NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Nautilus, Inc. and subsidiaries (collectively, "Nautilus," the "Company," "we" or "us") was founded in 1986 and incorporated in the State of Washington in 1993. Our headquarters are located in Vancouver, Washington.
We empower healthier living through individualized connected fitness experiences to build 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 and related accessories for consumer use, primarily in the U.S., Canada, and Europe. 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 through television advertising, catalogs and our websites. Our Retail business offers our products through a network of independent retail companies and specialty retailers with stores and websites located in the U.S. and internationally. We also derive a portion of our revenue from the licensing of our brands and intellectual property.
Basis of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and relate to Nautilus, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany transactions and balances have been eliminated in consolidation.
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. Actual results could differ from those estimates. We have reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. On the consolidated balance sheets, we have reclassified from other assets to deferred income tax assets, non-current.
Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.
Fiscal Year
On December 30, 2020, the Board of Directors of Nautilus approved a change in the Nautilus’ fiscal year from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31. The Company plans to file a transition report on Form 10-QT for the transition period from January 1, 2021 to March 31, 2021. The Company’s fiscal year 2022 will begin April 1, 2021 and end March 31, 2022.
Discontinued Operations
Results from discontinued operations relate to the disposal of our former Nautilus® Commercial business, which was completed in April 2011. We reached substantial completion of asset liquidation at December 31, 2012. Although there was no revenue related to our former Commercial business during 2018 through 2020, we continue to have product liability and other legal expenses associated with product previously sold into the Commercial channel.
Results of operations related to the Commercial business have been presented in the consolidated financial statements as discontinued operations for all periods presented.
Critical Accounting Estimates
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, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in the financial statements. Our critical accounting estimates relate to income taxes, valuation allowances, and other long-term assets valuation. Actual results could differ from our estimates.
Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents held in bank accounts in excess of federally-insured limits and trade receivables. Trade receivables are generally unsecured and therefore collection is affected by the economic conditions in each of our principal markets.
We rely on third-party contract manufacturers in Asia for substantially all of our products and for certain product engineering support. Business operations could be disrupted by natural disasters, difficulties in transporting products from non-U.S. suppliers, as well as political, social or economic instability in the countries where contract manufacturers or their vendors or customers conduct business. While any such contract manufacturing arrangement could be replaced over time, the temporary loss of the services of any primary contract manufacturer could delay product shipments and cause a significant disruption in our operations.
We derive a significant portion of our net sales from a small number of our Retail customers. A loss of business from one or more of these large customers, if not replaced with new business, would negatively affect our operating results and cash flows. In 2020, 2019 and 2018 two customers each individually accounted for more than 10%, but less than 20%, of our net sales.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less at purchase are considered to be cash equivalents. As of December 31, 2020, cash equivalents consisted of money market funds and totaled $14.9 million. As of December 31, 2019, we did not have any cash equivalents.
Restricted Cash
We are required by our banking partner to maintain a restricted bank account to cover for exposures on corporate credit cards and letters of credits. The use of these funds are restricted until the exposure with the banking partner is closed.
Available-For-Sale Securities
We classify our marketable debt securities as available-for-sale and, accordingly, record them at fair value. 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 expected to be used for current operations. Unrealized holding gains and losses, which are immaterial, are excluded from earnings and are reported net of tax in other comprehensive income until realized. Dividend and interest income is recognized when earned. Realized gains and losses, which were not material in 2020, 2019 or 2018, are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
We periodically evaluate whether declines in fair values of our investments below their cost are "other-than-temporary." This evaluation consists of qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery occurs. For additional information, refer to Note 5, Fair Value Measurements.
Derivative Securities
We record our derivative securities at fair value, and our portfolio currently consists of foreign currency forward contracts. Our interest rate swap agreement, which was classified as a cash flow hedge, was terminated as of June 30, 2019 and the $0.1 million, net of tax, amount related to the cash flow hedge recorded as deferred gains was reclassified from accumulated other comprehensive losses to other income.
We enter into foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. 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. Gains and losses on foreign currency forward contracts are recognized in the Other, net line of our consolidated statements of operations.
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. For additional information, refer to Note 6, Derivatives.
Trade Receivables
Accounts receivable primarily consists of trade receivables due from our Retail segment customers. We determine an allowance for doubtful accounts based on historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. For additional information, refer to Note 7, Trade Receivables.
Inventories
Inventories are stated at the lower of cost and net realizable value ("NRV"), with cost determined based on the first-in, first-out method. We establish inventory allowances for excess, slow-moving and obsolete inventory based on inventory levels, expected product life and forecasted sales. Inventories are written down to NRV based on historical demand, competitive factors, changes in technology and product lifecycles. For additional information, refer to Note 8, Inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Improvements or betterments which add new functionality or significantly extend the life of an asset are capitalized. Software costs related to an asset developed for internal use are capitalized after the preliminary project stage, management has committed to the completion of the project and it is probable the project will be complete and used as intended. Expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired, or otherwise disposed of, and the related accumulated depreciation, are removed from the accounts at the time of disposal. Gains and losses resulting from asset sales and dispositions are recognized in the period in which assets are disposed. Depreciation is recognized, using the straight-line method, over the lesser of the estimated useful lives of the assets or, in the case of leasehold improvements, the lease term, including renewal periods if we expect to exercise our renewal options. Depreciation on automobiles, computer software and equipment, machinery and equipment is determined based on estimated useful lives, which generally range from two-to-seven years, and furniture and fixtures which generally range from five-to-twenty years. For additional information, refer to Note 9, Property, Plant and Equipment.
Goodwill
Goodwill consists of the excess of acquisition costs over the fair values of net assets acquired in business combinations. It is not amortized, but rather is tested at the reporting unit level at least annually for impairment or more frequently if triggering events or changes in circumstances indicate impairment. Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specific events, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined in the most recent quantitative assessment. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative impairment analysis is performed. A quantitative impairment analysis involves estimating the fair value of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions. These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables. If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill.
In accordance ASC 350 — Intangibles — Goodwill and Other, we perform a goodwill and indefinite-lived asset impairment evaluation during the fourth quarter of each year. However, as a result of the decline in our market value relative to the market and our industry, identified as a triggering event, we performed an interim evaluation and a market capitalization reconciliation during the second quarter of 2019, which resulted in a non-cash goodwill impairment charge of $63.5 million which reduced goodwill to zero. We performed an assessment of goodwill in the fourth quarter of 2018 and determined no impairment was indicated in that year.
Other Intangible Assets
Indefinite-lived intangible assets consist of acquired trademarks, specifically trade names. Indefinite-lived intangible assets are stated at cost and are not amortized; instead, they are tested for impairment at least annually. We assess the value of indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including applicable key assumptions also used in the quantitative assessment listed below. If we determine that it is more likely than not that an indefinite-lived intangible assets is impaired, the quantitative approach is used to assess the asset fair value and the amount of the impairment. We review our
indefinite-lived trademarks for impairment in the fourth quarter of each year or when events or changes in circumstances indicate that the assets may be impaired. The fair value of trademarks is estimated using the relief-from-royalty method to estimate the value of the cost savings and a discounted cash flows method to estimate the value of future income. The sum of these two values for each trademark is the fair value of the trademark. If the carrying amount of trademarks exceeds the estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value.
We tested our indefinite-lived trademarks for impairment in the fourth quarters of 2020, 2019 and 2018. During the fourth quarter of 2020, we sold Octane Fitness and the related other intangible asset were reduced by $32.0 million. During the second quarter of 2019, we identified impairment indicators with our indefinite-lived trademarks resulting in an $8.5 million non-cash intangible impairment charge in our Octane Fitness brand name originally acquired through the Octane Fitness acquisition on December 31, 2015. The impairment charge is recorded in operating expenses on the consolidated statements of operations. We determined no impairment was indicated in 2018 for our indefinite-lived intangible assets.
Definite-lived intangible assets, primarily acquired trade names, customer relationships, patents and patent rights, are stated at cost, net of accumulated amortization, and are evaluated for impairment as discussed below under Impairment of Long-Lived Assets. We recognize amortization expense for our definite-lived intangible assets on a straight-line basis over the estimated useful lives. For further information regarding other intangible assets, see Note 11, Other Intangible Assets.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and definite-lived intangible assets, are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. When such an event or condition occurs, we estimate the future undiscounted cash flows to be derived from the use and eventual disposition of the asset to determine whether a potential impairment exists. If the carrying value exceeds estimated future undiscounted cash flows, we record impairment expense to reduce the carrying value of the asset to its estimated fair value. In accordance ASC 360 — Property, Plant, and Equipment and other long-lived assets, we performed a test for recoverability of our assets as the goodwill and indefinite-lived intangible asset impairment from the decline in our market value relative to the market and our industry identified a long-lived asset impairment indicator in 2019. For a long-lived assets or disposal group classified as held-for-sale to be disposed of, the carrying value is determined in a similar manner, except that fair values are reduced for the cost to sell. The assets and liabilities of a disposal group classified as held-for-sale were presented separately in the asset and liability sections, respectively, of the balance sheet. The disposal group was structured as a sale of the subsidiary shares and asset sale for the international assets. Our long-lived assets were recoverable, and step two impairment charge was not required in 2020, 2019 and 2018.
Equity Investments
ASU 2016-01 Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in earnings. We do not hold any equity investments where we use quoted market prices to determine the fair values of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. During the fourth quarter of 2020 we recognized an impairment of $2.5 million as we made an assessment of the investment after observing impairment indicators upon receipt of the most recent financial statements and third party valuation reports. The fair value was determined by reviewing the financial information and financial performance indicating a significant adverse change in the general market condition the investee operates. See Note 12, Equity Investments, for additional information.
Share Repurchases
Shares of our common stock may be repurchased from time to time as authorized by our Board of Directors. Repurchases may be made in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded from existing cash balances, and repurchased shares are retired and returned to unissued authorized shares. These repurchases are accounted for as reductions to our common stock to the extent available with remaining amounts allocated against retained earnings. As of December 31, 2020, we did not have an authorized share repurchase plan.
Revenue Recognition and Adoption of Topic 606
On January 1, 2018, we adopted ASU 2014-09 and all subsequent ASUs that modified ASC 606. We elected to apply the standard and all related ASUs retrospectively to each prior reporting period presented. The implementation of the new standard had no material impact on the measurement or recognition of revenue, resulting in no adjustments to prior periods. Additional disclosures, however, have been added in accordance with the ASU.
Our Direct and Retail revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For our Direct channel, control is transferred when products are shipped to customers as the entity has fulfilled the promise to transfer the goods. For Retail, control is transferred when contractual shipping terms are performed for the customer, generally upon our delivery to the carrier, in accordance with the terms of a sales contract.
Our product sales and shipping revenues are reported net of promotional discounts, returns allowances, contractual rebates, and consideration payable to our customers. We estimate the revenue impact of retail sales incentive programs based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time of the sale.
We estimate our liability for product returns based on historical experience, and record the expected customer refund liability as a reduction of revenue, and the expected inventory right of recovery, net of estimated scrap, as a reduction of cost of sales. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.
We provide standard assurance-type warranties on our products which cover defective materials or nonconforming products, and is included with each product at no additional charge. In addition, we offer service-type/extended warranties for an additional fee to our Direct channel customers and Retail specialty and commercial customers. These warranty contracts provide coverage on labor and parts beyond the standard assurance warranty period.
For our product sales, services, and freight and delivery fees, we are the principal in the contract and recognize revenue at a point in time. For our Direct channel extended warranty contracts, we are the agent and recognize revenue on a net basis because our performance obligation is to facilitate the arrangement between our customers and the third-party performance obligor.
For customer contracts that include multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price based on prices charged to customers on standalone sales or using expected cost plus margin.
Many Direct business customers finance their purchases through a third-party credit provider, for which we pay a commission or financing fee to the credit provider. Revenue for such transactions is recognized based on the sales price charged to the customer, net of promotional discounts, and the related commission or financing fee is included in selling and marketing expense.
Exemptions and Elections
We apply the practical expedient as per ASC 606-10-50-14 and do not disclose information related to remaining performance obligations due to their original expected durations are one year or less.
We expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded in selling and marketing expense.
We generally account for our shipping and handling activities as a fulfillment activity, consistent with the timing of revenue recognition; that is, when our customer takes control of the transferred goods. In the event that a customer were to take control of a product prior to shipment, we make an accounting policy election to treat such shipping and handling activities as a fulfillment cost. For additional information, see Note 4, Revenues.
Sales Discounts and Returns Allowance
Product sales and shipping revenues are reported net of promotional discounts and return allowances. We estimate the revenue impact of retail sales incentive programs based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time of the sale. We estimate our liability for product returns based on historical experience, and record the expected customer refund liability as a reduction of revenue, and the expected inventory right of recovery, net of estimated scrap, as a reduction of cost of sales. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.
Activity in our sales discounts and returns allowance was as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
4,385
|
|
|
$
|
4,419
|
|
|
$
|
6,920
|
|
Charges to reserve
|
22,009
|
|
|
18,311
|
|
|
15,058
|
|
Reductions for sales discounts and returns
|
(19,983)
|
|
|
(18,345)
|
|
|
(17,559)
|
|
|
|
|
|
|
|
Balance, December 31
|
$
|
6,411
|
|
|
$
|
4,385
|
|
|
$
|
4,419
|
|
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and excluded from net sales.
Shipping and Handling Fees
Shipping and handling fees billed to customers are recorded net of discounts and included in both net sales and cost of sales. We generally account for our shipping and handling activities as a fulfillment activity, consistent with the timing of revenue recognition; that is, when our customer takes control of the transferred goods.
Cost of Sales
Cost of sales primarily consists of: inventory costs; royalties paid to third parties; employment and occupancy costs of warehouse and distribution facilities, including depreciation of improvements and equipment; transportation expenses; product warranty expenses; distribution information systems expenses; and allocated expenses for shared administrative functions.
Product Warranty Obligations
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.
Litigation and Loss Contingencies
From time to time, we may be involved in various claims, lawsuits and other proceedings. These legal 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 record expenses for litigation and loss contingencies as a component of general and administrative expense when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then we disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannot be made.
Advertising and Promotion
We expense our advertising and promotion costs as incurred. Production costs of television advertising commercials are recorded in prepaids and other current assets until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs are included in selling and marketing expenses and totaled $36.3 million, $46.8 million and $65.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Prepaid advertising and promotion costs were $0.6 million, $1.3 million and $2.7 million as of December 31, 2020, 2019 and 2018, respectively.
Research and Development
Internal research and development costs, which primarily consist of salaries and wages, employee benefits, expenditures for materials, and fees to use licensed technologies, are expensed as incurred. Third-party research and development costs for products under development or being researched, if any, are expensed as the contracted work is performed. Improvements or betterments which add new functionality or significantly extend the life of an asset are capitalized. Software costs related to an asset developed for internal use are capitalized after the preliminary project stage, management has committed to the completion of the project and it is probable the project will be complete and used as intended.
Income Taxes
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are expected to be included, as income or expense, in the applicable tax return. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the enactment. Valuation allowances are provided against deferred income tax assets if we determine it is more likely than not that such assets will not be realized.
Unrecognized Tax Benefits
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination, including resolutions of any related appeals or litigation. We recognize tax-related interest and penalties as a component of income tax expense.
Foreign Currency Translation
We translate the accounts of our non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses, gains and losses are translated at weighted-average exchange rates during the year; and assets and liabilities are translated at the exchange rate on the balance sheet date. Translation gains and losses are reported in our consolidated balance sheets as a component of accumulated other comprehensive income.
Gains and losses arising from foreign currency transactions, including transactions between us and our non-U.S. subsidiaries, are recorded as a component of other income (expense) in our consolidated statements of operations.
Fair Value of Financial Instruments
The carrying values of cash, cash equivalents and restricted cash, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fair value due to their short maturities.
For additional information on financial instruments recorded at fair value on a recurring basis as of December 31, 2020, refer to Note 5, Fair Value Measurements.
Stock-Based Compensation
We recognize stock-based compensation expense on a straight-line basis over the applicable vesting period, based on the grant-date fair value of the award. To the extent a stock-based award is subject to performance conditions, the amount of expense recorded in a given period, if any, reflects our assessment of the probability of achieving the performance targets.
Fair value of stock options and shares subject to our employee stock purchase plan are estimated using the Black-Scholes valuation model; fair value of performance share unit ("PSU") awards, restricted stock unit ("RSU") awards and restricted stock awards ("RSA") is based on the closing market price on the day preceding the grant. Our accounting treatment of forfeiture expenses reversals is at the forfeiture date and do not estimate future forfeitures prior to their actual occurrence.
Shares to be issued upon the exercise of stock options or the vesting of stock awards will come from newly issued shares.
Income (Loss) Per Share Amounts
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. If there is a loss from continuing operations, diluted earnings per share is the same as basic earnings per share.
Recent Accounting Pronouncements
Newly-Adopted Pronouncements
ASU 2019-01
In March 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2019-01, “Leases (Topic 842): Codification Improvements.” The amendments in ASU 2019-01 address three issues: (1) determining the fair value of the underlying asset by lessors that are not manufactures or dealers; (2) presentation on the statement of cash flows of sales-type and direct financing leases; and (3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. ASU 2019-01 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 with early application permitted. Our adoption of ASU 2019-01 as of January 1, 2020 had no material impact on our financial position, results of operations or cash flows.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, which was finalized in August 2018. The main provisions include removals, modifications, and additions of specific disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption, while all other amendments should be applied retrospectively to all periods presented upon their effective date. Our adoption of ASU 2018-13 as of January 1, 2020 had no material impact on our financial position, results of operations or cash flows.
Recently Issued Pronouncements Not Yet Adopted
ASU 2020-04
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. 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 2019-12
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in ASU 2019-12 introduce the following new guidance: (1) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax; and (2) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The amendments in ASU 2019-12 make changes to the following current guidance: (1) making an intraperiod allocation if there is a loss in continuing operations and a gain outside of continuing operations; (2) determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; (3) accounting for tax law changes and year-to-date losses in interim periods; and (4) determining how to apply the income tax guidance to franchise taxes that are partially based on income. ASU 2019-12 is effective for public business entities' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November 2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. We do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.
(2) ASSETS AND LIABILITIES HELD-FOR-SALE
As part of our strategic decision to renew our focus on connected in-home fitness we sold OF Holdings. The OF Holdings business was reported within our Retail segment.
On October 14, 2020, we entered into a stock purchase agreement (the “Agreement”) with True Fitness Technology, Inc., a Missouri corporation (“True Fitness”). Pursuant to the terms of the Agreement, on October 14, 2020, True Fitness purchased 100% of the issued and outstanding capital stock of our wholly-owned subsidiary OF Holdings, Inc., a Delaware corporation (“Holdings”), which included Holding’s wholly-owned subsidiary Octane Fitness, LLC, a Minnesota limited liability company (collectively, “Octane Fitness”). In addition, effective October 14, 2020, pursuant to terms of a U.K. Asset Transfer Agreement, a subsidiary of True Fitness, True Fitness Technology U.K. Limited, purchased certain assets and assumed certain Octane Fitness brand-related liabilities of our U.K. subsidiary, Octane Fitness UK Ltd. Contemporaneously with the transactions described above, True Fitness Technology Ireland Limited, a subsidiary of True Fitness, entered into an NL Asset Transfer Agreement with Octane Fitness International B.V., a company organized under the laws of the Netherlands, providing for the True Fitness subsidiary to purchase certain assets and assume certain Octane brand-related liabilities of Octane Fitness International B.V. The above-described transactions are collectively referred to as the “Sale of the Octane Business”.
The aggregate consideration for the Sale of the Octane Business as provided by the Stock Purchase Agreement and the asset transfer agreements consists of a base purchase price of $25.0 million subject to adjustments for cash and cash equivalents, indebtedness, transaction expenses and working capital. True Fitness assumed $2.8 million of warranty liabilities and $0.5 million of vendor recourse lease obligations. We incurred selling costs of $3.0 million in connection with the Sale of the Octane Business.
The assets and liabilities of the Octane Fitness® disposal group sold were as follows (in thousands):
|
|
|
|
|
|
|
|
As of
|
|
|
October 14, 2020
|
|
Assets:
|
|
|
Cash and cash equivalents
|
$
|
497
|
|
|
Trade receivables
|
3,904
|
|
|
Inventories
|
10,099
|
|
|
Prepaids and other current assets
|
560
|
|
|
Property, plant and equipment, net
|
1,571
|
|
|
Other intangible assets
|
32,045
|
|
|
|
|
|
Other assets
|
23
|
|
|
Total assets sold
|
$
|
48,699
|
|
|
Liabilities:
|
|
|
Trade payables
|
3,766
|
|
|
Accrued liabilities
|
1,058
|
|
|
Warranty obligations
|
2,762
|
|
|
Deferred income tax liabilities
|
1,513
|
|
|
|
|
|
Total liabilities sold
|
$
|
9,099
|
|
|
|
|
|
|
|
|
|
As of
|
|
October 14, 2020
|
Assets
|
$
|
48,699
|
|
Liabilities
|
9,099
|
|
Carrying value
|
$
|
39,600
|
|
|
|
Current fair value (Consideration)
|
$
|
25,000
|
|
Plus cash and cash equivalents
|
497
|
|
Less disposal costs
|
(2,976)
|
|
Less working capital adjustment
|
(3,589)
|
|
Net fair value
|
18,932
|
|
Loss on disposal group
|
$
|
20,668
|
|
(3) DISCONTINUED OPERATIONS
Following is a summary of certain financial information regarding our discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
$
|
(162)
|
|
|
$
|
(206)
|
|
|
$
|
(206)
|
|
Income tax expense
|
527
|
|
|
299
|
|
|
246
|
|
Total loss from discontinued operations
|
$
|
(689)
|
|
|
$
|
(505)
|
|
|
$
|
(452)
|
|
(4) REVENUES
Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Product sales
|
|
$
|
534,758
|
|
|
$
|
296,447
|
|
|
$
|
380,489
|
|
Extended warranties and services
|
|
8,157
|
|
|
6,691
|
|
|
9,226
|
|
Other(1)
|
|
9,645
|
|
|
6,147
|
|
|
7,038
|
|
Net sales
|
|
$
|
552,560
|
|
|
$
|
309,285
|
|
|
$
|
396,753
|
|
(1) Other revenue is primarily freight and delivery, royalty income and subscription revenue.
Our revenues disaggregated by geographic region, based on ship-to address, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
United States
|
|
$
|
461,521
|
|
|
$
|
256,182
|
|
|
$
|
348,712
|
|
Canada
|
|
43,196
|
|
|
24,768
|
|
|
20,489
|
|
Europe, the Middle East and Africa
|
|
36,166
|
|
|
17,303
|
|
|
14,522
|
|
All other
|
|
11,677
|
|
|
11,032
|
|
|
13,030
|
|
Net sales
|
|
$
|
552,560
|
|
|
$
|
309,285
|
|
|
$
|
396,753
|
|
As of December 31, 2020, due to the severe shortage of shipping containers, some factory fulfilled orders, representing over $16 million in revenue, did not ship in late December. Container shortages, worsening global logistics disruptions, and continued factory capacity constraints resulted in $91.5 million of customer order backlog, which includes firm orders for future shipment to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. Direct orders of $46.5 million and Retail orders of $45.0 million comprise our backlog 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. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance, January 1
|
|
$
|
1,225
|
|
|
$
|
816
|
|
|
$
|
1,084
|
|
Cash additions
|
|
9,148
|
|
|
2,330
|
|
|
1,794
|
|
Revenue recognition
|
|
(3,981)
|
|
|
(1,921)
|
|
|
(2,062)
|
|
Balance, December 31
|
|
$
|
6,392
|
|
|
$
|
1,225
|
|
|
$
|
816
|
|
(5) 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, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
14,902
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,902
|
|
|
—
|
|
|
—
|
|
|
14,902
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
—
|
|
|
5,993
|
|
|
—
|
|
|
5,993
|
|
Corporate bonds
|
|
—
|
|
|
2,067
|
|
|
—
|
|
|
2,067
|
|
U.S. government bonds
|
|
—
|
|
|
28,139
|
|
|
—
|
|
|
28,139
|
|
|
|
—
|
|
|
36,199
|
|
|
—
|
|
|
36,199
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
—
|
|
|
228
|
|
|
—
|
|
|
228
|
|
Total derivatives at fair value - assets
|
|
—
|
|
|
228
|
|
|
—
|
|
|
228
|
|
Total assets at fair value
|
|
$
|
14,902
|
|
|
$
|
36,427
|
|
|
$
|
—
|
|
|
$
|
51,329
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
15
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
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 years ended December 31, 2020 and 2019. Additionally, we did not have any changes to our valuation techniques during the years ended December 31, 2020 and 2019.
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 interest rate swap contract and 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.
ASC 350 - Intangibles - Goodwill and Other, requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, growth rates and terminal value. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also use market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses.
During the year ended December 31, 2020, we did record an impairment of our equity investment assets required to be measured at fair value on a nonrecurring basis in the amount of $2.5 million. We recognized an impairment of $2.5 million as we made an assessment of the investment after observing impairment indicators upon receipt of the most recent financial statements and third party valuation reports and recorded a non-cash impairment charge of $2.5 million. The fair value was determined by reviewing the financial information and financial performance indicating a significant adverse change in the general market condition the investee operates.
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.
(6) DERIVATIVES
From time to time, we enter into interest rate swaps to fix a portion of our interest expense, and foreign exchange forward contracts to offset the earnings impacts of exchange rate fluctuations on certain monetary assets and liabilities. We do not enter into derivative instruments for any purpose other than to manage interest rate or foreign currency exposure. That is, we do not engage in interest rate or currency exchange rate speculation using derivative instruments.
We may hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. As of December 31, 2020, total outstanding contract notional amounts were $32.1 million. At December 31, 2020, these outstanding balance sheet hedging derivatives had maturities of 77 days or less.
The fair value of our derivative instruments was included in our consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
As of December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaids and other current assets
|
|
$
|
228
|
|
|
$
|
295
|
|
|
|
Accrued liabilities
|
|
15
|
|
|
9
|
|
|
|
|
|
$
|
213
|
|
|
$
|
286
|
|
The effect of derivative instruments on our consolidated statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
(Gain) loss recognized in other comprehensive income before reclassifications
|
|
---
|
|
$
|
—
|
|
|
$
|
(128)
|
|
|
$
|
165
|
|
Gain reclassified from accumulated other comprehensive income to earnings for the effective portion
|
|
Interest expense
|
|
—
|
|
|
125
|
|
|
219
|
|
Income tax expense
|
|
Income tax expense (benefit)
|
|
—
|
|
|
(30)
|
|
|
(61)
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
(Loss) gain recognized in earnings
|
|
Other, net
|
|
$
|
(2,419)
|
|
|
$
|
458
|
|
|
$
|
(743)
|
|
Income tax benefit (expense)
|
|
Income tax expense (benefit)
|
|
597
|
|
|
(43)
|
|
|
185
|
|
For additional information related to our derivatives, see Notes 5 and 17.
(7) TRADE RECEIVABLES
Trade receivables, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Trade receivables
|
$
|
91,561
|
|
|
$
|
54,645
|
|
Allowance for doubtful accounts
|
(337)
|
|
|
(45)
|
|
Trade receivables, net of allowance
|
$
|
91,224
|
|
|
$
|
54,600
|
|
For additional information related to assets and liabilities held-for-sale, see Note 2.
Changes in our allowance for doubtful trade receivables were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
45
|
|
|
$
|
99
|
|
|
$
|
119
|
|
Charges to bad debt expense
|
332
|
|
|
19
|
|
|
27
|
|
Write-offs, net
|
(40)
|
|
|
(73)
|
|
|
(47)
|
|
Balance, December 31
|
$
|
337
|
|
|
$
|
45
|
|
|
$
|
99
|
|
(8) INVENTORIES
Our inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Finished goods
|
$
|
48,371
|
|
|
$
|
49,853
|
|
Parts and components
|
2,769
|
|
|
4,915
|
|
Total inventories
|
$
|
51,140
|
|
|
$
|
54,768
|
|
For additional information related to assets and liabilities held-for-sale, see Note 2.
(9) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Automobiles
|
5
|
|
$
|
23
|
|
|
$
|
23
|
|
Leasehold improvements
|
4
|
to
|
20
|
|
3,059
|
|
|
3,830
|
|
Computer software and equipment
|
2
|
to
|
7
|
|
34,324
|
|
|
26,816
|
|
Machinery and equipment
|
3
|
to
|
5
|
|
15,527
|
|
|
18,551
|
|
Furniture and fixtures
|
5
|
to
|
20
|
|
2,587
|
|
|
2,808
|
|
Work in progress (1)
|
N/A
|
|
2,155
|
|
|
2,747
|
|
Total cost
|
|
|
|
|
57,675
|
|
|
54,775
|
|
Accumulated depreciation
|
|
|
|
|
(33,749)
|
|
|
(32,020)
|
|
Total property, plant and equipment, net
|
|
|
|
|
$
|
23,926
|
|
|
$
|
22,755
|
|
(1) Work in progress includes information technology assets and production tooling.
For additional information related to assets and liabilities held-for-sale, see Note 2.
Depreciation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Depreciation expense
|
$
|
7,779
|
|
|
$
|
7,314
|
|
|
$
|
5,778
|
|
(10) LEASES
We have several noncancelable operating leases, primarily for office space, that expire at various dates over the next five 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.
The components of lease cost were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating lease expense
|
$
|
4,404
|
|
|
$
|
4,518
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information related to leases was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2020
|
|
2019
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
|
|
Operating cash flow from operating leases
|
|
$
|
3,906
|
|
|
$
|
4,578
|
|
Additional operating lease information:
|
|
|
|
|
ROU assets obtained in exchange for operating lease obligations
|
|
$
|
—
|
|
|
$
|
24,212
|
|
Reductions to ROU assets resulting from reductions to operating lease obligations
|
|
$
|
3,239
|
|
|
$
|
3,428
|
|
Increases to ROU assets resulting from remeasurement of lease obligations
|
|
$
|
3,929
|
|
|
$
|
—
|
|
Weighted average remaining operating lease term
|
|
7.1 years
|
|
4.0 years
|
Weighted average discount rate on operating leases
|
|
4.94
|
%
|
|
4.49
|
%
|
Amounts disclosed for ROU assets obtained in exchange for lease obligations include amounts added to the carrying amount of ROU assets resulting from lease modifications and reassessments including transition liabilities upon adoption of ASC 842 on January 1, 2019. We determined the discount rate for leases by using a portfolio approach to determine an incremental borrowing rate to calculate the ROU assets and lease liabilities.
Maturities of operating lease liabilities under noncancelable leases were as follows (in thousands):
|
|
|
|
|
|
|
As of
|
|
December 31, 2020
|
Year ending:
|
|
|
|
2021
|
$
|
4,347
|
|
2022
|
4,165
|
|
2023
|
3,407
|
|
2024
|
3,509
|
|
Thereafter
|
11,073
|
|
Total undiscounted lease payments
|
26,501
|
|
Less imputed interest
|
(4,434)
|
|
Total lease liabilities
|
$
|
22,067
|
|
(11) OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Indefinite-lived trademarks(1),(2)
|
N/A
|
|
$
|
9,052
|
|
|
$
|
14,752
|
|
Definite-lived trademarks(2)
|
5
|
to
|
15
|
|
—
|
|
|
2,850
|
|
Patents
|
7
|
to
|
24
|
|
1,443
|
|
|
14,243
|
|
Customer relationships(2)
|
10
|
to
|
15
|
|
—
|
|
|
24,700
|
|
|
|
|
|
|
10,495
|
|
|
56,545
|
|
Accumulated amortization - definite-lived intangible assets
|
|
|
|
|
(1,115)
|
|
|
(13,302)
|
|
|
|
|
|
|
$
|
9,380
|
|
|
$
|
43,243
|
|
(1) During the second quarter of 2019, we identified impairment indicators with our indefinite-lived trademarks resulting in a non-cash intangible impairment charge of $8.5 million.
(2) During the fourth quarter of 2020, we sold Octane Fitness and the related other intangible asset were reduced by $32.0 million.
For additional information related to assets and liabilities held-for-sale, see Note 2.
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Amortization expense
|
$
|
1,669
|
|
|
$
|
3,497
|
|
|
$
|
3,164
|
|
Future amortization of definite-lived intangible assets is as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
61
|
|
2022
|
61
|
|
2023
|
61
|
|
2024
|
61
|
|
2025
|
61
|
|
Thereafter
|
23
|
|
|
$
|
328
|
|
(12) EQUITY INVESTMENTS
In 2019, we made strategic equity securities investments to increase our digital capabilities. The accounting guidance related to the classification and measurement of certain equity investments requires us to account for these investments at fair value or to elect to account for these investments under the "practicability exception," which permits measurement of these investments at cost, minus impairments, plus or minus observable changes in price from orderly transactions for the identical or a similar investment of the same issuer for each reporting period. We elected this practicability exception and for the year ended December 31, 2020, we recognized an impairment of $2.5 million as we made a qualitative assessment of the investment after observing impairment indicators upon receipt of the most recent financial statements and third party valuation reports. The fair value was determined by reviewing the financial information and financial performance indicating a significant adverse change in the general market condition the investee operates. No impairment was recorded during the year ended December 31, 2019 and we have not recognized any upward adjustments on either an annual or cumulative basis due to observable price changes.
The carrying value of our equity securities was included in the following line item in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement Alternative - No Readily Determinable Fair Value
|
|
|
|
As of December 31,
|
|
|
|
2020
|
|
2019
|
Other assets
|
|
|
$
|
1,000
|
|
|
$
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Payroll and related liabilities
|
$
|
9,702
|
|
|
$
|
2,929
|
|
Reserves
|
2,784
|
|
|
1,016
|
|
Deferred revenue
|
6,401
|
|
|
1,225
|
|
Other
|
3,954
|
|
|
2,463
|
|
Total accrued liabilities
|
$
|
22,841
|
|
|
$
|
7,633
|
|
For additional information related to assets and liabilities held-for-sale, see Note 2.
(14) PRODUCT WARRANTIES
Changes in our product warranty obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
5,717
|
|
|
$
|
5,575
|
|
|
$
|
6,117
|
|
Accruals
|
4,703
|
|
|
5,103
|
|
|
3,884
|
|
|
|
|
|
|
|
Payments
|
(5,222)
|
|
|
(4,961)
|
|
|
(4,426)
|
|
|
|
|
|
|
|
Balance, December 31
|
$
|
5,198
|
|
|
$
|
5,717
|
|
|
$
|
5,575
|
|
For additional information related to assets and liabilities held-for-sale, see Note 2.
(15) BORROWINGS
Chase Bank Credit Agreement
As of December 31, 2019, we had an outstanding credit agreement with JPMorgan Chase Bank N.A. (“Chase Bank”) which consisted of an $80.0 million term loan and a $40.0 million revolving line of credit. The term loan was used to finance the acquisition of Octane Fitness and was scheduled to mature on December 31, 2020. The revolving line of credit was scheduled to mature December 31, 2021. Both the term loan and the revolving line of credit were secured by substantially all of our assets. The Chase Bank debt facilities were terminated in January 2020 upon entering into a new credit agreement described below.
Wells Fargo Bank Credit Agreement
On January 31, 2020, we entered into a Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and lenders from time to time party thereto (collectively with Wells Fargo the “Lenders”) (“Credit Agreement”), pursuant to which the Lenders have agreed, among other things, to make available to us an asset-based revolving loan facility in the aggregate principal amount of up to $55.0 million, subject to a borrowing base (the “ABL Revolving Facility”), and a term loan facility in the aggregate principal amount of $15.0 million (the “Term Loan Facility” and together with the ABL Revolving Facility, the “Wells Fargo Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The Wells Fargo Financing expires and all outstanding amounts become due on January 31, 2025 unless the maturity is accelerated subject to the terms set forth in the Credit Agreement. 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.
We used the proceeds from the Wells Fargo Financing to extinguish our existing $40.0 million revolver with Chase Bank, pay transaction expenses, and for general corporate purposes. Our previously existing credit facilities and agreements with Chase Bank and all guarantees and liens existing in connection with those facilities and agreements were terminated upon the closing of this Wells Fargo financing. In connection with the termination of the Chase Bank facility, we recorded a loss on debt extinguishment of $0.2 million as interest expense in our consolidated statements of operations.
Interest on the ABL Revolving Facility will accrue at LIBOR plus a margin of 1.75% to 2.25% (based on average quarterly availability) and interest on the Term Loan Facility will accrue at LIBOR plus 5.00%. As of December 31, 2020, our interest rate was 1.90% for the ABL Revolving Facility and 5.15% for the Term Loan Facility.
As of December 31, 2020, outstanding borrowings totaled $13.8 million, with $13.6 million and $0.2 million under our Term Loan Facility and ABL Revolving Facility, respectively. As of December 31, 2020, we were in compliance with the financial covenants of the Wells Fargo Financing and $54.8 million was available for borrowing under the ABL Revolving Facility. Any outstanding balance is due and payable on January 31, 2025.
The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC 470, Debt. Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement are classified based on the provisions of ASC 470 because the lock-box remittances do not automatically reduce the debt outstanding. As of December 31, 2020, the Company was in compliance with all covenants contained in our Term Loan Facility and ABL Revolving Facility and assessed the probability that the creditor would accelerate the due date of the debt by exercising the subjective acceleration clauses of our Term Loan Facility and ABL Revolving Facility before its scheduled maturity as remote. Accordingly, this obligation has been classified as a long-term liability in the balance sheet.
The Credit Agreement contains customary affirmative and negative covenants for financings of this type, including, among other terms and conditions, delivery of financial statements, reports and maintenance of existence, revolving availability subject to a calculated borrowing base, as well as limitations and conditions on our ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of our property; make investments; or pay dividends or make distributions, in each case subject to certain exceptions. The financial covenants set forth in the Credit Agreement include a minimum liquidity covenant of $7.5 million. Beginning February 1, 2022, the minimum liquidity covenant will decrease to $5.0 million and only a minimum EBITDA covenant will apply. In addition, the Credit Agreement includes customary events of default, including but not limited to, the nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods).
(16) INCOME TAXES
Income Tax Expense
Income (loss) from continuing operations before income taxes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
U.S.
|
$
|
68,555
|
|
|
$
|
(102,004)
|
|
|
$
|
19,109
|
|
Non-U.S.
|
4,180
|
|
|
172
|
|
|
1,892
|
|
Income (loss) from continuing operations before income taxes
|
$
|
72,735
|
|
|
$
|
(101,832)
|
|
|
$
|
21,001
|
|
Income tax expense (benefit) from continuing operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
9,465
|
|
|
$
|
164
|
|
|
$
|
1,750
|
|
U.S. state
|
3,834
|
|
|
419
|
|
|
477
|
|
Non-U.S.
|
1,065
|
|
|
453
|
|
|
435
|
|
Total current
|
14,364
|
|
|
1,036
|
|
|
2,662
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(517)
|
|
|
(9,431)
|
|
|
2,235
|
|
U.S. state
|
(1,629)
|
|
|
(540)
|
|
|
1,059
|
|
Non-U.S.
|
(20)
|
|
|
(602)
|
|
|
(65)
|
|
Total deferred
|
(2,166)
|
|
|
(10,573)
|
|
|
3,229
|
|
Income tax expense (benefit)
|
$
|
12,198
|
|
|
$
|
(9,537)
|
|
|
$
|
5,891
|
|
Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
U.S. statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State tax, net of U.S. federal tax benefit
|
3.8
|
|
|
3.8
|
|
|
5.7
|
|
Non-U.S. income taxes
|
0.4
|
|
|
—
|
|
|
0.1
|
|
Nondeductible operating expenses
|
0.2
|
|
|
(0.4)
|
|
|
3.1
|
|
Research and development credit
|
(1.0)
|
|
|
0.5
|
|
|
(3.1)
|
|
Change in deferred tax measurement rate
|
(5.5)
|
|
|
(0.1)
|
|
|
0.1
|
|
Change in uncertain tax positions
|
0.2
|
|
|
0.1
|
|
|
0.8
|
|
Excess tax benefits from stock plans
|
(1.5)
|
|
|
(0.2)
|
|
|
(0.7)
|
|
Change in valuation allowance
|
34.3
|
|
|
(1.5)
|
|
|
1.8
|
|
Impairment of intangibles
|
—
|
|
|
(13.6)
|
|
|
—
|
|
Capital losses
|
(34.8)
|
|
|
—
|
|
|
—
|
|
Other
|
(0.3)
|
|
|
(0.2)
|
|
|
(0.7)
|
|
Effective income tax rate
|
16.8
|
%
|
|
9.4
|
%
|
|
28.1
|
%
|
Deferred Income Taxes
Individually significant components of deferred income tax assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Deferred income tax assets:
|
|
|
|
Accrued liabilities
|
$
|
4,113
|
|
|
$
|
2,152
|
|
Allowance for doubtful accounts
|
83
|
|
|
10
|
|
Inventory valuation
|
260
|
|
|
509
|
|
Capitalized indirect inventory costs
|
649
|
|
|
299
|
|
Stock-based compensation expense
|
978
|
|
|
548
|
|
Deferred rent
|
5,408
|
|
|
5,548
|
|
|
|
|
|
Net operating loss carryforward
|
1,427
|
|
|
7,580
|
|
Basis difference on long-lived assets
|
1,216
|
|
|
1,228
|
|
Credit carryforward
|
276
|
|
|
1,221
|
|
Capital losses
|
26,126
|
|
|
—
|
|
Other
|
105
|
|
|
426
|
|
Gross deferred income tax assets
|
40,641
|
|
|
19,521
|
|
Valuation allowance
|
(26,985)
|
|
|
(2,743)
|
|
Deferred income tax assets, net of valuation allowance
|
13,656
|
|
|
16,778
|
|
Deferred income tax liabilities:
|
|
|
|
Prepaid advertising
|
(134)
|
|
|
(320)
|
|
Other prepaids
|
(923)
|
|
|
(858)
|
|
Basis difference of long-lived assets
|
(5,275)
|
|
|
(11,628)
|
|
|
|
|
|
Deferred rent
|
(4,867)
|
|
|
(5,070)
|
|
Other
|
(31)
|
|
|
(55)
|
|
Deferred income tax liabilities
|
(11,230)
|
|
|
(17,931)
|
|
Net deferred income tax assets (liabilities)
|
$
|
2,426
|
|
|
$
|
(1,153)
|
|
|
|
|
|
Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
|
|
|
Deferred income tax assets, non-current
|
$
|
2,426
|
|
|
$
|
630
|
|
Deferred income tax liabilities, non-current
|
—
|
|
|
(1,783)
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
$
|
2,426
|
|
|
$
|
(1,153)
|
|
The income tax expenses from continuing operations for the period ended December 31, 2020 were primarily driven by the profit generated in the U.S. The lower effective tax rate from continuing operations for the same period was primarily due to the 14% rate benefit of net operating loss carry-backs as a result of the enactment of the CARES Act as described as below.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to coronavirus disease 2019 (“COVID-19”). The CARES Act, among other things, included several significant provisions that impacted corporate taxpayers’ accounting for income taxes. Prior to the enactment of the CARES Act, the 2017 Tax Cuts and Jobs Act generally eliminated the ability to carryback net operating losses (“NOLs”), and permitted the NOLs arising in tax years beginning after December 31, 2017 to be carried forward indefinitely, limited to 80% of the taxpayer’s income. The CARES Act amended the NOL rules, suspending the 80% limitation on the utilization of NOLs generated after December 31, 2017 and before January 1, 2021. Additionally, the CARES Act allows corporate NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five taxable years preceding the taxable year of the loss. Pursuant to the enactment of CARES Act, we performed various analyses and evaluated the impact to our financial statements. Based on our assessment, we determined that the modifications to the NOL carryback provision of the CARES Act resulted in a tax benefit and cash inflow for the company. We utilized the taxable losses incurred in 2019 by carrying back against the taxable income generated in prior years which were measured at 35%. As a result, we recorded a $3.9 million income tax benefit associated with the remeasurement to the NOL carryback at a 14% tax rate differential and a corresponding income tax receivable from the 2019 NOL carryback was recorded in 2020.
Furthermore, during 2020, we entered in to a stock purchase agreement with True Fitness Technology, Inc. ("True Fitness") where True Fitness acquired 100% of the issued and outstanding stock of our wholly-owned subsidiary OF Holdings, Inc. As a result, we expect approximately $25.5 million capital loss deferred tax asset in connection with this sale. In addition to the stock sale, we recorded a $2.5 million impairment on an equity investment in the fourth quarter of 2020, which resulted in an additional $0.6 million capital loss deferred tax asset. However, as we currently do not have or expect to generate capital gain to utilize these capital loss deferred tax assets in the near future, these deferred tax assets were fully reduced by a valuation allowance in 2020.
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified. In our assessment during the fourth quarter of 2020, we heavily weighted the positive evidence of 1) large positive earnings realized in recent quarters combined with the upward financial trends of current period; and 2) future realization of the existing U.S. deferred tax assets. Given our recent improved financial performance along with the sustained cumulative accounting profit in 2020, we projected a positive forecasted taxable income in the U.S. Accordingly, we determined that a portion of our U.S. domestic valuation allowance was no longer required and released $1.3 million of valuation allowance which was primarily against the U.S. state net operating loss carryforward deferred tax assets as we expect to utilize the portion of the remaining U.S state net operating loss carry forwards before its expirations. The amount is included as a component of income tax expense from continuing operations in 2020.
As of December 31, 2020, we had a valuation allowance against net deferred income tax assets of $27.0 million. Of the valuation allowance, $26.1 million relates to the aforementioned domestic capital losses and $0.7 million relates
to state tax credit carryforwards and state net operating loss carryforwards as we currently do not anticipate generating income of appropriate character to utilize those deferred tax assets. The remainder of $0.2 million relates to certain foreign intangible assets which are not more likely than not to be realized due the indefinite nature of the deferred tax assets. Should it be determined in the future that it is more likely than not that our domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the period in which such an assessment is made.
Income Tax Carryforwards
As of December 31, 2020, we had the following income tax carryforwards (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Expires in
|
Net operating loss carryforwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state
|
|
$
|
19.0
|
|
|
2021 - 2039
|
|
|
|
|
|
Capital loss carryforwards
|
|
|
|
|
U.S federal and state
|
|
$
|
103.9
|
|
|
2025
|
Income tax credit carryforwards
|
|
|
|
|
|
|
|
|
|
U.S. state
|
|
$
|
0.4
|
|
|
2021 - 2022
|
The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change.
Unrecognized Tax Benefits
Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
2,338
|
|
|
$
|
2,330
|
|
|
$
|
2,194
|
|
Additions for tax positions taken in prior years
|
4
|
|
|
44
|
|
|
41
|
|
Reductions for tax positions taken in prior years
|
—
|
|
|
(81)
|
|
|
(4)
|
|
Additions for tax positions related to the current year
|
109
|
|
|
87
|
|
|
116
|
|
Lapses of statutes of limitations
|
(20)
|
|
|
(42)
|
|
|
(12)
|
|
Other
|
(108)
|
|
|
—
|
|
|
(5)
|
|
Balance, December 31
|
$
|
2,323
|
|
|
$
|
2,338
|
|
|
$
|
2,330
|
|
Of the $2.3 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2020, $2.3 million would affect our effective tax rate if recognized.
We recorded tax-related interest and penalty expense of $0.4 million for both 2020 and 2019 and $0.3 million for 2018. We had a cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2020 and 2019 of $2.0 million and $1.7 million, respectively.
Our U.S. federal income tax returns for 2008 through 2020 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2008 through 2020 are open to review, depending on the respective statute of limitation in each state. In addition, we file income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.
As of December 31, 2020, we believe it is reasonably likely that, within the next twelve months, $1.0 million of the previously unrecognized tax benefits related to certain non-U.S. filing positions may be recognized due to the expirations of the statutes of limitations and an anticipated deregistration of a certain foreign entity.
(17) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss), net of applicable taxes, reported on our consolidated balance sheets consists of unrealized holding gains and losses on available-for-sale securities, effective portions of gains and losses of derivative securities designated as cash flow hedges, and foreign currency translation adjustments.
The following table sets forth the changes in accumulated other comprehensive (loss) income, net of tax (in thousands) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (Loss) Gain on Available-for-Sale Securities
|
|
Gain (Loss) on Derivative Securities
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
(6)
|
|
|
$
|
223
|
|
|
$
|
(1,126)
|
|
|
$
|
(909)
|
|
Current period other comprehensive income (loss) before reclassifications
|
|
18
|
|
|
(128)
|
|
|
189
|
|
|
79
|
|
Reclassification of amounts to earnings
|
|
(12)
|
|
|
(95)
|
|
|
—
|
|
|
(107)
|
|
Net other comprehensive income (loss) during period
|
|
6
|
|
|
(223)
|
|
|
189
|
|
|
(28)
|
|
Balance, December 31, 2019
|
|
—
|
|
|
—
|
|
|
(937)
|
|
|
(937)
|
|
Current period other comprehensive (loss) income before reclassifications
|
|
(4)
|
|
|
—
|
|
|
955
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss) during period
|
|
(4)
|
|
|
—
|
|
|
955
|
|
|
951
|
|
Balance, December 31, 2020
|
|
$
|
(4)
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
14
|
|
(18) STOCK-BASED COMPENSATION
2015 Long-Term Incentive Plan
On April 28, 2015, Nautilus shareholders approved our 2015 Long-Term Incentive Plan (the “2015 Plan”), which replaced our 2005 Long-Term Incentive Plan that expired in 2015. The 2015 Plan is administered by the Compensation Committee of the Board of Directors and authorizes us to grant various types of stock-based awards including: stock options, stock appreciation rights, RSAs, RSUs, and PSUs. Stock options granted under the 2015 Plan shall not have an exercise price less than the fair market value of our common stock on the date of the grant. The exercise price of a stock option or stock appreciation right may not be reduced without shareholder approval. Stock options generally vest over periods of three or four years of continuous service, commencing on the date of grant. Stock options granted under the 2015 Plan have a seven-year contractual term.
Upon adoption, there were approximately 4.8 million shares available for issuance under the 2015 Plan. The number of shares available for issuance upon adoption of the 2015 Plan included new shares approved, plus any shares of common stock which were previously reserved for issuance under our preceding plan that were not subject to grant as of April 28, 2015, or as to which the stock-based compensation award is forfeited on or after April 28, 2015. The number of shares available for issuance is reduced by (i) two shares for each share delivered in settlement of any stock appreciation rights, RSA, RSU or PSU awards, and (ii) one share for each share delivered in settlement of a stock option award. In no event shall more than 1.0 million aggregate shares of common stock subject to stock options, stock appreciation rights, RSA, RSU or PSU awards be granted to any one participant in any one year under the 2015 Plan.
2015 Long-Term Incentive Plan, As Amended
On May 1, 2020, Nautilus shareholders approved the amendment and restatement of our 2015 Plan (the "Amended 2015 Plan"). Prior to the amendment, there were approximately 4.8 million shares available for issuance under the 2015 Plan, 3.5 million shares originally reserved under the 2005 Long Term Incentive Plan and 1.3 million shares of common stock authorized under the 2015 Plan. The Amended 2015 Plan added an additional 2.0 million shares to be reserved for issuance. Upon adoption, there were approximately 6.8 million shares available for issuance under the Amended 2015 Plan.
The maximum aggregate number of shares of common stock subject to stock options, stock appreciation rights, restricted stock or stock unit awards which may be granted to any one participant in any one year under the Amended 2015 Plan is 1.0 million.
The aggregate number of shares available for issuance under the Amended 2015 Plan will be reduced by one and half (1.5) shares for each share delivered in settlement of any stock appreciation rights, restricted stock, restricted
stock unit or performance unit award, and one (1) share for each share delivered in settlement of a stock option award.
At December 31, 2020, we had 1.8 million shares available for future grant under our Amended 2015 Plan, and a total of 4.6 million shares of our common stock are reserved for future issuance pursuant to awards currently outstanding under the Amended 2015 Plan and our previous plan combined.
Stock Option Activity
Stock option activity was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted-
Average
Exercise
Price
|
Outstanding at December 31, 2019
|
740
|
|
|
$
|
2.30
|
|
Granted
|
15
|
|
|
1.35
|
|
Forfeited, canceled or expired
|
(6)
|
|
|
6.62
|
|
Exercised
|
(8)
|
|
|
6.92
|
|
Outstanding at December 31, 2020
|
741
|
|
|
$
|
2.20
|
|
Certain information regarding options outstanding at December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Options Vested and Expected to Vest
|
Number (in thousands)
|
741
|
|
|
272
|
|
|
741
|
|
Weighted-average exercise price
|
$
|
2.20
|
|
|
$
|
2.92
|
|
|
$
|
2.20
|
|
Aggregate intrinsic value (in thousands)
|
$
|
11,821
|
|
|
$
|
11,821
|
|
|
$
|
11,821
|
|
Weighted average remaining contractual term (in years)
|
6.3
|
|
5.6
|
|
6.3
|
RSA Activity
Compensation expense for RSAs is recognized over the estimated vesting period. Following is a summary of RSA activity (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs Outstanding
|
|
Weighted-
Average
Grant Date Fair Value per Share
|
Outstanding at December 31, 2019
|
85
|
|
|
$
|
8.90
|
|
Granted
|
87
|
|
|
6.64
|
|
|
|
|
|
Vested
|
(55)
|
|
|
5.32
|
|
Outstanding at December 31, 2020
|
117
|
|
|
$
|
8.90
|
|
RSU Activity
Compensation expense for RSUs is recognized over the estimated vesting period. Following is a summary of RSU activity (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs Outstanding
|
|
Weighted-
Average
Grant Date Fair Value per Share
|
Outstanding at December 31, 2019
|
1,310
|
|
|
$
|
3.52
|
|
Granted
|
1,005
|
|
|
7.84
|
|
Forfeited, canceled or expired
|
(52)
|
|
|
5.56
|
|
Vested
|
(541)
|
|
|
2.98
|
|
Outstanding at December 31, 2020
|
1,722
|
|
|
$
|
4.91
|
|
PSU Activity
Compensation expense for PSUs is recognized over the estimated requisite service period based on the number of PSUs ultimately expected to vest.
In February 2016, we granted PSU awards to certain of our executive officers and management team covering a total of 54,818 shares of our common stock. The PSUs vest based on achievement of goals established for growth in operating income as a percentage of net revenue and return on invested capital over the three-year performance period ended December 31, 2018. The number of shares that ultimately vested following conclusion of the performance period was determined based on the level at which the financial goals were achieved. The number of shares vesting could range from 60% of the PSU awards if minimum thresholds were achieved to a maximum of 150%. These awards are expected to vest at 0% achievement. As of December 31, 2019, these awards had been forfeited or were replaced by comparable awards and were no longer outstanding.
In February 2017, we granted PSU awards to certain of our executive officers and management team covering a total of 72,017 shares of our common stock. The PSUs vest based on achievement of goals established for growth in operating income as a percentage of net revenue and return on invested capital over the three-year performance period ended December 31, 2019. The number of shares that ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150%. These awards are currently expected to vest at 0% achievement. As of December 31, 2019, these awards had been forfeited or were replaced by comparable awards and were no longer outstanding.
In February 2018, we granted PSU awards to certain of our executive officers and management team covering a total of 119,351 shares of our common stock. The PSUs vest based on achievement of goals established for growth in operating income as a percentage of net revenue and return on invested capital over the three-year performance period ending December 31, 2020. The number of shares that ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150%. These awards are expected to vest at 0% achievement. As of December 31, 2020, approximately 60,000 PSU shares remained, net of actual forfeitures to date.
In May 2020, we granted PSU awards to certain of our executive officers and management team covering a total of 262,999 shares of our common stock. The PSUs vest based on achievement of the goal that measures our relative total shareholder return against pre-approved peers three-year performance period ending May 5, 2023. The number of shares that ultimately vest following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of shares vesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150%. These awards are expected to vest at 100% achievement. As of December 31, 2020, approximately 263,000 PSU shares remained, net of actual forfeitures to date.
Following is a summary of PSU activity (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs Outstanding
|
|
Weighted-
Average
Grant Date Fair Value per Share
|
Outstanding at December 31, 2019
|
115
|
|
|
$
|
14.57
|
|
Granted and additional goal shares awarded
|
263
|
|
|
6.64
|
|
Forfeited, canceled or expired
|
(55)
|
|
|
17.49
|
|
Vested
|
—
|
|
|
—
|
|
Outstanding at December 31, 2020
|
323
|
|
|
$
|
7.62
|
|
Stock-Based Compensation
Stock-based compensation expense, primarily included in general and administrative expense, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Stock options
|
$
|
182
|
|
|
$
|
61
|
|
|
$
|
6
|
|
RSAs
|
478
|
|
|
289
|
|
|
292
|
|
RSUs
|
2,533
|
|
|
609
|
|
|
1,527
|
|
PSUs
|
383
|
|
|
(410)
|
|
|
52
|
|
ESPP
|
158
|
|
|
70
|
|
|
104
|
|
|
$
|
3,734
|
|
|
$
|
619
|
|
|
$
|
1,981
|
|
Certain other information regarding our stock-based compensation was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Total intrinsic value of stock options exercised
|
$
|
66
|
|
|
$
|
84
|
|
|
$
|
1,451
|
|
Fair value of RSUs vested
|
6,662
|
|
|
354
|
|
|
655
|
|
Fair value of PSUs vested
|
—
|
|
|
—
|
|
|
614
|
|
As of December 31, 2020, unrecognized compensation expense for outstanding, but unvested stock-based awards was $7.2 million, which is expected to be recognized over a weighted average period of 0.3 to 1.8 years.
Employee Stock Purchase Plan
On April 28, 2015, our shareholders approved our Employee Stock Purchase Plan (the “ESPP”). The ESPP is administered by the Compensation Committee of the Board of Directors and provides eligible employees with an opportunity to purchase shares of our common stock at a discount using payroll deductions. The ESPP authorizes the issuance of up to 0.5 million shares of our common stock, subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations and other similar events.
Pursuant to the ESPP, and subject to certain limitations specified therein, eligible employees may elect to purchase shares of our common stock in one or more of a series of offerings conducted pursuant to the procedures set forth in the ESPP at a purchase price equal to 90% of the lower of the fair market value of the common stock on the first trading day of the offering period or on the last day of the offering period. Offering periods commence on May 15 and November 15 of each year and are six-months in duration, with the exception of the first offering period in 2015, which was a four-month offering. Purchases under the ESPP may be made exclusively through payroll deductions.
Persons eligible to participate in the ESPP generally include employees who have been employed for at least 12 months prior to the applicable offering date and who, immediately upon purchasing shares under the ESPP, would own directly or indirectly, an aggregate of less than 5% of the total combined voting power or value of all outstanding shares of our common stock.
Compensation expense for the ESPP is recognized over the six-month offering period based on the total estimated participant contributions and number of shares expected to be purchased.
ESPP activity was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Available for Issuance
|
|
Weighted-
Average
Purchase Price
|
|
Weighted-Average Discount per Share
|
Balance at December 31, 2019
|
293
|
|
|
|
|
|
Employee shares purchased
|
(94)
|
|
|
$
|
2.71
|
|
|
$
|
8.15
|
|
Balance at December 31, 2020
|
199
|
|
|
|
|
|
Assumptions used in calculating the fair value of stock option grants and employee stock purchases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
ESPP
|
|
Options
|
|
ESPP
|
|
Options
|
|
ESPP
|
Options
|
Dividend yield
|
—%
|
|
—%
|
|
—%
|
|
—%
|
|
—%
|
—%
|
Risk-free interest rate
|
0.9%
|
|
1.5%
|
|
2.3%
|
|
1.8%
|
|
1.7%
|
—%
|
Expected life (years)
|
N/A
|
|
N/A
|
|
N/A
|
|
5
|
|
N/A
|
N/A
|
Expected volatility
|
132%
|
|
64%
|
|
64%
|
|
55%
|
|
40%
|
—%
|
Dividend yield is based on our current expectation that no dividend payments will be made in future periods.
Risk-free interest rate is the U.S. Treasury zero-coupon rate, as of the grant date, for issues having a term approximately equal to the expected life of the stock option. For the ESPP, it is the U.S. Treasury six-month constant maturities rate, as of the offering date.
Expected life is the period of time over which stock options are expected to remain outstanding. We calculate expected term based on the average of the sum of the vesting periods and the full contractual term.
Expected volatility is the percentage amount by which the price of our common stock is expected to fluctuate annually during the estimated expected life for stock options. Expected price volatility is calculated using historical daily closing prices over a period matching the weighted-average expected life for stock options, as management believes such changes are the best indicator of future volatility. For the ESPP, expected volatility is the percentage amount by which the price of our common stock is expected to fluctuate semi-annually during the offering period.
(19) INCOME (LOSS) PER SHARE
Basic per share amounts were computed using the weighted average number of common shares outstanding. Diluted per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method. Basic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method
The weighted average numbers of shares outstanding used to compute income (loss) per share amounts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Shares used for basic per share calculations
|
30,007
|
|
|
29,684
|
|
|
30,099
|
|
Dilutive effect of outstanding options, RSUs, and PSUs
|
2,116
|
|
|
—
|
|
|
256
|
|
Shares used for diluted per share calculations
|
32,123
|
|
|
29,684
|
|
|
30,355
|
|
The weighted average numbers of shares outstanding listed in the table below were dilutive and are excluded from the computation of diluted per share when there is a loss from continuing operations, as such, the exercise or
conversion of any potential shares would increase the number of shares in the denominator and results in a lower income (loss).
These shares may be dilutive potential common shares in the future (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
2018
|
Stock options
|
—
|
|
|
96
|
|
|
—
|
|
RSUs
|
—
|
|
|
257
|
|
|
—
|
|
|
|
|
|
|
|
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income (loss) per share. In the case of RSUs, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
2018
|
Stock options
|
14
|
|
|
76
|
|
|
10
|
|
|
|
|
|
|
|
RSUs
|
11
|
|
|
228
|
|
|
1
|
|
(20) 401(k) SAVINGS PLAN
We sponsor a 401(k) savings plan that allows eligible employees to contribute a certain percentage of their salary. Employees are automatically enrolled within the first month of employment and have the ability to opt out. As a safe harbor plan sponsor, we are subject to non-discretionary matching contributions. Currently, we match 100% of the employee's first 1% of eligible pay contributed plus 50% of eligible pay contributed on the next 5%, for a maximum employer matching of 3.5%. Employees vest in the employer matching portions at 25% after the first year of employment, and 100% after two years of employment. Our matching contributions for the savings plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
401(k) matching contributions
|
$
|
1,086
|
|
|
$
|
976
|
|
|
$
|
1,105
|
|
(21) SEGMENT AND ENTERPRISE-WIDE INFORMATION
We have two operating segments - Direct and Retail. There have been no changes in our operating segments during the year ended December 31, 2020.
We evaluate performance using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is the measure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are those directly assigned to an operating segment's operations, primarily accounts receivable, inventories, goodwill and other intangible assets. Unallocated assets primarily include cash and cash equivalents, available-for-sale securities, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Net Sales:
|
|
|
|
|
|
Direct
|
$
|
240,926
|
|
|
$
|
119,651
|
|
|
$
|
184,925
|
|
Retail
|
308,036
|
|
|
186,584
|
|
|
208,092
|
|
Unallocated royalty
|
3,598
|
|
|
3,050
|
|
|
3,736
|
|
Consolidated net sales
|
$
|
552,560
|
|
|
$
|
309,285
|
|
|
$
|
396,753
|
|
Contribution:
|
|
|
|
|
|
Direct
|
$
|
59,976
|
|
|
$
|
(24,569)
|
|
|
$
|
6,865
|
|
Retail
|
62,782
|
|
|
16,043
|
|
|
31,516
|
|
Unallocated royalty
|
3,598
|
|
|
3,050
|
|
|
3,733
|
|
Consolidated contribution
|
$
|
126,356
|
|
|
$
|
(5,476)
|
|
|
$
|
42,114
|
|
|
|
|
|
|
|
Reconciliation of consolidated contribution to income (loss) from continuing operations:
|
|
|
|
|
|
Consolidated contribution
|
$
|
126,356
|
|
|
$
|
(5,476)
|
|
|
$
|
42,114
|
|
Amounts not directly related to segments:
|
|
|
|
|
|
Operating expenses
|
(48,547)
|
|
|
(95,068)
|
|
|
(21,345)
|
|
Other expense, net
|
(5,074)
|
|
|
(1,288)
|
|
|
232
|
|
Income tax expense (benefit)
|
12,198
|
|
|
(9,537)
|
|
|
5,891
|
|
Income (loss) from continuing operations
|
$
|
60,537
|
|
|
$
|
(92,295)
|
|
|
$
|
15,110
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
Direct
|
$
|
5,071
|
|
|
$
|
2,919
|
|
|
$
|
1,537
|
|
Retail
|
3,574
|
|
|
5,657
|
|
|
5,098
|
|
Unallocated corporate
|
803
|
|
|
2,235
|
|
|
2,307
|
|
Total depreciation and amortization expense
|
$
|
9,448
|
|
|
$
|
10,811
|
|
|
$
|
8,942
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Assets:
|
2020
|
|
2019
|
|
|
Direct
|
$
|
45,516
|
|
|
$
|
47,377
|
|
|
|
Retail
|
141,247
|
|
|
148,965
|
|
|
|
Unallocated corporate
|
131,354
|
|
|
24,137
|
|
|
|
Total assets
|
$
|
318,117
|
|
|
$
|
220,479
|
|
|
|
There are no material long-lived assets held outside of the U.S.
In 2020, 2019 and 2018, each of Amazon.com and Dick's Sporting Goods accounted for more than 10% of total net sales as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Amazon.com
|
|
17.1
|
%
|
|
15.2
|
%
|
|
11.5
|
%
|
Dick's Sporting Goods
|
|
10.2
|
%
|
|
11.7
|
%
|
|
13.8
|
%
|
(22) COMMITMENTS AND CONTINGENCIES
Operating leases
We lease property and equipment under non-cancellable operating leases which, in the aggregate, extend through 2029. Many of these leases contain renewal options and provide for rent escalations and payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
For additional information related to leases, see Note 10, Leases.
Guarantees, Commitments and 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, 2020, we had approximately $165.7 million compared to $28.4 million as of December 31, 2019 in non-cancelable market-based purchase obligations, primarily for inventory purchases expected to be received within 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 number of products that are shipped directly to Retail customer warehouses versus through Nautilus warehouses. As of December 31, 2020, we had no outstanding letters of credit with any of our vendors.
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, 2020.
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 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.
Litigation and jury verdicts are, to some degree, inherently unpredictable, and although we have determined that a loss is not probable in connection with any current legal proceeding, it is reasonably possible that a loss may be incurred in connection with proceedings to which we are a party. Assessment of whether incurrence of a loss is probable, or a reasonable possibility, in connection with a particular proceeding, and estimation of the loss, or a range of loss, involves complex judgments and numerous uncertainties. Management is unable to estimate a range of reasonably possible losses related to litigation in which the damages sought are indeterminate, or the legal and factual basis for the relevant claims have not been developed with specificity. As such, zero liability is recorded as of December 31, 2020.
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, 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.
As of the date of filing of this Annual Report on Form 10-K, we were not involved in any material legal proceedings.
(23) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes our unaudited quarterly financial data for 2020 and 2019 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Total
|
2020
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
93,722
|
|
|
$
|
114,188
|
|
|
$
|
155,391
|
|
|
$
|
189,259
|
|
|
$
|
552,560
|
|
Gross profit
|
35,597
|
|
|
47,396
|
|
|
67,938
|
|
|
77,871
|
|
|
228,802
|
|
Operating (loss) income(1)
|
(560)
|
|
|
(7,106)
|
|
|
43,995
|
|
|
41,480
|
|
|
77,809
|
|
Income (loss) from continuing operations
|
2,302
|
|
|
(4,986)
|
|
|
33,969
|
|
|
29,252
|
|
|
60,537
|
|
Loss from discontinued operations
|
(118)
|
|
|
(124)
|
|
|
(131)
|
|
|
(316)
|
|
|
(689)
|
|
Net income (loss)
|
2,184
|
|
|
(5,110)
|
|
|
33,838
|
|
|
28,936
|
|
|
59,848
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.07
|
|
|
$
|
(0.17)
|
|
|
$
|
1.13
|
|
|
$
|
0.96
|
|
|
$
|
1.99
|
|
Diluted(4)
|
0.07
|
|
|
(0.17)
|
|
|
1.04
|
|
|
0.89
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
84,400
|
|
|
$
|
59,004
|
|
|
$
|
61,708
|
|
|
$
|
104,173
|
|
|
$
|
309,285
|
|
Gross profit
|
35,842
|
|
|
17,517
|
|
|
19,067
|
|
|
38,157
|
|
|
110,583
|
|
Operating (loss) income(2)
|
(10,167)
|
|
|
(85,414)
|
|
|
(8,253)
|
|
|
3,290
|
|
|
(100,544)
|
|
(Loss) income from continuing operations(3)
|
(8,484)
|
|
|
(78,744)
|
|
|
(8,730)
|
|
|
3,663
|
|
|
(92,295)
|
|
Loss from discontinued operations
|
(91)
|
|
|
(124)
|
|
|
(114)
|
|
|
(176)
|
|
|
(505)
|
|
Net (loss) income
|
(8,575)
|
|
|
(78,868)
|
|
|
(8,844)
|
|
|
3,487
|
|
|
(92,800)
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.29)
|
|
|
$
|
(2.66)
|
|
|
$
|
(0.30)
|
|
|
$
|
0.12
|
|
|
$
|
(3.13)
|
|
Diluted
|
(0.29)
|
|
|
(2.66)
|
|
|
(0.30)
|
|
|
0.12
|
|
|
(3.13)
|
|
(1) Operating (loss) income for the quarter ended June 30, 2020 included a $29.0 million non-cash loss on disposal group and for the quarter ended September 30, 2020 included an $8.3 million non-cash gain on disposal group.
(2) Operating (loss) income for the quarter ended June 30, 2019 included a $72.0 million non-cash goodwill and other intangible impairment charge.
(3) (Loss) income from continuing operations for the quarter ended September 30, 2019 includes an immaterial correction to reduce income tax expense and the valuation allowance by $1.8 million. The correction reflects the impact of 2017 tax reform associated with the application of indefinite-lived deferred taxes to properly calculate the valuation allowance.
(4) May not foot or cross foot due to rounding.