QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-31321
NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)
Washington
94-3002667
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
17750 S.E. 6th Way
Vancouver, Washington98683
(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 4, 2022 was 31,248,298 shares.
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization
5,987
6,638
Benefit for allowance for doubtful accounts
(468)
(42)
Inventory lower of cost or net realizable value
291
1,409
Stock-based compensation expense
4,611
3,170
Deferred income taxes, net of valuation allowances
(2,938)
(8,037)
Other
610
(1,160)
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:
Trade receivables
(4,298)
(61,830)
Inventories
(59,258)
(28,529)
Prepaids and other assets
10,059
(8,616)
Income taxes receivable
(13,774)
6,128
Trade payables
(36,366)
62,090
Accrued liabilities and other liabilities, including warranty obligations
8,178
12,573
Net cash (used in) provided by operating activities
(91,583)
65,335
Cash flows from investing activities:
Proceeds from sales and maturities of available-for-sale securities
73,448
—
Acquisition of business, net of cash acquired
(26,012)
—
Purchases of property, plant and equipment
(9,136)
(8,033)
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
38,300
(22,822)
Cash flows from financing activities:
Proceeds from long-term debt
63,652
1,616
Payments on long-term debt
(22,477)
(14,815)
Payment of debt issuance costs
(577)
(19)
Payments on finance lease liabilities
(30)
—
Proceeds from employee stock purchases
486
256
Proceeds from exercise of stock options
472
50
Tax payments related to stock award issuances
(2,866)
(2,196)
Net cash provided by (used in) financing activities
38,660
(15,108)
Effect of exchange rate changes
(1,529)
4,059
Net (decrease) increase in cash, cash equivalents and restricted cash
(16,152)
31,464
Cash, cash equivalents and restricted cash at beginning of period
39,780
26,456
Cash, cash equivalents and restricted cash at end of period
$
23,628
$
57,920
Supplemental disclosure of cash flow information:
Cash paid for interest
$
639
$
651
Cash paid for income taxes, net
19,857
17,257
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid
$
333
$
908
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same amounts shown above:
December 31,
2021
2020
Cash and cash equivalents
$
18,402
$
56,581
Restricted cash
1,339
1,339
Other assets - restricted, non-current
3,887
—
Total cash, cash equivalents and restricted cash
$
23,628
$
57,920
See accompanying Notes to Condensed Consolidated Financial Statements.
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 year ended December 31, 2020 (the “2020 Form 10-K”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results could differ from those estimates. These uncertainties will be heightened by the COVID-19 pandemic, as we may be unable to accurately predict the impact of COVID-19 going forward and as a result our estimates may change in the near term. Further information regarding significant estimates can be found in our 2020 Form 10-K.
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 and March 31, 2021, and our results of operations, comprehensive (loss) income and shareholders' equity for the three and nine-month periods ended December 31, 2021 and 2020 and our cash flows for the nine-month period ended December 31, 2021 and 2020. Interim results are not necessarily indicative of results for a full year. Our revenues typically vary seasonally, and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.
Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.
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
election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax; and (2) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The amendments in ASU 2019-12 make changes to the following current guidance: (1) making an intra-period allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim periods; and (4) determining how to apply the income tax guidance to franchise taxes that are partially based on income. ASU 2019-12 is effective for public business entities' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. Our adoption of ASU 2019-12 as of January 1, 2021 had no material impact on our financial position, results of operations or cash flows.
Recently Issued Pronouncements Not Yet Adopted
ASU 2020-04 and ASU 2021-01
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use London Inter-bank Offered Rate (“LIBOR”) as a reference rate, which is effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from reference rate reform. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash flows.
ASU 2020-01
In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November 2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
On September 17, 2021, we acquired VAY AG (“VAY”) for an aggregate purchase consideration 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.
We accounted for the transaction as a business combination. Goodwill from the acquisition of $24.5 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets and liabilities assumed and is not deductible for tax purposes. Goodwill recorded in connection with this acquisition is primarily attributable to VAY intellectual property base, employee workforce and application to future digital technologies. Acquired assets were recorded at estimated fair value as of the acquisition date. Certain liabilities were acquired as part of the transaction and were recorded at estimated fair value.
Total acquisition costs incurred through the 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 twenty 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):
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,
2021
2020
2021
2020
Product sales
$
141,885
$
183,642
$
454,822
$
444,876
Extended warranties and services
1,841
2,852
4,985
6,222
Other(1)
3,532
2,765
10,003
7,740
Net sales
$
147,258
$
189,259
$
469,810
$
458,838
(1) Other revenue is primarily subscription revenue, freight and delivery and royalty income.
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,
2021
2020
2021
2020
United States
$
110,870
$
153,919
$
360,540
$
381,571
Canada
22,912
17,955
60,126
36,947
Europe, the Middle East and Africa
9,874
14,024
37,456
31,022
All other
3,602
3,361
11,688
9,298
Net sales
$
147,258
$
189,259
$
469,810
$
458,838
As of December 31, 2021, estimated revenue expected to be recognized in the future totaled $53.0 million, primarily related to customer order backlog, which includes firm orders for future shipment and unfulfilled orders to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. 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 million as of December 31, 2020. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers, and net of current promotional programs and sales discounts for our Direct customers.
The following table provides information about our liabilities from contracts with customers, primarily customer deposits and deferred revenue for which advance consideration is received prior to the transfer of control. Revenue is recognized when transfer of control occurs. All customer deposits and deferred revenue received are short-term in nature and were recorded on the condensed consolidated balance sheets as accrued liabilities. Significant changes in contract liabilities balances, including revenue recognized in the reporting period that was included in opening contract liabilities, are shown below (in thousands):
Three-Months Ended December 31,
Nine-Months Ended December 31,
2021
2020
2021
2020
Balance, beginning of period
$
3,453
$
3,639
$
5,551
$
2,050
Cash additions
4,203
3,496
8,749
7,049
Revenue recognition
(1,378)
(743)
(8,022)
(2,707)
Balance, end of period
$
6,278
$
6,392
$
6,278
$
6,392
(4) FAIR VALUE MEASUREMENTS
Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories:
•Level 1 - observable inputs such as quoted prices (unadjusted) in active liquid markets for identical securities as of the reporting date;
•Level 2 - other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk, or observable market prices in markets with insufficient volume and/or infrequent transactions; and
•Level 3 - significant inputs that are generally unobservable inputs for which there is little or no market data available, including our own assumptions in determining fair value.
Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
December 31, 2021
Level 1
Level 2
Level 3
Total
Assets:
Derivatives
Foreign currency forward contracts
$
—
$
19
$
—
$
19
Total assets measured at fair value
$
—
$
19
$
—
$
19
Liabilities:
Derivatives
Foreign currency forward contracts
$
—
$
36
$
—
$
36
Total liabilities measured at fair value
$
—
$
36
$
—
$
36
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
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 period ended December 31, 2021, nor for the year ended March 31, 2021.
We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from inputs, other than quoted market prices in active markets for identical assets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in comprehensive income until realized.
The fair values of our foreign currency forward contracts are calculated as the present value of estimated future cash flows using discount factors derived from relevant Level 2 market inputs, including forward curves and volatility levels.
We did not have any changes to our valuation techniques during the during the nine-month period ended December 31, 2021, nor for the year ended March 31, 2021.
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangible assets and certain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy. Other than assets acquired, see Note 2, Business Acquisition, we determined the fair value of our developed technology included in property, plant and equipment using the cost approach which considers how much it would cost to replace an asset of equivalent utility. We did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis. 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.
(5) DERIVATIVES
From time to time, we enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. We do not enter into derivative instruments for any purpose other than to manage foreign currency exposure. That is, we do not engage in currency exchange rate speculation using derivative instruments.
We may hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. As of December 31, 2021, total outstanding contract notional amounts were $30.2 million and had maturities of 109 days or less.
The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):
Balance Sheet Classification
As of
December 31, 2021
March 31, 2021
Derivative instruments not designated as cash flow hedges:
Foreign currency forward contracts
Prepaids and other current assets
$
19
$
—
Foreign currency forward contracts
Accrued liabilities
36
672
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:
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.
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Estimated Useful Life (in years)
As of
December 31, 2021
March 31, 2021
Automobiles
5
$
23
$
23
Leasehold improvements
4
to
20
3,150
3,059
Computer software and equipment
2
to
7
42,231
36,956
Machinery and equipment
3
to
5
16,466
15,699
Furniture and fixtures
5
to
20
2,635
2,586
Work in progress(1)
N/A
7,430
1,314
Total cost
71,935
59,637
Accumulated depreciation
(40,959)
(35,141)
Total property, plant and equipment, net
$
30,976
$
24,496
(1) Work in progress includes information technology assets and production tooling.
Depreciation expense was as follows (in thousands):
Three-Months Ended December 31,
Nine-Months Ended December 31,
2021
2020
2021
2020
Depreciation expense
$
1,993
$
2,114
$
5,941
$
5,772
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The roll forward of goodwill was as follows (in thousands):
Total
Balance, April 1, 2021
$
—
Business acquisition (Note 2)
24,508
Balance, September 30, 2021
24,508
Business acquisition (Note 2) - measurement period adjustments
2
Balance, December 31, 2021
$
24,510
ASC 350 — Intangibles — Goodwill and Other, we perform our goodwill and indefinite-lived trade names impairment valuations annually, on March 31,or sooner if triggering events are identified. While our stock price and related market capitalization remained above our reporting unit carrying values as of December 31, 2021, we are observing continued market volatility including declines in our market capitalization subsequent to December 31, 2021 which, in part, could increase the possibility of a future impairment charge. Based on our analysis, including
our market capitalization during the period, we determined there were no triggering events during the quarter ended December 31, 2021.
Should the facts and circumstances surrounding our assumptions change, our goodwill impairment analysis may fail. Assumptions and estimates to determine far values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we continue to experience a sustained decline in our market capitalization, adjusted for estimated control premium, that is determined to be indicative of a reduction in fair value one or more of our reporting units, we may be required to record future impairment charges for goodwill. An impairment could have a material effect on our consolidated balance sheet and results of operations
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
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
Future amortization of definite-lived intangible assets is as follows (in thousands):
2022
$
15
2023
61
2024
61
2025
61
2026
47
Thereafter
22
$
267
(9) LEASES
We have several non-cancellable operating leases, primarily for office space, that expire at various dates over the next nine years. These leases generally contain renewal options to extend for one 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.
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%
—%
We determined the discount rate for leases using a portfolio approach to determine an incremental borrowing rate to calculate the right-of-use assets and lease liabilities.
Maturities of 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
(10) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
As of
December 31, 2021
March 31, 2021
Deferred revenue
$
6,278
$
5,551
Reserves (1)
5,230
2,624
Payroll and related liabilities
4,818
6,616
Legal settlement (2)
4,250
—
Other
4,656
4,836
Total accrued liabilities
$
25,232
$
19,627
(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, Commitments and Contingencies.
(11) PRODUCT WARRANTIES
Our products carry defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs of supplying and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from thirty days to, in limited circumstances, the lifetime of certain product components. We record a liability at the time of sale for the estimated costs of fulfilling future warranty claims. If necessary, we adjust the liability for specific warranty-related matters when they become known and are reasonably estimable. Estimated warranty expense is included in cost of sales, based on historical warranty claim experience and available product quality data. Warranty expense is affected by the performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer, product failure rates, and higher or lower than expected repair costs. If warranty expense differs from previous estimates, or if circumstances change such that the assumptions inherent in previous estimates are no longer valid, the amount of product warranty obligations is adjusted accordingly.
Changes in our product warranty obligations were as follows (in thousands):
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,
2021
2020
2021
2020
Shares used to calculate basic income per share
31,199
30,284
30,955
30,077
Dilutive effect of outstanding stock options, performance stock units and restricted stock units
—
2,349
—
2,259
Shares used to calculate diluted income per share
31,199
32,633
30,955
32,336
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted per share due to loss from continuing operations, as such, the exercise or conversion of any potential shares would increase the number of shares in the denominator and result in a lower loss per share (in thousands):
Three-Months Ended December 31,
Nine-Months Ended December 31,
2021
2020
2021
2020
Restricted stock units
673
—
1,024
—
Stock options
357
—
504
—
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income per share. In the case of restricted stock units, this is because unrecognized compensation expense exceeds the current value of the awards (i.e., grant date market value was higher than current average market price). In the case of stock options, this is because the average market price did not exceed the exercise price.
These shares may be anti-dilutive potential common shares in the future (in thousands):
Three-Months Ended December 31,
Nine-Months Ended December 31,
2021
2020
2021
2020
Restricted stock units
1,168
31
333
15
Stock options
2
—
2
3
(14) SEGMENT AND ENTERPRISE-WIDE INFORMATION
We have two operating segments, Direct and Retail. There were no changes in our operating segments during the nine-months ended December 31, 2021.
We evaluate performance of the operating segments using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is the measure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories and other intangible assets. Unallocated assets primarily include cash, cash equivalents and restricted cash, derivative securities, shared information technology infrastructure, distribution
centers, corporate headquarters, prepaids and other current assets, deferred income tax assets and other assets. Capital expenditures directly attributable to the Direct and Retail segments were not significant in any period.
Following is summary information by reportable segment (in thousands):
Three-Months Ended December 31,
Nine-Months Ended December 31,
2021
2020
2021
2020
Net sales:
Direct
$
60,705
$
82,158
$
161,954
$
193,785
Retail
85,701
106,320
305,338
262,423
Royalty
852
781
2,518
2,630
Consolidated net sales
$
147,258
$
189,259
$
469,810
$
458,838
Contribution:
Direct
$
(8,980)
$
23,584
$
(4,056)
$
58,167
Retail
3,270
25,338
44,101
60,393
Royalty
852
781
2,518
2,630
Consolidated contribution
$
(4,858)
$
49,703
$
42,563
$
121,190
Reconciliation of consolidated contribution to (loss) income from continuing operations:
Consolidated contribution
$
(4,858)
$
49,703
$
42,563
$
121,190
Amounts not directly related to segments:
Operating expenses
(14,456)
(8,223)
(45,960)
(42,821)
Other expense, net
(1,142)
(3,640)
(1,930)
(4,490)
Income tax benefit (expense)
7,001
(8,588)
1,321
(15,644)
(Loss) income from continuing operations
$
(13,455)
$
29,252
$
(4,006)
$
58,235
As of
December 31, 2021
March 31, 2021
Assets:
Direct
$
50,585
$
47,002
Retail
198,791
146,001
Unallocated corporate
117,589
161,227
Total assets
$
366,965
$
354,230
The following customers accounted for 10% or more of total net sales as follows:
On October 29, 2021, we amended our Credit Agreement dated May 13, 2021 which amended our original Credit Agreement, dated January 31, 2020, with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Credit Facility”), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The amendment increased the aggregate principal amount available under the ABL Revolving Facility from $55.0 million to $100.0 million (the “Revolver”), subject to a borrowing base. The maturity date of the Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million, as of the effective date of the amendment, and will amortize 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 repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.
Other structural improvements to the Credit Agreement include amending the definition of Springing Trigger Event to mean the greater of (i) 10.0% of the lesser of (a) the Revolver Commitment and (b) the Borrowing Base as of such date of determination and (ii) $7.5 million. The Springing Trigger Event pertains to the period in which a Fixed Charge Coverage Ratio test will apply and be tested. Consistent with the Credit Agreement before the amendment, there continues to be no additional financial maintenance covenants. Additionally, the borrowing base definitions were favorably amended to change the eligible in-transit inventory sublimit from $10.0 million to $22.5 million and the total inventory sublimit from $35.0 million to $65.0 million.
As of December 31, 2021, outstanding borrowings totaled $56.1 million, with $10.9 million and $45.2 million under our Term Loan Facility and Revolver, respectively. As of December 31, 2021, we were in compliance with the financial covenants of the Credit Agreement and $54.9 million was available for borrowing under the ABL Revolving Facility.
Interest on the Revolver will accrue at Secured Overnight Financing Rate (“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%. As of December 31, 2021, our interest rate was 1.97% for the Revolver and 4.60% 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) COMMITMENTS AND CONTINGENCIES
Guarantees, Commitments and Off-Balance Sheet Arrangements
As of December 31, 2021, we had standby letters of credit of $0.9 million.
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of December 31, 2021, we had approximately $59.2 million compared to $216.3 million as of March 31, 2021 in non-cancellable market-based purchase obligations, primarily to secure additional factory capacity for inventory purchases in the next twelve months. The decrease in purchase obligations was primarily due to having received much of the inventory we have ordered for the season. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements
with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnification obligations vary from contract to contract, and generally a maximum obligation is not stated within the agreements. We hold insurance policies that mitigate potential losses arising from certain types of indemnification obligations. Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no related liabilities were recorded as of December 31, 2021.
Legal Matters
From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur.
We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates accordingly. We evaluate, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would make a loss probable or reasonably possible, and whether the amount of a probable or reasonably possible loss is estimable. Among other factors, we evaluate the advice of internal and external counsel, the outcomes from similar litigation, the current status of the lawsuits (including settlement initiatives), legislative developments and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. Further, while we face contingencies that are reasonably possible to occur, other than as discussed below, we are unable to estimate the possible loss or range of loss at this time.
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 damages, a one-year free membership to JRNY®, and administrative fees and was included as a component of General and administrative on our Condensed Consolidated Statements of Operations. As of 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). All references to the third quarters of fiscal 2022 and 2021 to mean the for the three and nine-month periods ended December 31, 2021 and 2020, respectively. Unless the context otherwise requires, “Nautilus,” “we,” “us” and “our” refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.
Cautionary Notice About Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “plan,” “expect,” “aim,” “believe,” “project,” “intend,” “estimate,” “will,” “should,” “could,” and other terms of similar meaning typically identify forward-looking statements. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements include any statements related to our future business, financial performance or operating results; anticipated fluctuations in net sales due to seasonality; plans and expectations regarding gross and operating margins; plans and expectations regarding research and development expenses and capital expenditures and anticipated results from such expenditures and other investments in our capabilities and resources; anticipated losses from discontinued operations; plans for new product introductions, strategic partnerships and anticipated demand for our new and existing products; and statements regarding our inventory and working capital requirements and the sufficiency of our financial resources. These forward-looking statements, and others we make from time-to-time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including our ability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs, changes in consumer fitness trends, changes in the media consumption habits of our target consumers or the effectiveness, availability and price of media time consistent with our cost and audience profile parameters, greater than anticipated costs or delays associated with launch of new products, weaker than expected demand for new or existing products, a decline in consumer spending due to unfavorable economic conditions, softness in the retail marketplace or the availability from retailers of heavily discounted competitive products, an adverse change in the availability of credit for our customers who finance their purchases, our ability to pass along vendor raw material price increases and other cost pressures, including increased shipping costs and unfavorable foreign currency exchange rates, tariffs, risks associated with current and potential delays, work stoppages, or supply chain disruptions caused by the coronavirus pandemic, our ability to hire and retain key management personnel, our ability to effectively develop, market and sell future products, the availability and timing of capital for financing our strategic initiatives, including being able to raise capital on favorable terms or at all; changes in the financial markets, including changes in credit markets and interest rates that affect our ability to access those markets on favorable terms, the impact of any future impairments, our ability to protect our intellectual property, the introduction of competing products, and our ability to get foreign-sourced product through customs in a timely manner. Additional assumptions, risks and uncertainties are described in Part I, Item 1A, “Risk Factors,” in our 2020 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.
Overview
We empower healthier living through individualized connected fitness experiences and are committed to building a healthier world, one person at a time. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products, related accessories and digital platform for consumer use, primarily in the U.S., Canada, Europe and Asia. Our products are sold under some of the most-recognized brand names in the fitness industry: Bowflex®, Schwinn®, JRNY® and Nautilus®.
We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products directly to consumers primarily through websites. Our Retail business offers our products through a network of independent retail companies to reach consumers in the home use markets in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
As previously disclosed, we changed our fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31.
Our results for the three and nine-months ended December 31, 2021, are driven by the actions outlined in our North Star strategy. The five strategic pillars of our North Star strategy are: (1) Adopt a consumer first mindset; (2) Scale a differentiated digital offering; (3) Focus investments on core businesses; (4) Evolve supply chain to be a strategic advantage; and (5) Build organizational capabilities to win by unleashing the power of our team. We intend to leverage our many strengths to transform into a company that empowers healthier living through individualized connected fitness experiences. Our transformation will properly leverage our leading brands, products, innovation, distribution and digital assets to build a healthier world, one person at a time.
At the center of health and well-being is fitness and the market has so far behaved largely as we expected. The market size more than doubled over the past 2 years, is regulating from its peak with more normal seasonality, and will settle at a “new normal” significantly above pre-pandemic levels based on a profound evolution in consumers’ workouts and workplace habits. As a result of these changed habits and sentiments, we continue to believe much of the industry growth opportunity will remain at elevated levels relative to pre-pandemic. This results in stronger opportunity for our industry and Nautilus.
Comparison for the Three-Months Ended December 31, 2021 to the Three-Months ended December 31, 2020
•Net sales were $147.3 million for the three-months ended December 31, 2021, compared to $189.3 million a decline of 22.2% versus for the three-months ended December 31, 2020, or down 21.7%, excluding sales related to the Octane brand, which was sold in October 2020. Lower demand of our cardio products were partially offset by sales of SelectTech® weights and benches compared to the same period in 2020.
•Net sales of our Direct segment decreased by $21.5 million, or 26.1%, for the three-months ended December 31, 2021, compared to the three-months ended December 31, 2020. Net sales decrease was primarily driven by lower cardio sales and higher sales discounting.
•Net sales of our Retail segment decreased by $20.6 million, or 19.4%, for the three-months ended December 31, 2021, compared to the three-months ended December 31, 2020. Excluding sales related to the Octane brand, which was sold in 2020, net sales were down 18.5%. The decrease in sales is primarily driven by lower cardio sales and higher sales discounting, partially offset by strong sales of SelectTech® weights and benches.
•Royalty income for the three-months ended December 31, 2021 increased by $0.1 million compared to the three-months ended December 31, 2020.
•Gross profit was $29.9 million for the three-months ended December 31, 2021, compared to gross profit of $77.9 million for the three-months ended December 31, 2020. Gross profit margins were 20.3% for the three-months ended December 31, 2021 compared to 41.1% for the three-months ended December 31, 2020. The 20.8 ppt decrease in gross margins was primarily due to: increased product costs, logistics and discounting (-18 ppts) and increased investments in JRNY® (-3 ppts).
•Operating expenses were $49.2 million for the three-months ended December 31, 2021, an increase of $12.8 million, or 35.3%, compared to operating expenses of $36.4 million for the three-months ended December 31, 2020, primarily due to $11.0 million more in advertising and $3.6 million increase in JRNY® investments. Total advertising expenses were $21.5 million for the three-months ended December 31, 2021 versus $10.5 million for the three-months ended December 31, 2020.
•Operating loss was $19.3 million or negative 13.1% operating margin for the three-months ended December 31, 2021, compared to operating income of $41.5 million for the three-months ended December 31, 2020, primarily due to lower gross profits and higher operating expenses.
•Loss from continuing operations was $13.5 million, or $(0.43) per diluted share, for the three-months ended December 31, 2021, compared to income from continuing operations of $29.3 million, or $0.90 per diluted share, for the three-months ended December 31, 2020.
•Net loss was $13.5 million for the three-months ended December 31, 2021, compared to net income of $28.9 million for the three-months ended December 31, 2020.
•The effective tax rates were 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 million up 2.4% for the nine-months ended December 31, 2021 compared to net sales of $458.8 million for 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 margins was primarily due to: increased product costs, logistics and discounting (-13 ppts) and increased investments in JRNY® (-2 ppts).
•Operating expenses were $130.9 million, an increase of $16.0 million, or 14.0% for the nine-months ended December 31, 2021, 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 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.
•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.
Comparison for the Three and Nine-Month Periods Ended December 31, 2021 to the Three and Nine-Month Periods Ended December 31, 2020 and 2019, respectively.
The Company measured the sales results versus the same period both one, and in addition, two years ago as we return to our new normal level of demand post COVID pandemic.
•Net sales were $147.3 million, a decline of 22.2% versus the three-month period ended December 31, 2020. When excluding sales related to the Octane brand net sales grew 63% a 28% CAGR for the three-month period ended December 31, 2021 when compared to the same period in 2019.
•Net sales were $469.8 million, grew 2.4% versus the nine-month period ended December 31, 2020. When excluding sales related to the Octane brand net sales grew 144% a 56% CAGR for the nine-month period ended December 31, 2021 when compared to the same period in 2019.
JRNY® Update
•Nautilus, Inc. continues to enhance the JRNY® platform, creating differentiated connected-fitness experiences for their members.
•In the third quarter, the Company expanded the JRNY® enabled product line, adding the Bowflex® Max Total® 16 and Bowflex® SelectTech® 552 and 1090 dumbbells. The attachment of JRNY® to the Bowflex® SelectTech® modalities has been a significant growth driver of the JRNY® member base, which reached nearly 250k members as of December 31, 2021.
•The Company extended JRNY® to include whole body workouts, including FitOn and new strength videos on demand. This enables customers to track workouts across strength, cardio, and whole-body in their journal. Year-to-date, the Company has added more than 150 locations to their popular Explore the World™ experiences and continues to add new trainer-led videos to the platform.
•The Company began offering 12-month complimentary trials in late September, offering customers the opportunity to create lasting habits with the platform and provide feedback on their experience over a longer term.
•The Company also recently launched JRNY.com a new subscription management and billing platform, establishing a browser-based portal for customers to manage their membership and interact with JRNY®. The subscription platform provides critical customer engagement, including payment confirmation, payment refunds, subscription changes and cancellations, and trial ending and renewal reminders.
Forward Looking Guidance
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
sales relationships. In addition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the U.S. and Canada. The COVID-19 pandemic has created a heightened need for home-fitness products at an unplanned rate. We are unable to estimate the length of time that the short-term increases in demand for many of our home-fitness products will outpace supply and we are accelerating the manufacturing and delivery of key products. We cannot predict the longer-term impacts of COVID-19 and the impact on our results of operations is uncertain. Our gross margins are being impacted by fluctuations in the costs or availability of materials used to manufacture our products, tariffs, expedited shipping and transportation costs and product warranty costs. Gross margins may also be affected by fluctuations in cost associated with acquisition or license of products and technologies, product warranty costs, the cost of fuel, foreign currency exchange rates, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of our products on television, websites and other media, facility costs, operating costs of our information and communications systems, product supply chain management, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.
As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2020 Form 10-K as supplemented by our quarterly reports on Form 10-Q.
Discontinued Operations
Results from discontinued operations relate to the disposal of our former Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation as of December 31, 2012. Although there was no revenue related to the former Commercial business in either the 2021 or 2020 periods, we continue to incur product liability and other legal expenses associated with product previously sold into the Commercial channel.
Comparison of Segment Results for the Three-Month Period Ended December 31, 2021 to the Three-Month Period Ended December 31, 2020
Net sales were $60.7 million for the three-month period ended December 31, 2021, compared to $82.2 million, a decline of 26.1%, versus the same period in 2020. Net sales decrease was primarily driven by lower cardio sales and higher discounting.
Cardio sales declined 32.8% versus the same period in 2020. Lower sales were primarily driven by lower bike demand. Strength product sales declined 14.1% versus the same period in 2020. Lower sales were primarily driven by lower sales of Bowflex® Home Gyms, partially offset by increased sales of SelectTech® weights and benches.
The Direct segment ended the quarter with $8.8 million of backlog as of December 31, 2021, the first quarter with meaningful backlog since March 31, 2021. These amounts represent unfulfilled consumer orders net of current promotional programs and sales discounts.
Gross profit margin was 29.8% for the three-month period ended December 31, 2021 versus 53.6% for the same period in 2020. The 23.8 ppt decrease in gross margin was primarily driven by:increased product costs, logistics and discounting (-20 ppts) and increased investments in JRNY® (-4 ppts). Gross profit was $18.1 million, down 58.8% versus the same period in 2020.
Segment contribution loss was $9.0 million for the three-month period ended December 31, 2021, compared to income of $23.6 million for the same period in 2020. The decline was primarily driven by lower gross profit and increased investments in media and JRNY®. Advertising expenses were $16.1 million compared to $10.5 million for the same period in 2020.
Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers for the three-month period ended December 31, 2021 were 60.3%, compared to 52.0% for the same period in 2020. The increase in approvals reflects higher credit quality applications.
Comparison of Segment Results for the 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 to the Three-Month Period Ended December 31, 2020
Net sales for the three-month period ended December 31, 2021 were $85.7 million, down 19.4%, from $106.3 million for the same period in 2020. Excluding sales related to Octane, net sales were down 18.5% compared to last year. Retail segment sales outside the United States and Canada were down 22%, or 20% excluding Octane.
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%, to $0.9 million for the three-month period ended December 31, 2021, compared to the same period of 2020, primarily due to royalty settlements.
Royalty income decreased by $0.1 million, or 4.3%, to $2.5 million for the nine-month period ended December 31, 2021, compared to the same period of 2020, primarily due to royalty settlements.
Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of media advertising, promotions, trade shows, seminars, sales incentives related to our 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
%
The increase in selling and marketing expenses for the three-month period ended December 31, 2021 compared to the same period of 2020 was primarily related to an increase of $5.6 million in media spend and $5.4 million in brand advertising.
The increase in selling and marketing expenses for the nine-month period ended December 31, 2021 compared to the same period of 2020 was primarily related to an increase of $13.5 million in brand advertising and $10.0 million in media spend.
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
The increases in media advertising for Direct for the three and nine-month periods ended December 31, 2021, as compared to the same periods of 2020 were primarily due to increased media spending as we return to more historical levels of advertising support to drive demand and preserve market share.
General and Administrative
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, acquisition costs and other administrative fees.
General and administrative was as follows (dollars in thousands):
The increase in general and administrative expenses for the three-month period ended December 31, 2021 compared to the same period of 2020 was primarily due to increase in personnel expenses.
The increase in general and administrative expenses for the nine-month period ended December 31, 2021 compared to the same period of 2020 was primarily due to a $4.7 million loss contingency related to a legal settlement for a class action lawsuit and increases in personnel expenses and acquisition costs.
Research and Development
Research and development expenses include payroll, employee benefits, other headcount-related expenses and information technology associated with product development.
Research and development was as follows (dollars in thousands):
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
%
Nine-Months Ended December 31,
Change
2021
2020
$
%
Research and development
$
15,882
$
11,997
$
3,885
32.4%
As % of net sales
3.4
%
2.6
%
The increases in research and development expenses for the three and nine-month periods ended December 31, 2021, as compared to the same periods of 2020, were driven primarily by increased investments in JRNY®, our digital platform.
Loss on Disposal Group
The loss on disposal group for the nine-month period ended December 31, 2020 related to the disposal of our Octane Business in 2020.
Operating (Loss) Income
Operating loss for the three-months ended December 31, 2021 was $19.3 million, a decrease of $60.8 million, or 146.6%, as compared to an operating income of $41.5 million for the same period of 2020. The decrease was primarily due to lower gross profit and increased operating expenses as discussed in more detail above.
Operating loss for the nine-months ended December 31, 2021 was $3.4 million, a decrease of $81.8 million, or 104.3%, as compared to an operating income of $78.4 million for the same period of 2020. The decrease was primarily due to lower gross profit and increased operating expenses as discussed in more detail above.
Other, Net
Other, net relates to the effect of exchange rate fluctuations with the U.S. and our foreign subsidiaries.
Income Tax (Benefit) Expense
Income tax provision includes U.S. and international income taxes, and interest and penalties on uncertain tax positions.
Income tax (benefit) expense was as follows (dollars in thousands):
Income tax benefit for the three-months and nine-months ended December 31, 2021 was primarily due to the loss generated in the U.S.
Income tax expense for the three-months and nine-months ended December 31, 2020 was primarily a result of the profit generated in the U.S.
(Loss) Income from Continuing Operations
Loss from continuing operations was $13.5 million for the three-months ended December 31, 2021, or $0.43 per diluted share, compared to income from continuing operations of $29.3 million, or $0.90 per diluted share, for the three-months ended December 31, 2020. The decrease in income from continuing operations was primarily due to lower gross profit and higher operating expenses as discussed in more detail above.
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 million for the three-months ended December 31, 2021, compared to net income of $28.9 million for the three-months ended December 31, 2020. Net loss per diluted share was $0.43 for the three-months ended December 31, 2021, compared to net income per diluted share of $0.89 for the three-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.
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, we had $19.7 million of cash, cash equivalents and restricted cash, and $54.9 million was available for borrowing under the ABL Revolving Facility, compared to $113.2 million of cash, cash equivalents, restricted cash and available-for-sale securities, and $54.4 million available for borrowing under the ABL Revolving Facility as of March 31, 2021. We expect our cash, cash equivalents, restricted cash and amounts available for borrowing under our Credit Facility as of December 31, 2021, along with cash expected to be generated from operations, to be sufficient to fund our operating and capital requirements for at least twelve months from December 31, 2021.
Cash used in operating activities was $91.6 million for the nine-month period ended December 31, 2021, compared to cash provided in operating activities of $65.3 million for the nine-month period ended December 31, 2020. The decrease in cash flows from operating activities for the nine-month period ended December 31, 2021 as compared to the same period of 2020 was primarily due to changes in our operating assets and liabilities discussed below, as well as the decrease in net income.
Trade receivables increased to $93.6 million as of December 31, 2021, compared to $88.7 million as of March 31, 2021, primarily due to timing of customer payments.
Inventory was $128.1 million as of December 31, 2021, compared to $68.1 million as of March 31, 2021. The increase in inventory was driven by the strategic decision to increase on-hand inventory levels for the fitness season given continued disruption in global logistics. About 15% of inventory as of December 31, 2021 was in-transit.
Prepaid and other current assets decreased by $14.9 million to $11.0 million, compared to $25.8 million as of March 31, 2021, primarily due to decreases in other short-term deposits for inventory and prepaid marketing.
Trade payables decreased by $37.0 million to $61.9 million as of December 31, 2021, compared to $98.9 million as of March 31, 2021, primarily due to timing of payments for inventory.
Accrued liabilities increased by $5.6 million to $25.2 million as of December 31, 2021, compared to $19.6 million as of March 31, 2021, primarily due to an accrued loss contingency related to a class action lawsuit legal settlement.
Cash provided by investing activities of $38.3 million for the nine-month period ended December 31, 2021 was primarily due to proceeds from sales and maturities of available-for-sale securities partially offset by the $26.0 million acquisition of VAY. We anticipate spending between $12.0 million and $14.0 million in fiscal 2022 for digital platform enhancements, systems integration, and production tooling.
Cash provided by financing activities of $38.7 million for the nine-month period ended December 31, 2021 was primarily related to proceeds from long-term debt offset by payments on long-term debt.
On October 29, 2021, we amended our Credit Agreement dated May 13, 2021 which amended our original Credit Agreement, dated January 31, 2020, with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (the “Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Credit Facility”), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The amendment increased the aggregate principal amount available under the ABL Revolving Facility from $55.0 million to $100.0 million (the “Revolver”), subject to a borrowing base. The maturity date of the Credit Facility was extended to October 29, 2026. The unamortized balance on the Term Loan was $11.5 million, as of the effective date of the amendment, and will amortize 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 repayment of obligations under the Credit Agreement is secured by substantially all of our assets. Principal and interest amounts are required to be paid as scheduled.
Other structural improvements to the Credit Agreement include amending the definition of Springing Trigger Event to mean the greater of (i) 10.0% of the lesser of (a) the Revolver Commitment and (b) the Borrowing Base as of such date of determination and (ii) $7.5 million. The Springing Trigger Event pertains to the period in which a Fixed Charge Coverage Ratio test will apply and be tested. Consistent with the Credit Agreement before the amendment, there continues to be no additional financial maintenance covenants. Additionally, the borrowing base definitions were favorably amended to change the eligible in-transit inventory sublimit from $10.0 million to $22.5 million and the total inventory sublimit from $35.0 million to $65.0 million.
As of December 31, 2021, outstanding borrowings totaled $56.1 million, with $10.9 million and $45.2 million under our Term Loan Facility and Revolver, respectively. As of December 31, 2021, we were in compliance with the financial covenants of the Credit Agreement and $54.9 million was available for borrowing under the ABL Revolving Facility.
Interest on the Revolver will accrue at Secured Overnight Financing Rate (“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%. As of December 31, 2021, our interest rate was 1.97% for the Revolver and 4.60% for the Term Loan Facility.
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding.
Off-Balance Sheet Arrangements
We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of December 31, 2021, we had approximately $59.2 million, compared to $216.3 million as of March 31, 2021 in non-cancellable market-based purchase obligations, primarily to secure additional factory capacity for inventory purchases in the next twelve months. Purchase obligations can vary from quarter-to-quarter and versus the same period in prior years due to a number of factors, including the amount of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses. The decrease in purchase obligations was primarily due to receipt of inventory ordered for the holiday and fitness season.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies that mitigate potential losses arising from certain types of indemnifications.
Management does not deem these obligations to be significant to our financial position, results of operations or cash flows, and therefore, no liabilities were recorded at December 31, 2021.
SEASONALITY
We expect our revenue from fitness equipment products to vary seasonally. Sales are typically strongest in the fourth quarter and are generally weakest in the second quarter. We believe that consumers tend to be involved in outdoor activities during the spring and summer months, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not changed other than goodwill from those discussed in our 2020 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Exchange Risk
Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents, derivative assets and variable-rate debt obligations. Our cash equivalents mature within three-months or less from the date of purchase. Marketable securities with original maturities of greater than three-months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. We have classified our marketable securities as available-for-sale and, therefore, we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instruments in our portfolio, a decline in interest rates would reduce our interest income over time, and an increase in interest rates may negatively affect the market price or liquidity of certain securities within the portfolio.
Our ABL Revolving Facility and Term Loan Facility generally charge interest based on a benchmark rate such as Secured Overnight Financing Rate. Fluctuations in short-term interest rates may cause interest payments on term loan principal and drawn amounts on the revolving line to increase or decrease. As of December 31, 2021, the outstanding balances on our ABL Revolving Facility and Term Loan Facility totaled $56.1 million.
We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. Total notional amounts outstanding as of December 31, 2021 were $30.2 million.
A hypothetical 10% increase in interest rates, or a 10% movement in the currencies underlying our foreign currency derivative positions, would have material impacts on our results of operations, financial position or cash flows. We do not enter into derivative instruments for any purpose other than to manage our interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments.
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, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to occur. As of December 31, 2021, we accrued $4.3 million for a contingent loss related to a legal settlement involving a class action lawsuit related to the advertisement of our treadmills. The settlement includes damages, a one-year free membership to JRNY®, and administrative fees and is reflected in Accrued liabilities and Other long-term liabilities on the face of our Consolidated Balance Sheets.
As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
Item 1A. Risk Factors
We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 2020 Form 10-K are not the only risks and uncertainties to which we are subject, and there may be other risk and uncertainties that are not currently considered material or are not known to us that could impair our business or operations. If any of the risks described in our 2020 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There have been no material changes to the risk factors as set forth in our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
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.
