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MarketScreener Homepage  >  Equities  >  Nyse  >  Nautilus, Inc.    NLS

NAUTILUS, INC.

(NLS)
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NAUTILUS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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11/08/2019 | 04:36pm EDT
The following discussion and analysis is based upon our financial statements as
of the dates and for the periods presented in this section. You should read this
discussion and analysis in conjunction with the financial statements and notes
thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2018 (the "2018 Form 10-K"). All references to the third
quarter and first nine months of 2019 and 2018 mean the three and nine-month
periods ended September 30, 2019 and 2018, respectively. Unless the context
otherwise requires, "Nautilus," "we," "us" and "our" refer to Nautilus, Inc. and
its subsidiaries. Unless indicated otherwise, all information regarding our
operating results pertains to our continuing operations.

Forward-Looking Statements


This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will,"
"should," "could," and other terms of similar meaning typically identify
forward-looking statements. Forward-looking statements include any statements
related to our future business, financial performance or operating results;
anticipated fluctuations in net sales due to seasonality; plans and expectations
regarding gross and operating margins; plans and expectations regarding research
and development expenses and capital expenditures and anticipated results from
such expenditures and other investments in our capabilities and resources;
anticipated losses from discontinued operations; plans for new product
introductions, strategic partnerships and anticipated demand for our new and
existing products; and statements regarding our inventory and working capital
requirements and the sufficiency of our financial resources. These
forward-looking statements, and others we make from time-to-time, are subject to
a number of risks and uncertainties. Many factors could cause actual results to
differ materially from those projected in forward-looking statements, including
our ability to timely acquire inventory that meets our quality control standards
from sole source foreign manufacturers at acceptable costs, changes in consumer
fitness trends, changes in the media consumption habits of our target consumers
or the effectiveness, availability and price of media time consistent with our
cost and audience profile parameters, greater than anticipated costs or delays
associated with launch of new products, weaker than expected demand for new or
existing products, a decline in consumer spending due to unfavorable economic
conditions, softness in the retail marketplace or the availability from
retailers of heavily discounted competitive products, an adverse change in the
availability of credit for our customers who finance their purchases, our
ability to pass along vendor raw material price increases and other cost
pressures, including increased shipping costs and unfavorable foreign currency
exchange rates, our ability to hire and retain key management personnel, our
ability to effectively develop, market and sell future products, our ability to
protect our intellectual property, the introduction of competing products, and
our ability to get foreign-sourced product through customs in a timely manner.
Additional assumptions, risks and uncertainties are described in Part I, Item
1A, "Risk Factors," in our 2018 Form 10-K as supplemented or modified in our
quarterly reports on Form 10-Q. We do not undertake any duty to update
forward-looking statements after the date they are made or conform them to
actual results or to changes in circumstances or expectations.


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Overview


We are committed to providing innovative, quality solutions to help people
achieve a fit and healthy lifestyle. 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, Europe and Asia. Our products are sold under some of the
most-recognized brand names in the fitness industry: Nautilus®, Bowflex®, Octane
Fitness®, Schwinn® and Universal®.

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, the
Internet and catalogs. 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.

Our results for the third quarter were primarily impacted by lower sales,
however, we believe the appropriate improvements are being implemented into our
overall business to address this trend. The primary actions taken include
extensive, in-depth consumer insights research, which has identified an
effective new positioning for the Bowflex brand, which is now underway through a
new advertising campaign and updates to our website, television, social media,
and other digital platforms. Additionally, we expect to launch many targeted new
products across all our channels over the next few quarters. In parallel, we
plan to continue our digital transformation with the inclusion of updated
digital experience platforms on key new products, moving toward our goal of
having all our products equipped with subscription-based digital experience
offerings.

Net sales for the first nine months of 2019 were $205.1 million, reflecting a
27.1% decrease as compared to net sales of $281.4 million for the first nine
months of 2018. Net sales of our Direct segment decreased by $51.2 million, or
38.0%, in the first nine months of 2019, compared to the first nine months of
2018, primarily driven by a reduction in advertising spending and lower sales of
our Bowflex Max Trainer® product.

Net sales of our Retail segment decreased by $24.6 million, or 17.1%, in the
first nine months of 2019, compared to the first nine months of 2018, primarily
reflecting partial shipment delays due to recently imposed tariffs.

Royalty income for the first nine months of 2019 decreased by $0.5 million compared to the same period in the prior year, which included payment of royalties related to a new agreement.


Gross profit for the first nine months of 2019 was $72.4 million, or 35.3% of
net sales, a decrease of $58.6 million, or 44.7%, as compared to gross profit of
$131.0 million, or 46.6% of net sales, for the first nine months of 2018. The
decrease in gross profit dollars was primarily due to lower sales coupled with
lower gross margin percentages in both the Direct and Retail segments. Gross
margin percentage points decreased by 11.3% in the first nine months of 2019
compared to the same period of the prior year primarily due to unfavorable
product-mix and under absorption of operations fixed costs due to lower net
sales.

Operating expenses for the first nine months of 2019 were $176.3 million, an
increase of $63.3 million, or 56.0%, as compared to operating expenses of $113.0
million for the first nine months of 2018. The increase in operating expenses
was primarily related to a goodwill and intangible impairment charge of $72.0
million partially offset by lower media spending and stock compensation expense.

Operating loss for the first nine months of 2019 was $103.8 million, a decrease
of $121.9 million, or 675.0%, as compared to operating income of $18.1 million
for the first nine months of 2018. The decrease in operating income for the
first nine months of 2019 compared to the first nine months of 2018 was
primarily driven by a goodwill and intangible impairment charge and lower gross
margins associated with our sales during the period.

Loss from continuing operations was $97.8 million for the first nine months of
2019, or $3.30 per diluted share, compared to income from continuing operations
of $13.7 million, or $0.45 per diluted share, for the first nine months of 2018.
The effective tax rates for the first nine months of 2019 and 2018 were 6.6% and
25.4%, respectively. The 18.8% year-over-year percentage rate differential was
due primarily to the goodwill impairment charge in the second quarter of 2019,
for which no tax benefit was recognized, as well as the valuation allowance
recorded in the third quarter of 2019, which together reduced the effective tax
rate for the period.

Net loss for the first nine months of 2019 was $98.1 million, compared to net
income of $13.3 million for the first nine months of 2018. Net loss per diluted
share was $3.31 for the first nine months of 2019, compared to net income per
diluted share of $0.44 for the first nine months of 2018.


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Factors Affecting Our Performance


Our results of operations may vary significantly from period-to-period. Our
revenues typically fluctuate due to the seasonality of our industry, customer
buying patterns, product innovation, a digital transformation of health and
fitness products, the nature and level of competition for health and fitness
products, our ability to procure products to meet customer demand, the level of
spending on, and effectiveness of, our media and advertising programs and our
ability to attract new customers and maintain existing sales relationships. For
example, sales are typically strongest in the fourth quarter due to holiday
shopping and in the first quarter due to new year fitness goals. In addition,
our revenues are highly susceptible to economic factors, including, among other
things, the overall condition of the economy and the availability of consumer
credit in both the U.S. and Canada. Our profit margins may vary in response to
the aforementioned factors and our ability to manage product costs. Profit
margins may also be affected by fluctuations in the costs or availability of
materials used to manufacture our products, costs associated with acquisition or
license of products and technologies, product warranty costs, the cost of fuel,
foreign currency exchange rates, and changes in costs of other distribution or
manufacturing-related services. Our operating profits or losses may also be
affected by the efficiency and effectiveness of our organization, including
executive management transition. Historically, our operating expenses have been
influenced by media costs to produce and distribute advertisements of our
products on television, the Internet and other media, facility costs, operating
costs of our information and communications systems, product supply chain
management, customer support and new product development activities and
enhancements to existing products. In addition, our operating expenses have been
affected from time-to-time by asset impairment charges, restructuring charges
and other significant unusual or infrequent expenses.

As a result of the above and other factors, our period-to-period operating
results may not be indicative of future performance. You should not place undue
reliance on our operating results and should consider our prospects in light of
the risks, expenses and difficulties typically encountered by us and other
companies, both within and outside our industry. We may not be able to
successfully address these risks and difficulties and, consequently, we cannot
assure you of any future growth or profitability. For more information, see our
discussion of risk factors located at Part I, Item 1A of our 2018 Form 10-K.

Discontinued Operations


Results from discontinued operations relate to the disposal of our former
Commercial business, which was completed in April 2011. We reached substantial
completion of asset liquidation at December 31, 2012. Although there was no
revenue related to the Commercial business in either the 2019 or 2018 periods,
we continue to incur product liability and other legal expenses associated with
product previously sold into the Commercial channel.


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RESULTS OF OPERATIONS

Results of operations information was as follows (dollars in thousands):

                                          Three Months Ended September 30,             Change
                                              2019               2018              $            %
Net sales                                 $   61,708$       91,057$ (29,349 )     (32.2 )%
Cost of sales                                 42,641               52,551        (9,910 )     (18.9 )%
Gross profit                                  19,067               38,506       (19,439 )     (50.5 )%
Operating expenses:
Selling and marketing                         17,472               20,635        (3,163 )     (15.3 )%
General and administrative                     6,726                7,503          (777 )     (10.4 )%
Research and development                       3,122                4,208        (1,086 )     (25.8 )%
Total operating expenses                      27,320               32,346        (5,026 )     (15.5 )%
Operating (loss) income                       (8,253 )              6,160       (14,413 )    (234.0 )%
Other (expense) income:
Interest income                                    -                  269          (269 )
Interest expense                                (293 )               (244 )         (49 )
Other, net                                      (129 )                188          (317 )
Total other (expense) income, net               (422 )                213          (635 )
(Loss) income from continuing operations
before income taxes                           (8,675 )              6,373       (15,048 )
Income tax expense                             1,900                1,870   

30

(Loss) income from continuing operations     (10,575 )              4,503       (15,078 )
Loss from discontinued operations, net of
taxes                                           (114 )               (194 )          80
Net (loss) income                         $  (10,689 )$        4,309$ (14,998 )



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                                               Nine Months Ended September 30,                Change
                                                  2019                 2018               $             %
Net sales                                  $       205,112$       281,368$  (76,256 )    (27.1 )%
Cost of sales                                      132,686               150,343        (17,657 )    (11.7 )%
Gross profit                                        72,426               131,025        (58,599 )    (44.7 )%
Operating expenses:
Selling and marketing                               69,146                79,482        (10,336 )    (13.0 )%
General and administrative                          23,824                20,740          3,084       14.9  %
Research and development                            11,282                12,744         (1,462 )    (11.5 )%
Goodwill and intangible impairment charge           72,008                     -         72,008          -  %
Total operating expenses                           176,260               112,966         63,294       56.0  %
Operating (loss) income                           (103,834 )              18,059       (121,893 )   (675.0 )%
Other (expense) income:
Interest income                                        162                   835           (673 )
Interest expense                                      (721 )                (805 )           84
Other, net                                            (351 )                 206           (557 )
Total other (expense) income, net                     (910 )                 236         (1,146 )
(Loss) income from continuing operations
before income taxes                               (104,744 )              18,295       (123,039 )
Income tax (benefit) expense                        (6,941 )               4,645        (11,586 )
(Loss) income from continuing operations           (97,803 )              13,650       (111,453 )
Loss from discontinued operations, net of
taxes                                                 (329 )                (354 )           25
Net (loss) income                          $       (98,132 )$        13,296$ (111,428 )



Results of operations information by segment was as follows (dollars in
thousands):
                  Three Months Ended September 30,                 Change
                      2019                 2018               $              %
Net sales:
Direct         $        16,197$        28,955$ (12,758 )       (44.1 )%
Retail                  44,823                61,490       (16,667 )       (27.1 )%
Royalty                    688                   612            76          12.4  %
               $        61,708$        91,057$ (29,349 )       (32.2 )%
Cost of sales:
Direct         $         9,987       $        12,376$  (2,389 )       (19.3 )%
Retail                  32,654                40,175        (7,521 )       (18.7 )%
               $        42,641$        52,551$  (9,910 )       (18.9 )%
Gross profit:
Direct         $         6,210       $        16,579$ (10,369 )       (62.5 )%
Retail                  12,169                21,315        (9,146 )       (42.9 )%
Royalty                    688                   612            76          12.4  %
               $        19,067$        38,506$ (19,439 )       (50.5 )%
Gross margin:
Direct                    38.3 %                57.3 %      (1,900 ) basis points
Retail                    27.1 %                34.7 %        (760 ) basis points



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                   Nine Months Ended September 30,                 Change
                      2019                 2018               $              %
Net sales:
Direct         $        83,745$       134,980$ (51,235 )       (38.0 )%
Retail                 119,097               143,668       (24,571 )       (17.1 )%
Royalty                  2,270                 2,720          (450 )       (16.5 )%
               $       205,112$       281,368$ (76,256 )       (27.1 )%
Cost of sales:
Direct         $        42,112$        52,805$ (10,693 )       (20.2 )%
Retail                  90,574                97,535        (6,961 )        (7.1 )%
Royalty                      -                     3            (3 )      (100.0 )%
               $       132,686$       150,343$ (17,657 )       (11.7 )%
Gross profit:
Direct         $        41,633$        82,175$ (40,542 )       (49.3 )%
Retail                  28,523                46,133       (17,610 )       (38.2 )%
Royalty                  2,270                 2,717          (447 )       (16.5 )%
               $        72,426$       131,025$ (58,599 )       (44.7 )%
Gross margin:
Direct                    49.7 %                60.9 %      (1,120 ) basis points
Retail                    23.9 %                32.1 %        (820 ) basis points




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The following table compares the net sales of our major product lines within each business segment (dollars in thousands):

                            Three Months Ended September 30,                   Change
                                    2019                     2018           $           %
Direct net sales:
Cardio products(1)   $          12,431                     $ 24,353$ (11,922 )   (49.0 )%
Strength products(2)             3,766                        4,602         (836 )   (18.2 )%
                                16,197                       28,955      (12,758 )   (44.1 )%
Retail net sales:
Cardio products(1)              35,509                       48,294      (12,785 )   (26.5 )%
Strength products(2)             9,314                       13,196       (3,882 )   (29.4 )%
                                44,823                       61,490      (16,667 )   (27.1 )%

Royalty                            688                          612           76      12.4  %
                     $          61,708                     $ 91,057$ (29,349 )   (32.2 )%


                                        Nine Months Ended September 30,                Change
                                           2019                 2018               $             %
Direct net sales:
Cardio products(1)                   $       68,121$        118,026$  (49,905 )     (42.3 )%
Strength products(2)                         15,624                16,954   

(1,330 ) (7.8 )%

                                             83,745               134,980        (51,235 )     (38.0 )%
Retail net sales:
Cardio products(1)                           92,250               114,916        (22,666 )     (19.7 )%
Strength products(2)                         26,847                28,752         (1,905 )      (6.6 )%
                                            119,097               143,668        (24,571 )     (17.1 )%

Royalty                                       2,270                 2,720           (450 )     (16.5 )%
                                     $      205,112$        281,368$  (76,256 )     (27.1 )%

(1)  Cardio products include: Max Trainer®, TreadClimber®, HVT™, LateralX®, Zero Runner®, treadmills,
exercise bikes and ellipticals.
(2)  Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.



Direct


Direct net sales decreased by 44.1% for the three month period ended
September 30, 2019 compared to the same period of 2018, primarily reflecting a
decline in sales of the Bowflex Max Trainer® products. Year-over-year sales were
also lower due to reduced media spending of 37.0% in the three month period
ended September 30, 2019 compared to the same period of 2018.

For the nine months ended September 30, 2019, Direct net sales decreased by
38.0% compared to the same period of 2018, primarily due to a 42.3% decline in
cardio product sales, which was largely related to Bowflex Max Trainer® products
and a reduction in advertising spending. Improvements are being implemented that
we believe should be effective in addressing this trend. The primary actions
taken include extensive, in-depth consumer insights research, which has
identified an effective new positioning for the Bowflex brand, which is now
underway through a new advertising campaign and updates to our website,
television, social media and other digital platforms.

Combined consumer credit approvals by our primary and secondary U.S. third-party
financing providers for the third quarter of 2019 were 51.0%, compared to 54.5%
in the same period of 2018. The decrease in approvals reflects lower credit
quality applications.

For the three and nine month periods ended September 30, 2019, cost of sales of
our Direct business decreased by $2.4 million and $10.7 million, respectively,
as compared to the same periods of 2018, due to the decreases in net sales.


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For the three and nine month periods ended September 30, 2019, Direct gross margins decreased by 1,900 and 1,120 basis points, respectively, as compared to the same periods of 2018, primarily due to unfavorable overhead absorption related to decreased net sales and unfavorable product mix.

Retail


Retail net sales decreased by 27.1% and 17.1% for the three and nine month
periods ended September 30, 2019, respectively, compared to the same periods of
2018. The decreases in the three and nine month periods were primarily due to
partial shipment delays due to recently imposed tariffs until the beginning of
the fourth quarter of 2019 and a decline in Bowflex Max Trainer® product sales
in the segment. We expect sales in the last quarter of 2019 to include planned
new product introductions and in-store merchandising with key customers.

The decreases in cost of sales of our Retail business for the three and nine
month periods ended September 30, 2019 compared to the same periods of 2018 were
primarily related to the decreases in net sales.

For the three and nine month periods ended September 30, 2019, Retail gross
margins decreased by 760 and 820 basis points, respectively, compared to the
same periods of 2018, due to unfavorable product mix and unfavorable overhead
absorption related to decreased net sales.

Operating Expenses
Operating expenses for the first nine months of 2019 were $176.3 million, an
increase of $63.3 million, or 56.0%, as compared to operating expenses of $113.0
million for the first nine months of 2018. The increase in operating expenses
was primarily related to a goodwill and intangible impairment charge of $72.0
million, partially offset by lower media spending.

Selling and Marketing
Selling and marketing expenses include payroll, employee benefits, and other
headcount-related expenses associated with sales and marketing personnel, and
the costs of media advertising, promotions, trade shows, seminars, and other
programs.
Dollars in thousands   Three Months Ended September 30,           Change
                           2019                2018            $          %
Selling and marketing     $17,472$20,635$(3,163)   (15.3)%
As % of net sales          28.3%               22.7%


Dollars in thousands    Nine Months Ended September 30,           Change
                           2019                2018             $          %
Selling and marketing     $69,146$79,482$(10,336)   (13.0)%
As % of net sales          33.7%               28.2%



The decreases in selling and marketing expense in the three and nine month
periods ended September 30, 2019 compared to the same periods of 2018 were
primarily due to lower media spending of $3.4 million and $10.5 million,
respectively. The decreases in the three and nine month periods ended
September 30, 2019 were partially offset by increased advertising production
costs. We launched a major new multi-media advertising and communication
campaign behind the Bowflex brand and new products during the third quarter of
2019.

Media advertising expense of our Direct business is the largest component of
selling and marketing and was as follows:
Dollars in thousands  Three Months Ended September 30,           Change
                          2019                2018            $          %
Media advertising        $5,757$9,142$(3,385)   (37.0)%


Dollars in thousands   Nine Months Ended September 30,           Change
                          2019                2018             $          %
Media advertising        $32,012$42,510$(10,498)   (24.7)%


The decreases in media advertising for the three and nine months ended September 30, 2019 as compared to the same periods of 2018 reflected a reduction in spending resulting from unfavorable media return on investments.

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General and Administrative
General and administrative expenses include payroll, employee benefits,
stock-based compensation expense, and other headcount-related expenses
associated with finance, legal, facilities, certain human resources and other
administrative personnel, and other administrative fees.
Dollars in thousands        Three Months Ended September 30,          Change
                                2019                2018           $         %
General and administrative     $6,726$7,503$(777)   (10.4)%
As % of net sales               10.9%               8.2%


Dollars in thousands         Nine Months Ended September 30,         Change
                                2019                2018           $        %
General and administrative     $23,824$20,740$3,084   14.9%
As % of net sales               11.6%               7.4%


The decrease in general and administrative for the three month period ended September 30, 2019 compared to the same period of 2018 was primarily driven by lower litigation expense.


The increase in general and administrative for the nine months ended
September 30, 2019 as compared to the same period of 2018 was primarily related
to increases in litigation settlement expense and litigation expense of $2.0
million and $1.2 million, respectively.

Research and Development
Research and development expenses include payroll, employee benefits, other
headcount-related expenses and information technology associated with product
development.
Dollars in thousands      Three Months Ended September 30,           Change
                              2019                2018            $          %
Research and development     $3,122$4,208$(1,086)   (25.8)%
As % of net sales             5.1%                4.6%


Dollars in thousands       Nine Months Ended September 30,           Change
                              2019                2018            $          %
Research and development     $11,282$12,744$(1,462)   (11.5)%
As % of net sales             5.5%                4.5%



The decreases in research and development in the three and nine month periods
ended September 30, 2019 as compared to the same periods of 2018 were primarily
due to increases in capitalized internal labor and decreases in third-party
application development expense.

Goodwill and Intangible Impairment Charge
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 and indefinite-lived
intangible assets impairment charge of $72.0 million.

ASC 350 requires us to make significant assumptions and estimates about the
extent and timing of future cash flows, discount rates, growth rates and
terminal value. The 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.


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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 created a triggering event. The
long-lived assets were recoverable and no impairment was required.

For additional information related to our goodwill and intangible impairment charge, see Notes 4 and 8.


Operating (Loss) Income
Operating loss for the first nine months of 2019 was $103.8 million, a decrease
of $121.9 million, or 675.0%, as compared to operating income of $18.1 million
for the first nine months of 2018. The decrease in operating income for the
first nine months of 2019 compared to the first nine months of 2018 was
primarily driven by a goodwill and other intangible impairment charge and lower
gross margins associated with our sales during the period.

Other, Net
Other, net relates to the effect of exchange rate fluctuations with the U.S. and
our foreign subsidiaries.

Income Tax Expense
Income tax provision includes U.S. and international income taxes, and interest
and penalties on uncertain tax positions.
Dollars in thousands  Three Months Ended September 30,       Change
                           2019                2018         $     %
Income tax expense        $1,900$1,870$30   1.6%
Effective tax rate       (21.9)%              29.3%


Dollars in thousands           Nine Months Ended September 30,        Change
                                   2019                2018            $       %
Income tax (benefit) expense     $(6,941)$4,645$(11,586)   *
Effective tax rate                 6.6%                25.4%


* Not meaningful.

Income tax provisions from continuing operations for the three and nine month
periods ended September 30, 2019 were an expense of $1.9 million and a benefit
of $6.9 million, respectively. Each quarter, we re-evaluate the potential
realization of our deferred tax assets, considering both positive and negative
evidence, including cumulative income or loss for the past three years and
forecasted taxable income or loss. As a result of this re-evaluation during the
third quarter of 2019, we concluded that $3.9 million of valuation allowance is
required to reduce certain net deferred tax assets to their anticipated
realizable value. The remaining value of the deferred tax assets was determined
by evaluating the potential to recover the value of these assets through future
reversal of certain existing deferred tax liabilities. The reduced effective tax
rate from continuing operations for the nine month period ended September 30,
2019 was primarily due to the goodwill impairment in the second quarter of 2019,
for which no tax benefit was recognized, combined with the valuation allowance
recorded in the third quarter of 2019. Income tax expense from continuing
operations for the three and nine month periods ended September 30, 2018 was
primarily related to our income generated in the U.S.

See Note 17 of Notes to Condensed Consolidated Financial Statements for additional information.

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LIQUIDITY AND CAPITAL RESOURCES


As of September 30, 2019, we had $5.8 million of cash and cash equivalents
compared to $63.5 million of cash, cash equivalents and investments as of
December 31, 2018. We expect our cash and cash equivalents and amounts available
under our line of credit at September 30, 2019, along with cash expected to be
generated from operations, to be sufficient to fund our operating and capital
requirements for at least twelve months from September 30, 2019. Our future
capital requirements may vary materially from those currently planned and will
depend on many factors, including our levels of revenue, the timing and extent
of spending on research and development efforts and other business initiatives,
the expansion of sales and marketing activities, the timing of new product
introductions, market acceptance of our products, and overall economic
conditions. To the extent that current and anticipated future sources of
liquidity are insufficient to fund our future business activities and
requirements, we may be required to seek additional equity or debt financing.
The sale of additional equity would result in additional dilution to our
stockholders. The incurrence of debt financing would result in debt service
obligations and the instruments governing such debt could provide for operating
and financing covenants that would restrict our operations.

Cash used in operating activities was $35.6 million for the nine months ended
September 30, 2019, compared to cash provided by operating activities of $9.8
million for the nine months ended September 30, 2018.

The decrease in cash flows from operating activities for the nine months ended
September 30, 2019 as compared to the same period of 2018 was primarily due to
the decrease in operating performance, along with the changes in our operating
assets and liabilities discussed below.

Trade receivables decreased by $15.0 million to $30.9 million as of
September 30, 2019, compared to $45.8 million as of December 31, 2018, primarily
due to the seasonality of the business. Trade receivables as of September 30,
2019 compared to September 30, 2018 decreased by $15.3 million due to the lower
Retail segment net sales in the third quarter of 2019.

Inventories decreased by $18.4 million to $50.1 million as of September 30,
2019, compared to $68.5 million as of December 31, 2018 primarily due to
seasonality and our efforts to reduce the high level of ending inventory from
the previous year. Inventories as of September 30, 2019 compared to
September 30, 2018 decreased by $5.5 million, primarily due to our efforts to
reduce inventory.

Prepaid and other current assets decreased by $1.8 million to $6.2 million as of
September 30, 2019, compared to $8.0 million as of December 31, 2018, primarily
due to lower prepaid marketing expenses. This was partially offset by increases
to prepaid insurance and information technology expenses.

Trade payables decreased by $48.8 million to $38.5 million as of September 30,
2019, compared to $87.3 million as of December 31, 2018, primarily due to
seasonality of the business and inventory related payments. Trade payables as of
September 30, 2019, compared to September 30, 2018, decreased by $29.2 million
primarily due to timing and overall reduction of inventory related payments.

Accrued liabilities decreased by $0.9 million to $7.5 million as of September 30, 2019, compared to $8.4 million as of December 31, 2018, primarily due to decreases in payroll and related liabilities and other accruals.


Cash provided by investing activities of $15.1 million for the first nine months
of 2019 was primarily related to $25.3 million of net maturities of marketable
securities, partially offset by $6.6 million of capital expenditures for
implementation of new software systems, and production tooling and equipment and
equity investments of $3.5 million. We anticipate spending between $8.0 million
and $10.0 million in 2019 for digital platform enhancements, systems
integration, and production tooling.

During the nine months ended September 30, 2019, we invested $3.5 million in
non-controlling equity securities without readily determinable fair values. The
carrying amount of the investment was recorded at cost and will be adjusted for
any impairments and observable price changes under the election of the
measurement alternative, with such changes recognized in earnings.
Cash used in financing activities of $11.3 million for the first nine months of
2019 was primarily related to loan principal repayments of $31.7 million,
partially offset by proceeds from line of credit of $20.2 million.

Financing Arrangements
We have a Credit Agreement with JPMorgan Chase Bank, N.A. ("Chase Bank") that
provides for a $40.0 million revolving line of credit. The term of the Credit
Agreement expires on March 29, 2022 and is secured by substantially all of our
assets.


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The Credit Agreement contains customary covenants for financings of this type,
including, among other terms and conditions, revolving availability subject to a
calculated borrowing base, minimum cash reserves and minimum fixed charge cover
ratio covenants, as well as limitations and conditions on our ability to (i)
create, incur, assume or be liable for indebtedness; (ii) dispose of assets
outside the ordinary course of business; (iii) acquire, merge or consolidate
with or into another person or entity; (iv) create, incur or allow any lien on
any of our property; (v) make investments; or (vi) pay dividends or make
distributions, in each case subject to certain exceptions. In addition, the
Credit Agreement provides for certain events of default such as 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), as well as a subjective acceleration clause.

Based on management's forecast, we have concluded that it is probable that we
will not comply with the minimum fixed charge coverage ratio covenant of the
Credit Agreement at the December 31, 2019 measurement date. In the event we are
unable to obtain a waiver or otherwise remedy this expected covenant violation,
we will classify the line of credit as a current liability in our December 31,
2019 financial statements if the covenant violation occurs. Under the terms of
the Credit Agreement, the fixed charge cover ratio, as of the last day of any
fiscal quarter, may not be less than 1.10 to 1.00 when measured on any trailing
four quarter basis beginning on December 31, 2019. While we anticipate receiving
waivers or modifications of the existing debt covenants, we are also pursuing
alternative sources of funding.
The interest rate applicable to each advance under the revolving line of credit
is based on either Chase Bank's floating prime rate or adjusted LIBOR, plus an
applicable margin. As of September 30, 2019, our borrowing rate for line of
credit advances was 4.10%.

As of September 30, 2019, we had $20.6 million of outstanding borrowings under
the line of credit. As of September 30, 2019, we were in compliance with the
financial covenants of the Credit Agreement and $12.7 million was available for
borrowing under the line of credit.

During the three months ended March 31, 2019, we paid down our existing term
loan of $32.0 million and refinanced the remaining portion with borrowings under
our new line of credit.

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

The nature and terms of these indemnifications vary from contract to contract,
and generally a maximum obligation is not stated. We hold insurance policies
that mitigate potential losses arising from certain types of indemnifications.
Management does not deem these obligations to be significant to our financial
position, results of operations or cash flows, and therefore, no liabilities
were recorded at September 30, 2019.

Stock Repurchase Program
On February 21, 2018 our Board of Directors authorized a $15.0 million share
repurchase program. Under this program, shares of our common stock may be
repurchased from time to time through February 21, 2020. As of December 31, 2018
we had repurchased 75,813 shares under this program at a weighted average price
of $13.30 per share for a total purchase price of $1.0 million.

For the nine months ended September 30, 2019 no shares were repurchased. As of September 30, 2019, $14.0 million remained available for future repurchases under the share repurchase program.


Repurchases under the program 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 will be funded from
existing cash balances, and repurchased shares will be retired and returned to
unissued authorized shares.


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SEASONALITY


We expect our revenues from fitness equipment products to vary seasonally. Sales
are typically strongest in the first and fourth quarters, followed by the third
quarter, and are generally weakest in the second quarter. We believe that
consumers tend to be involved in outdoor activities during the spring and summer
months, including outdoor exercise, which impacts sales of indoor fitness
equipment. Fourth quarter could be lower than expected due our customers and
retailers lowering their holiday spending. This seasonality can have a
significant effect on our inventory levels, working capital needs and resource
utilization.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Effective January 1, 2019, we adopted ASC 842, Leases (Topic 842). For information on the adoption of Topic 842, see Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.


Other than the changes related to adoption of ASC 842, our critical accounting
policies and estimates have not changed from those discussed in our 2018 Form
10-K.

NEW ACCOUNTING PRONOUNCEMENTS

See Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 for a discussion of new accounting pronouncements.

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