal settlement (2)	4,250		—			Legal settlement (2)	287		4,250
Other	Other	4,656		4,836			Other	4,127		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,
2021 2020
Balance, beginning of period $ 8,651 $ 6,250
Accruals 4,416 2,791
Payments (5,942) (3,843)
Balance, end of period $ 7,125 $ 5,198

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	Six-Months Ended September 30,
	2022		2021
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 Securities Foreign Currency Translation Adjustments Accumulated Other Comprehensive Loss
Balance, March 31, 2021 $ (8) $ (147) $ (155)
Current period other comprehensive loss before reclassifications (4) (342) (346)
Net other comprehensive loss during period (4) (342) (346)
Balance, December 31, 2021 $ (12) $ (489) $ (501)


									Foreign Currency Translation Adjustments		Accumulated Other Comprehensive Loss
		Unrealized Loss on Available-for-Sale Securities		Foreign Currency Translation Adjustments		Accumulated Other Comprehensive Loss
Balance, September 30, 2021		$	(12)	$	(341)	$	(353)
Balance, March 31, 2022								Balance, March 31, 2022	$	(527)	$	(527)
Current period other comprehensive loss before reclassifications	Current period other comprehensive loss before reclassifications	—		(148)		(148)		Current period other comprehensive loss before reclassifications	(2,080)		(2,080)

Net other comprehensive loss during period	Net 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, 2022								Balance, September 30, 2022	$	(2,607)	$	(2,607)

Unrealized Loss on Available-for-Sale Securities Foreign Currency Translation Adjustments Accumulated Other Comprehensive (Loss) Income
Balance, March 31, 2020 $ — $ (1,312) $ (1,312)
Current period other comprehensive (loss) income before reclassifications (4) 1,330 1,326
Net other comprehensive (loss) income during period (4) 1,330 1,326
Balance, December 31, 2020 $ (4) $ 18 $ 14


	Foreign Currency Translation Adjustments		Accumulated 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 Securities Foreign Currency Translation Adjustments Accumulated 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 Securities		Foreign Currency Translation Adjustments		Accumulated 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)

1815

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	Unrealized Loss on Available-for-Sale Securities		Foreign Currency Translation Adjustments		Accumulated 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,
		2021	2020	2021	2020		2022	2021	2022	2021
Shares used to calculate basic income per share	Shares used to calculate basic income per share	31,199	30,284	30,955	30,077	Shares used to calculate basic income per share	31,585	30,968	31,496	30,833
Dilutive effect of outstanding stock options, performance stock units and restricted stock units	Dilutive effect of outstanding stock options, performance stock units and restricted stock units	—	2,349	—	2,259	Dilutive effect of outstanding stock options, performance stock units and restricted stock units	—	—	—	1,604
Shares used to calculate diluted income per share	Shares used to calculate diluted income per share	31,199	32,633	30,955	32,336	Shares used to calculate diluted income per share	31,585	30,968	31,496	32,437

Dilutive Shares

The weighted average numbers of shares outstanding listed in the table below were ~~anti-dilutive~~dilutive 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 ~~result~~results in a lower ~~loss~~income (loss) per ~~share~~share.

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,
		2021	2020	2021	2020		2022	2021	2022	2021

Restricted stock units	Restricted stock units	673	—	1,024	—	Restricted stock units	136	894	241	—
Stock options	Stock options	357	—	504	—	Stock options	51	526	107	—
Total potential dilutive shares excluded due to net loss						Total potential dilutive shares excluded due to net loss	187	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,
2021 2020 2021 2020
Restricted stock units 1,168 31 333 15
Stock options 2 — 2 3

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	Three-Months Ended September 30,		Six-Months Ended September 30,
	2022	2021	2022	2021

Stock options	1,696	407	1,473	295
RSUs	174	2	88	2
Total anti-dilutive shares excluded	1,870	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-months~~six-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,
		2021		2020		2021		2020			2022		2021		2022		2021
Net sales:	Net sales:									Net sales:
Direct	Direct	$	60,705	$	82,158	$	161,954	$	193,785	Direct	$	24,480	$	37,853	$	50,957	$	101,249
Retail	Retail	85,701		106,320		305,338		262,423		Retail	39,905		99,153		67,348		219,637
Royalty	Royalty	852		781		2,518		2,630		Royalty	1,073		953		1,970		1,666
Consolidated net sales	Consolidated net sales	$	147,258	$	189,259	$	469,810	$	458,838	Consolidated net sales	$	65,458	$	137,959	$	120,275	$	322,552

Contribution:	Contribution:									Contribution:
Direct	Direct	$	(8,980)	$	23,584	$	(4,056)	$	58,167	Direct	$	(7,887)	$	(1,835)	$	(17,780)	$	4,924
Retail	Retail	3,270		25,338		44,101		60,393		Retail	966		18,741		(4,442)		40,831
Royalty	Royalty	852		781		2,518		2,630		Royalty	1,073		953		1,970		1,666
Consolidated contribution	Consolidated 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 contribution	Consolidated 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, net	Other 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 expense										Income 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 of				As of
		December 31, 2021		March 31, 2021				September 30, 2022		March 31, 2022
Assets:	Assets:						Assets:
Direct	Direct	$	50,585	$	47,002		Direct	$	63,675	$	93,554
Retail	Retail	198,791		146,001			Retail	108,477		144,683
Unallocated corporate	Unallocated corporate	117,589		161,227			Unallocated corporate	54,361		75,808
Total assets	Total 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,
		2021	2020	2021	2020		2022	2021	2022	2021
Amazon.com	Amazon.com	*	13.5%	14.4%	17.8%	Amazon.com	33.7%	15.4%	31.7%	16.8%
Best Buy	Best Buy	14.0%	*	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 to~~is $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 amortize~~million. 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. The~~2026 and repayment of obligations under the Credit Agreement is secured by substantially all of our ~~assets. Principal~~assets, 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, ~~2021~~2022 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.

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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 ~~includes~~included damages, a one-year free membership to JRNY®, and administrative fees and was included as a component of General and administrative on our Condensed Consolidated Statements of Operations. 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 ~~December~~March 31, ~~2020~~2022 (the ~~“2020~~“2022 Form 10-K”). All references to the ~~third~~second quarters and six-months ended of fiscal 2023 and fiscal 2022 ~~and 2021 to~~ mean ~~the~~ for the three and ~~nine-month~~six-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 ~~2020~~2022 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-months~~six-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 profound~~an 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, 2021~~September 30, 2022 to the Three-Months ~~ended December 31, 2020~~Ended 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 ~~for~~last 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. ~~Lower~~The 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 products~~typical sales discounts were ~~partially offset by sales of SelectTech~~® ~~weights and benches compared to~~largely 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 cardio~~the 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. Excluding~~September 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, 2021~~September 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, 2021~~17.5% compared to ~~41.1% for the three-months ended December 31, 2020.~~30.5% last year. The ~~20.8~~13.0 ppt decrease in gross margins was primarily due ~~to:~~to increased ~~product costs,~~discounting (-4 ppts), unfavorable logistics ~~and discounting (-18~~overhead 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 increase~~compared 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 ~~more~~lower 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 ~~advertising~~other variable selling and ~~$3.6~~marketing 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 ~~income~~loss of ~~$41.5~~$2.0 million ~~for the three-months ended December 31, 2020,~~last year, primarily ~~due to~~driven 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-months~~Six-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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•~~Net~~Operating loss was ~~$13.5~~$65.5 million ~~for the three-months ended December 31, 2021,~~or a negative 54.5% operating margin, compared to ~~net~~operating income of ~~$28.9~~$15.9 million ~~for~~last 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 effective~~Income 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 $469.8~~expense was $8.3 million ~~up 2.4% for the nine-months ended December 31, 2021~~this year compared to ~~net sales of $458.8~~$5.7 million ~~for~~last 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 investments~~a 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 $16.0~~Loss 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® ~~Update~~Digital Platform

•Nautilus ~~Inc.~~ continues to enhance the JRNY®platform ~~creating~~through 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 expanded~~Bowflex® 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 Bowflex~~adaptive fitness platform, paired via a user’s device® .

•~~Max Total~~Nautilus' 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 members~~membership 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 customers~~We 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 unable~~unprecedented 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, ~~fluctuations~~among 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 of~~claims, 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 ~~2020~~2022 Form 10-K as supplemented by our quarterly reports on Form 10-Q.

Discontinued Operations

Results from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation as of December 31, 2012. Although there was no revenue related to the former Commercial business in ~~either~~ the ~~2021~~fiscal 2022 or ~~2020~~year-to-date fiscal 2023 periods, we ~~continue~~continued 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
		2021		2020		$		%			2022		2021		$		%
Net sales	Net sales	$	147,258	$	189,259	$	(42,001)	(22.2)	%	Net sales	$	65,458	$	137,959	$	(72,501)	(52.6)	%
Cost of sales	Cost of sales	117,342		111,388		5,954		5.3	%	Cost of sales	54,000		95,906		(41,906)		(43.7)	%
Gross profit	Gross profit	29,916		77,871		(47,955)		(61.6)	%	Gross profit	11,458		42,053		(30,595)		(72.8)	%
Operating expenses:	Operating expenses:									Operating expenses:
Selling and marketing	Selling and marketing	32,395		21,998		10,397		47.3	%	Selling and marketing	9,400		21,939		(12,539)		(57.2)	%
General and administrative	General and administrative	11,456		10,364		1,092		10.5	%	General and administrative	10,995		16,376		(5,381)		(32.9)	%
Research and development	Research and development	5,379		4,029		1,350		33.5	%	Research and development	5,405		5,688		(283)		(5.0)	%

Total operating expenses	Total operating expenses	49,230		36,391		12,839		35.3	%	Total operating expenses	25,800		44,003		(18,203)		(41.4)	%
Operating (loss) income		(19,314)		41,480		(60,794)		(146.6)	%
Operating loss										Operating loss	(14,342)		(1,950)		(12,392)		635.5	%
Other expense:	Other expense:									Other expense:
Interest income	Interest income	1		7		(6)				Interest income	4		12		(8)
Interest expense	Interest expense	(354)		(280)		(74)				Interest expense	(595)		(481)		(114)
Other, net	Other, net	(789)		(3,367)		2,578				Other, net	(224)		94		(318)
Total other expense, net	Total 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 taxes										Loss from continuing operations before income taxes	(15,157)		(2,325)		(12,832)
Income tax expense										Income tax expense	156		2,242		(2,086)
Loss from continuing operations										Loss from continuing operations	(15,313)		(4,567)		(10,746)
Income (loss) from discontinued operations, net of taxes										Income (loss) from discontinued operations, net of taxes	2,110		(35)		2,145
Net loss										Net 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 sales 342,336 265,633 76,703 28.9 %
Gross profit 127,474 193,205 (65,731) (34.0) %
Operating expenses:
Selling and marketing 75,634 53,651 21,983 41.0 %
General and administrative 39,355 28,520 10,835 38.0 %
Research and development 15,882 11,997 3,885 32.4 %
Loss on disposal group — 20,668 (20,668) (100.0) %
Total operating expenses 130,871 114,836 16,035 14.0 %
Operating (loss) income (3,397) 78,369 (81,766) (104.3) %
Other expense:
Interest income 34 9 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 sales	101,859		224,994		(123,135)		(54.7)	%
Gross profit	18,416		97,558		(79,142)		(81.1)	%
Operating expenses:
Selling and marketing	22,290		43,239		(20,949)		(48.4)	%
General and administrative	23,458		27,899		(4,441)		(15.9)	%
Research and development	11,229		10,503		726		6.9	%
Goodwill and intangible impairment charge	26,965		—		26,965		NM

Total operating expenses	83,942		81,641		2,301		2.8	%
Operating (loss) income	(65,526)		15,917		(81,443)		(511.7)	%
Other expense:
Interest income	5		33		(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 expense	8,251		5,680		2,571
(Loss) income from continuing operations	(75,482)		9,449		(84,931)
Income (loss) from discontinued operations, net of taxes	2,102		(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)	%
Direct	Direct	60,705			82,158			(21,453)			(26.1)	%	Direct	24,480			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)	%
Retail	Retail	85,701			106,320			(20,619)			(19.4)	%	Retail	39,905			99,153			(59,248)			(59.8)	%

Royalty	Royalty	852			781			71			9.1	%	Royalty	1,073			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:
Direct	Direct	$	42,597		$	38,155		$	4,442		11.6	%	Direct	$	21,379		$	23,877		$	(2,498)		(10.5)	%
Retail	Retail	74,745			73,233			1,512			2.1	%	Retail	32,621			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:
Direct	Direct	$	18,108		$	44,003		$	(25,895)		(58.8)	%	Direct	$	3,101		$	13,976		$	(10,875)		(77.8)	%
Retail	Retail	10,956			33,087			(22,131)			(66.9)	%	Retail	7,284			27,124			(19,840)			(73.1)	%
Royalty	Royalty	852			781			71			9.1	%	Royalty	1,073			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:
Direct	Direct	29.8		%	53.6		%	(2,380)		basis points			Direct	12.7		%	36.9		%	(24)		ppts
Retail	Retail	12.8		%	31.1		%	(1,830)		basis points			Retail	18.3		%	27.4		%	(9)		ppts

Contribution:	Contribution:												Contribution:
Direct	Direct	$	(8,980)		$	23,584		(32,564)			(138.1)	%	Direct	$	(7,887)		$	(1,835)		$	(6,052)		329.8	%
Retail	Retail	3,270			25,338			(22,068)			(87.1)	%	Retail	966			18,741			(17,775)			(94.8)	%

Contribution rate:	Contribution rate:												Contribution rate:
Direct	Direct	(14.8)		%	28.7		%	(4,350)		basis points			Direct	(32.2)		%	(4.8)		%	(27)		ppts
Retail	Retail	3.8		%	23.8		%	(2,000)		basis points			Retail	2.4		%	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 %
Direct 161,954 193,785 (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 %
Retail 305,338 262,423 42,915 16.4 %
Royalty 2,518 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 %
Retail 236,980 178,364 58,616 32.9 %
$ 342,336 $ 265,633 $ 76,703 28.9 %
Gross profit:
Direct $ 56,598 $ 106,516 $ (49,918) (46.9) %
Retail 68,358 84,059 (15,701) (18.7) %
Royalty 2,518 2,630 (112) (4.3) %
$ 127,474 $ 193,205 $ (65,731) (34.0) %
Gross profit margin:
Direct 34.9 % 55.0 % (2,010) basis points
Retail 22.4 % 32.0 % (960) basis points
Contribution:
Direct $ (4,056) $ 58,167 $ (62,223) (107.0) %
Retail 44,101 60,393 (16,292) (27.0) %
Contribution rate:
Direct (2.5) % 30.0 % (3,250) basis points
Retail 14.4 % 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
	2022			2021			$			%
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)	%
Direct	50,957			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)	%
Retail	67,348			219,637			(152,289)			(69.3)	%



Royalty	1,970			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)	%
Retail	58,566			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)	%
Retail	8,781			57,402			(48,621)			(84.7)	%
Royalty	1,970			1,666			304			18.2	%
	$	18,416		$	97,558		$	(79,142)		(81.1)	%
Gross profit margin:
Direct	15.0		%	38.0		%	(23)		ppts
Retail	13.0		%	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, 2021~~September 30, 2022 to the Three-Month Period Ended ~~December 31, 2020~~September 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 cardio~~the 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 of~~demand 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 represent~~September 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, 2021~~September 30, 2022 versus ~~53.6%~~36.9% for the same period in ~~2020.~~2021. The ~~23.8~~24.2 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 ~~income~~segment 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 in~~as 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, 2021~~second quarter of 2022 were ~~60.3%~~50.8%, compared to ~~52.0%~~56.1% for the same period in ~~2020.~~2021. The ~~increase~~decrease 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, 2021~~September 30, 2022 to the Three-Month Period Ended ~~December 31, 2020~~September 30, 2021

Net sales for the three-month period ended ~~December 31, 2021~~September 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. Excluding~~2021. 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 ~~$2.5~~the Six-Month Period Ended September 30, 2021

Net sales were $51.0 million for the ~~nine-month~~six-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 sales 22.0 % 11.6 %
Nine-Months Ended
December 31, Change
2021 2020 $ %
Selling and marketing $ 75,634 $ 53,651 $ 21,983 41.0%
As % of net sales 16.1 % 11.7 %


	Three-Months Ended September 30,						Change
	2022			2021			$		%
Selling and marketing	$	9,400		$	21,939		$	(12,539)	(57.2)%
As % of net sales	14.4		%	15.9		%


	Six-Months Ended September 30,						Change
	2022			2021			$		%
Selling and marketing	$	22,290		$	43,239		$	(20,949)	(48.4)%
As % of net sales	18.5		%	13.4		%

The ~~increase~~decrease in selling and marketing expenses for the three-month period ended ~~December 31, 2021~~September 30, 2022 compared to the same period of ~~2020~~2021 was primarily related to ~~an increase~~a decrease of ~~$5.6~~$9.3 million in media spend and ~~$5.4~~a decrease of $2.7 million in ~~brand advertising.~~other variable selling and marketing expenses due to decreased sales.

The ~~increase~~decrease in selling and marketing expenses for the ~~nine-month~~six-month period ended ~~December 31, 2021~~September 30, 2022 compared to the same period of ~~2020~~2021 was primarily ~~related~~due to ~~an increase of $13.5~~a $15.2 million ~~in brand advertising and $10.0 million~~decrease 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 - Brand 5,415 — 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 - Brand 13,502 — 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 Direct~~expense for the ~~three and nine-month periods~~three-month period ended ~~December 31, 2021,~~September 30, 2022, as compared to the same ~~periods~~period of ~~2020 were primarily due to increased media spending as we~~2021 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,						Change				Three-Months Ended September 30,						Change
		2021			2020			$		%		2022			2021			$		%
General and administrative	General and administrative	$	11,456		$	10,364		$	1,092	10.5%	General and administrative	$	10,995		$	16,376		$	(5,381)	(32.9)%
As % of net sales	As % of net sales	7.8		%	5.5		%				As % of net sales	16.8		%	11.9		%


		Nine-Months Ended December 31,						Change				Six-Months Ended September 30,						Change
		2021			2020			$		%		2022			2021			$		%
General and administrative	General and administrative	$	39,355		$	28,520		$	10,835	38.0%	General and administrative	$	23,458		$	27,899		$	(4,441)	(15.9)%
As % of net sales	As % of net sales	8.4		%	6.2		%				As % of net sales	19.5		%	8.6		%

~~Table of Contents~~

The ~~increase~~decrease in general and administrative expenses for the three-month period ended ~~December 31, 2021~~September 30, 2022 compared to the same period of ~~2020~~2021 was primarily due to ~~increase in personnel expenses.~~a $4.7 million prior year loss contingency related to a legal settlement.

The ~~increase~~decrease in general and administrative expenses for the ~~nine-month~~six-month period ended ~~December 31, 2021~~September 30, 2022 compared to the same period of ~~2020~~2021 was primarily due to a $4.7 million prior year loss contingency related to a legal settlement ~~for~~and a ~~class action lawsuit and increases~~$1.1 million decrease in ~~personnel~~legal 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 sales	8.3		%	4.1		%

Three-Months Ended
December 31, Change
2021 2020 $ %
Research and development $ 5,379 $ 4,029 $ 1,350 33.5%
As % of net sales 3.7 % 2.1 %

Table of Contents


		Nine-Months Ended December 31,						Change				Six-Months Ended September 30,						Change
		2021			2020			$		%		2022			2021			$		%
Research and development	Research and development	$	15,882		$	11,997		$	3,885	32.4%	Research and development	$	11,229		$	10,503		$	726	6.9%
As % of net sales	As % of net sales	3.4		%	2.6		%				As % of net sales	9.3		%	3.3		%

The ~~increases~~research 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 periods~~six-month period ended ~~December 31, 2021,~~September 30, 2022 as compared to the same ~~periods of 2020, were~~period in 2021 was driven primarily by increased investments in JRNY®, our digital platform.

~~Loss on Disposal Group~~Goodwill 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 group~~cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also use market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses.

In accordance with ASC 360 — Property, Plant, and Equipment and other long-lived assets, we perform a test for recoverability when triggering events occur. No impairment was recognized in the ~~nine-month period~~quarter ended ~~December 31, 2020~~September 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, 2021~~September 30, 2022 was ~~$19.3~~$14.3 million, ~~a decrease~~an increase of ~~$60.8~~$12.4 million, or ~~146.6%~~635.5%, as compared to an operating ~~income~~loss of ~~$41.5~~$2.0 million for the same period of ~~2020.~~2021. The decrease was primarily ~~due to~~driven 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-months~~six-month period ended ~~December 31, 2021~~September 30, 2022 was ~~$3.4~~$65.5 million, ~~a decrease~~an 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 to~~driven 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 ~~provision~~expense 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):

Table of Contents

Three-Months Ended
December 31, Change
2021 2020 $ %
Income tax (benefit) expense $ (7,001) $ 8,588 $ (15,589) (181.5)%
Effective tax rate 34.2 % 22.7 %


		Nine-Months Ended December 31,						Change				Three-Months Ended September 30,						Change
		2021			2020			$		%		2022			2021			$		%
Income tax (benefit) expense		$	(1,321)		$	15,644		$	(16,965)	(108.4)%
Income tax expense											Income tax expense	$	156		$	2,242		$	(2,086)	(93.0)%
Effective tax rate	Effective tax rate	24.8		%	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, 2020~~September 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-months~~six-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 ~~income~~loss 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-months~~six-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-month~~six-month period ended ~~December 31, 2021,~~September 30, 2022, compared to cash ~~provided~~used in operating activities of ~~$65.3~~$56.8 million for the ~~nine-month~~six-month period ended ~~December 31, 2020.~~September 30, 2021. The ~~decrease~~improvement in cash flows from operating activities for the ~~nine-month~~six-month period ended ~~December 31, 2021~~September 30, 2022 as compared to the same period of ~~2020~~2021 was primarily due to changes in our operating assets and liabilities discussed below, ~~as well as the~~offset by a decrease in non-cash charges and net income.

Trade receivables ~~increased~~decreased 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 ~~increase~~decrease in inventory was driven by ~~the strategic decision~~sell-through and strong inventory management as we continued to ~~increase on-hand~~right-size inventory ~~levels for the fitness season given continued disruption in global logistics.~~levels. About ~~15%~~11% of inventory as of ~~December 31, 2021~~September 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 inventory~~a $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 ~~increased~~decreased 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 by~~used in investing activities of ~~$38.3~~$7.5 million for the ~~nine-month~~six-month period ended ~~December 31, 2021~~September 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 ~~2022~~2023 for digital platform enhancements, systems integration, and production tooling.

Cash provided by financing activities of ~~$38.7~~$16.5 million for the ~~nine-month~~six-month period ended ~~December 31, 2021~~September 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 to~~is $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 amortize~~million. 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. The~~2026 and repayment of obligations under the Credit Agreement is secured by substantially all of our ~~assets. Principal~~assets, with principal and interest amounts ~~are~~ required to be paid as scheduled.

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 $59.2~~approximately $25.3 million, compared to ~~$216.3~~$39.8 million as of March 31, ~~2021~~2022 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.

~~Table of Contents~~

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 ~~the~~our fiscal third quarter ending December and fiscal fourth quarter ending March and are generally weakest in ~~the~~our 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 ~~2020~~fiscal 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 to~~There have been no material changes in our market risk ~~from changes~~as 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 affect~~Annual Report on Form 10-K for the ~~market price or liquidity of certain securities within~~year ended March 31, 2022, filed with the ~~portfolio.~~

~~Our ABL Revolving Facility and Term Loan Facility generally charge interest based~~SEC 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 we~~re $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

During the second quarter of ~~December 31, 2021,~~fiscal 2022, we ~~accrued $4.3~~recorded 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 liabilities~~was included as a component of General and ~~Other long-term liabilities~~administrative on our Condensed Consolidated Statements of Operations for the ~~face~~fiscal 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 ~~2020~~2022 Form 10-K are not the only risks and uncertainties to which we are subject, and there may be other risk and uncertainties that are not currently considered material or are not known to us that could impair our business or operations. If any of the risks described in our ~~2020~~2022 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There have been no material changes to the risk factors as set forth in our ~~2020~~2022 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

3.1						Amended and Restated Articles of Incorporation - Incorporated by reference to Exhibit A to Schedule 14A, as filed with the Commission on April 22, 2008.

3.2						Amended and Restated Bylaws - Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, as filed with the Commission on April 5, 2005.

3.3						Amendment to Amended and Restated Bylaws of the Company - Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, as filed with the Commission on January 31, 2007.




10.1						Amendment to Nautilus, Inc. Amended and Restated 2015 Long-Term Incentive Plan - Incorporated by reference to Exhibit 4.6 of our Registration Statement on Form S-8, as filed with the Commission on August 22, 2022.

31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1						Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

* 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)

~~February~~November 9, 2022	By:	/S/ James Barr IV
Date		James Barr IV
		Chief Executive Officer


	NAUTILUS, INC.
	(Registrant)

~~February~~November 9, 2022	By:	/S/ Aina E. Konold
Date		Aina E. Konold
		Chief Financial Officer

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	Preliminary valuation at September 17, 2021		Measurement period adjustments		Adjusted valuation at December 31, 2021
Cash	$	230	$	637	$	867
Accounts receivable	9		—		9

Prepaid expenses	15		(2)		13
Deferred tax assets	58		1		59
Developed technology (included in property, plant and equipment)	3,000		—		3,000

Identifiable assets acquired	3,312		636		3,948



Accrued liabilities	187		745		932
Unearned revenue	53		3		56
Deferred tax liabilities, non-current	591		—		591

Total liabilities assumed	831		748		1,579

Net identifiable assets acquired	2,481		(112)		2,369
Goodwill	24,508		2		24,510
Total assets acquired	$	26,989	$	(110)	$	26,879