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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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05/07/2020 | 04:26pm 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, 2019 (the "2019 Form 10-K"). All references to the first
quarter and first three months of 2020 and 2019 mean the three-month periods
ended March 31, 2020 and 2019, 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, tariffs, risks associated with current and potential delays,
work stoppages, or supply chain disruptions caused by the coronavirus pandemic,
our ability to hire and retain key management personnel, our ability to
effectively develop, market and sell future products, 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 2019 Form 10-K as supplemented or modified in our quarterly
reports on Form 10-Q. We do not undertake any duty to update forward-looking
statements after the date they are made or conform them to actual results or to
changes in circumstances or expectations.

Overview


We 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, related accessories and digital platform for consumer use,
primarily in the U.S., Canada, Europe and Asia. Our products are sold under some
of the most-recognized brand names in the fitness industry: Nautilus®, Bowflex®,
Octane Fitness® and Schwinn®.

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, our
websites, social media channels, 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 first quarter were primarily impacted by higher sales,
driven by stronger demand for home-fitness products and the appropriate
improvements being implemented into our overall business to address long-term
profitability. The primary actions taken include extensive, in-depth consumer
insights research, which has identified an effective new positioning for the
Bowflex® brand, and which is now underway through a new advertising campaign and
updates to our websites, television commercials, social media, and other digital
platforms. Additionally, we expect to launch 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 the majority of
our products equipped with subscription-based digital experience offerings.

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Net sales for the first three months of 2020 were $93.7 million, reflecting a
11.0% increase as compared to net sales of $84.4 million for the first three
months of 2019. The increase was driven primarily by strong demand for strength
and cardio products, particularly the Bowflex® SelectTech® weights and the new
connected-fitness bikes. Additionally, the Company was able to capture the
accelerated demand for home fitness resulting from COVID-19 stay-at-home orders
in the last few weeks of March through strong omni-channel execution.

Net sales of our Direct segment increased by $0.4 million, or 0.9%, for the
first three months of 2020, compared to the first three months of 2019.
Increased sales were driven primarily by strength products which grew 58.5%
versus last year. Strength product sales were driven by Bowflex® SelectTech®
weights and Bowflex® Home Gyms. Cardio product sales declined by 9.4% as strong
demand for our connected-fitness bikes, the Bowflex® C6 and Schwinn® IC4, were
not enough to fully offset declines in our Max Trainer® sales.

Net sales of our Retail segment increased by $8.8 million, or 23.9%, for the
first three months of 2020, compared to the first three months of 2019, with
strong growth coming from both strength and cardio product sales. Strength sales
were up 54.6%, driven primarily by strong demand for Bowflex® SelectTech®
weights and Bowflex® Home Gyms. Cardio sales were up 17.7%, driven by the
Schwinn® IC4 connected-fitness bikes and partially offset by declines in Octane
Fitness® products as gym closures have begun to affect sales of commercial-grade
equipment. Although numerous retailers have temporarily closed store locations
due to COVID-19, Bowflex® and Schwinn® experienced strong year-over-year sales
increases through retail partners' e-commerce and curbside pick-up platforms.

Royalty income increased by $0.1 million, or 11.9%, for the first three months
of 2020, compared to the first three months of 2019, primarily due to a royalty
settlement.

Gross profit decreased by $0.2 million, or 0.7%, for the first three months of
2020 to $35.6 million, or 38.0% of net sales, compared to gross profit of $35.8
million, or 42.5% of net sales, for the first three months of 2019. The decrease
in gross profit dollars was primarily due to lower gross margin percentages in
both the Direct and Retail segments. Gross margin percentage points decreased by
4.5% for the first three months of 2020 compared to the first three months of
2019 primarily due to unfavorable sales mix and higher landed product costs.

Operating expenses decreased by $9.9 million or 21.4%, for the first three
months of 2020 to $36.2 million, compared to operating expenses of $46.0 million
for the first three months of 2019. The decrease in operating expenses was
primarily due to increased expense discipline, particularly in advertising
expenses which delivered strong return on investment in the first quarter of
2020.

Operating loss decreased by $9.6 million, or 94.5%, for the first three months
of 2020 to $0.6 million, compared to operating loss of $10.2 million for the
first three months of 2019. The decrease in operating loss for the first three
months of 2020 compared to the first three months of 2019 was primarily driven
by lower operating expenses partially offset by lower gross margins.

Income from continuing operations was $2.3 million for the first three months of
2020, or $0.08 per diluted share, compared to loss from continuing operations of
$8.5 million, or $0.29 per diluted share, for the first three months of 2019.
The increase in income from continuing operations was driven by higher revenue,
expense discipline, and aided by the tax benefit related to the CARES Act.

The effective tax rates for the first three months of 2020 and 2019 were 301.2%
and 20.0%, respectively. The 281.2% year-over-year percentage rate differential
was primarily due to changes in the tax treatment of net operating loses as a
result of the CARES Act. The Company anticipates carrying back 2019 and 2020
losses to the 2016 and 2017 tax years and recognized $3.2 million of tax
benefit, representing the 14 point tax rate differential between 2019 and 2020
and carry back tax periods, as income in the first quarter of 2020.

Net income was $2.2 million for the first three months of 2020, compared to net
loss of $8.6 million for the first three months of 2019. Net income per diluted
share was $0.07 for the first three months of 2020, compared to net loss per
diluted share of $0.29 for the first three months of 2019.

Factors Affecting Our Performance


Our results of operations may vary significantly from period-to-period. Our
revenues typically fluctuate due to the seasonality of our industry, customer
buying patterns, product innovation, the nature and level of competition for
health and fitness products, our ability to procure products to meet customer
demand, the level of spending on, and effectiveness of, our media and
advertising

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programs and our ability to attract new customers and maintain existing sales
relationships. In addition, our revenues are highly susceptible to economic
factors, including, among other things, the overall condition of the economy and
the availability of consumer credit in both the U.S. and Canada. The COVID-19
pandemic has created a heightened need for home-fitness products at an unplanned
rate partially offset by declines in Octane Fitness® equipment as gym closures
have begun to affect sales of commercial-grade equipment. Short-term increases
in demand for many of our home-fitness products continue to outpace supply and
we are accelerating the manufacturing and delivery of key products. We are
uncertain and cannot predict with confidence the longer-term impacts of COVID-19
on our company's results of operations. 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, tariffs, expedited shipping and
transportation costs, 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. 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. 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 2019 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 2020 or 2019 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 March 31,                Change
                                            2020               2019              $             %
Net sales                             $      93,722$      84,400$    9,322        11.0  %
Cost of sales                                58,125              48,558          9,567        19.7  %
Gross profit                                 35,597              35,842           (245 )      (0.7 )%
Operating expenses:
Selling and marketing                        24,686              34,043         (9,357 )     (27.5 )%
General and administrative                    7,656               7,655              1           -  %
Research and development                      3,815               4,311           (496 )     (11.5 )%
Total operating expenses                     36,157              46,009         (9,852 )     (21.4 )%
Operating loss                                 (560 )           (10,167 )        9,607       (94.5 )%
Other expense:
Interest income                                   2                 165           (163 )
Interest expense                               (627 )              (205 )         (422 )
Other, net                                       41                (393 )          434
Total other expense, net                       (584 )              (433 )         (151 )
Loss from continuing operations
before income taxes                          (1,144 )           (10,600 )        9,456
Income tax benefit                           (3,446 )            (2,116 )       (1,330 )
Income (loss) from continuing
operations                                    2,302              (8,484 )       10,786
Loss from discontinued operations,
net of income taxes                            (118 )               (91 )          (27 )
Net income (loss)                     $       2,184$      (8,575 )$   10,759



Results of operations information by segment was as follows (dollars in
thousands):
                  Three Months Ended March 31,                 Change
                     2020               2019             $              %
Net sales:
Direct         $      47,141$      46,714$    427          0.9  %
Retail                45,613              36,821        8,792         23.9  %
Royalty                  968                 865          103         11.9  %
               $      93,722$      84,400$  9,322         11.0  %
Cost of sales:
Direct         $      22,842$      20,318$  2,524         12.4  %
Retail                35,283              28,240        7,043         24.9  %
               $      58,125$      48,558$  9,567         19.7  %
Gross profit:
Direct         $      24,299$      26,396$ (2,097 )       (7.9 )%
Retail                10,330               8,581        1,749         20.4  %
Royalty                  968                 865          103         11.9  %
               $      35,597$      35,842$   (245 )       (0.7 )%
Gross margin:
Direct                  51.5 %              56.5 %       (500 ) basis points
Retail                  22.6 %              23.3 %        (70 ) 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 March 31,                 Change
                                       2020               2019               $              %
Direct net sales:
Cardio products(1)                 $   35,876$      39,607$   (3,731 )       (9.4 )%
Strength products(2)                   11,265                7,107           4,158         58.5  %
                                       47,141               46,714             427          0.9  %
Retail net sales:
Cardio products(1)                     36,143               30,696           5,447         17.7  %
Strength products(2)                    9,470                6,125           3,345         54.6  %
                                       45,613               36,821           8,792         23.9  %

Royalty                                   968                  865             103         11.9  %
                                   $   93,722$      84,400$    9,322         11.0  %

(1)  Cardio products include: connected-fitness bikes like the Bowflex® C6 and Schwinn® IC4, Max
Trainer®, TreadClimber®, Zero Runner®, LateralX®, treadmills, other exercise bikes, ellipticals
and subscription services.
(2)  Strength products include: home gyms and Bowflex® SelectTech® dumbbells, kettlebell weights,
and accessories.



Direct
Net sales were $47.1 million, up 0.9%, from $46.7 million. Increased sales were
driven primarily by strength products which grew 58.5% versus last year.
Strength product sales were driven by Bowflex® SelectTech® weights and Bowflex®
Home Gyms. Cardio product sales declined by 9.4% as strong demand for our
connected-fitness bikes, the Bowflex® C6 and Schwinn® IC4, were not enough to
fully offset declines in our Max Trainer® sales.

Gross margin rate was 51.5%, down from 56.5%, primarily driven by unfavorable
product mix and higher landed product costs. Sales declines in the higher margin
Max Trainers line continue to pressure margins, while landed product costs were
driven higher by tariffs and expediting shipments from our factories in Asia.

Segment contribution income was $1.8 million, up 139.8%, compared to segment
contribution loss of $4.5 million. The improvement in segment contribution was
primarily driven by $6.5 million reduction in media spend, as gross profit was
below last year. Advertising expenses were $13.2 million in first quarter of
2020 compared to $19.7 million first quarter of 2019.

Combined consumer credit approvals by our primary and secondary U.S. third-party
financing providers for the first quarter of 2020 were 52.9%, compared to 54.3%
in the same period of 2019. The decrease in approval rates reflects lower credit
quality applications.

Retail

Net sales were $45.6 million, up 23.9%, from $36.8 million with strong growth
coming from both strength and cardio product sales. Strength sales up were up
54.6%, driven primarily by strong demand for Bowflex® SelectTech® weights and
Bowflex® Home Gyms. Cardio sales were up 17.7%, driven by the Schwinn® IC4
connected-fitness bikes and partially offset by declines in Octane Fitness®
products as gym closures have begun to affect sales of commercial-grade
equipment. Although numerous retailers have temporarily closed store locations
due to COVID-19, Bowflex® and Schwinn® experienced strong year-over-year sales
increases through retail partners' e-commerce and curbside pick-up platforms.

Gross margin rate was 22.6%, down from 23.3%, driven primarily by unfavorable sales mix and higher landed product costs. Landed product costs were driven higher by tariffs and expediting shipments from our factories in Asia.


Segment contribution income was $2.4 million, up 430.9%, compared to segment
contribution loss of $0.7 million. The improvement in segment contribution was
primarily driven by higher net sales and reductions in operating expenses,
partially offset by lower gross margin rates.


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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 March 31,           Change
                           2020              2019           $          %
Selling and marketing    $24,686$34,043$(9,357)   (27.5)%
As % of net sales         26.3%             40.3%



The decrease in selling and marketing expense in the three month period ended
March 31, 2020 as compared to the same period of 2019 was primarily related to a
$6.5 million decrease in media advertising and a $0.5 million decrease in
financing fees.

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 March 31,           Change
                          2020              2019           $          %
Media advertising       $13,185$19,702$(6,517)   (33.1)%



The decrease in media advertising for the three month period ended March 31,
2020 compared to the same period of 2019 reflected the increased focus on return
on investment that began in the fourth quarter of 2019.

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 March 31,      Change
                               2020              2019         $    %
General and administrative    $7,656$7,655$1    -%
As % of net sales              8.2%              9.1%


General and administrative expenses were flat for the three months ended March 31, 2020 compared to the same period of 2019 due to increases for incentive costs of $1.3 million and consulting costs of $0.6 million offset by a decrease in litigation costs of $1.9 million.


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 March 31,          Change
                             2020              2019          $         %
Research and development    $3,815$4,311$(496)   (11.5)%
As % of net sales            4.1%              5.1%



The decrease in research and development expenses for the three month period
ended March 31, 2020 compared to the same period of 2019 was driven primarily by
lower maintenance expenses related to digital platforms.

Interest Expense
Interest expense increased $0.4 million to $0.6 million for the three month
period ended March 31, 2020, compared to the same period of 2019. The increase
was primarily due to loss on debt extinguishment of $0.2 million reported as
interest expense in our consolidated statement of income incurred in connection
with the termination of our prior credit agreement with Chase Bank. See Note 15
of Notes to Condensed Consolidated Financial Statements for additional
information.

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


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Income Tax Benefit
Income tax provision includes U.S. and international income taxes, and interest
and penalties on uncertain tax positions.

Dollars in thousands   Three Months Ended March 31,          Change
                          2020              2019           $         %
Income tax benefit      $(3,446)$(2,116)$(1,330)   62.9%
Effective tax rate       301.2%            20.0%



The income tax benefit and effective tax rate from continuing operations for the
three month period ended March 31, 2020 was primarily due to the 14% rate
benefit of net operating loss carry-back from the 2019 tax year to the 2016 tax
year as a result of CARES Act enactment, which is discretely recognized in the
first quarter of 2020. The effective tax rate and income tax benefit from
continuing operations for the three month period ended March 31, 2019 was
primarily due to our losses generated in the U.S.

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LIQUIDITY AND CAPITAL RESOURCES


As of March 31, 2020, we had $26.5 million of cash, cash equivalents and
restricted cash, and $18.0 million was available for borrowing under the ABL
Revolving Facility, compared to $11.1 million of cash and cash equivalents as of
December 31, 2019. We expect our cash and cash equivalents and amounts available
under our Wells Fargo Financing at March 31, 2020, 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 March 31, 2020. Our future capital
requirements may vary materially from those currently planned and will depend on
many factors, including our levels of revenue, the timing and extent of spending
on research and development efforts and other business initiatives, the
expansion of sales and marketing activities, the timing of new product
introductions, market acceptance of our products, and overall economic
conditions. To the extent that current and anticipated future sources of
liquidity are insufficient to fund our future business activities and
requirements, we may be required to seek additional equity or debt financing.
The sale of additional equity would result in additional dilution to our
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 provided by operating activities was $6.3 million for the three months
ended March 31, 2020, compared to cash used in operating activities of $24.5
million for the three months ended March 31, 2019. The increase in cash flows
from operating activities for the three months ended March 31, 2020 as compared
to the same period of 2019 was primarily due to the increase in operating
income, along with the changes in our operating assets and liabilities discussed
below.

Trade receivables decreased by $20.3 million to $34.3 million as of March 31,
2020, compared to $54.6 million as of December 31, 2019, primarily due to the
seasonality of the business. Trade receivables as of March 31, 2020 compared to
March 31, 2019 increased by $12.3 million due to the higher net sales in the
first quarter of 2020. Allowance for doubtful accounts increased $0.4 million
primarily due to requested payment delays for commercial accounts impacted by
COVID-19.

Inventories decreased by $19.8 million to $34.9 million as of March 31, 2020,
compared to $54.8 million as of December 31, 2019, primarily due to the
seasonality of the business and to the surge in demand. Inventories as of
March 31, 2020 compared to March 31, 2019 decreased by $26.0 million, primarily
due to our efforts to align inventory more closely to sales trends and to the
surge in demand.

Prepaid and other current assets decreased by $1.0 million to $7.3 million as of
March 31, 2020, compared to $8.3 million as of December 31, 2019, primarily due
to lower prepaid marketing expenses. This decrease was partially offset by
increases to prepaid insurance and information technology expenses.

Trade payables decreased by $40.0 million to $34.2 million as of March 31, 2020,
compared to $74.3 million as of December 31, 2019, primarily due to seasonality
of the business and inventory related payments. Trade payables as of March 31,
2020 compared to March 31, 2019 decreased by $6.4 million, primarily due to our
aligning inventory more closely to sales trends.

Accrued liabilities increased by $1.8 million to $9.4 million as of March 31,
2020, compared to $7.6 million as of December 31, 2019, primarily due to payroll
related liabilities and other accruals.

Cash used by investing activities of $1.7 million for the first three months of
2020 was due to capital expenditures for implementation of new software systems,
production tooling and equipment. We anticipate spending between $8.0 million
and $10.0 million in 2020 for digital platform enhancements, systems
integration, and production tooling.

Cash provided by financing activities of $12.0 million for the first three months of 2020 was primarily related to proceeds from Wells Fargo Financing agreements of $44.1 million, partially offset by loan principal repayments of $30.3 million.


Financing Arrangements
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"), 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.

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We used the proceeds from the Wells Fargo Financing to extinguish our existing
$40.0 million revolver with Chase Bank ("2019 Chase Credit Agreement"), 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 the Wells Fargo Financing. In connection with the
termination of the 2019 Chase Credit Agreement we recorded a loss on debt
extinguishment of $0.2 million as interest expense in our consolidated statement
of income.

As of March 31, 2020, outstanding borrowings totaled $28.4 million with $14.8
million and $13.6 million under our Wells Fargo Financing Term Loan Facility and
ABL Revolving Facility, respectively. As of March 31, 2020, we were in
compliance with the financial covenants of the Wells Fargo Financing and $18.0
million was available for borrowing under the ABL Revolving Facility. Any
outstanding balance is due and payable on January 31, 2025, unless the maturity
is accelerated subject to the terms set forth in the Credit Agreement.

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 its 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).

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 March 31, 2020.

Stock Repurchase Program
On February 21, 2018 our Board of Directors authorized a $15.0 million share
repurchase program and repurchases under this program totaled $1.0 million. For
the three months ended March 31, 2020 no shares were repurchased. As of
February 21, 2020, the share repurchase program expired.

SEASONALITY


We expect our revenue from fitness equipment products to vary seasonally. Sales
are typically strongest in the fourth quarter and are generally weakest in the
second quarter. We believe that consumers tend to be involved in outdoor
activities during the spring and summer months, including outdoor exercise,
which impacts sales of indoor fitness equipment. This seasonality can have a
significant effect on our inventory levels, working capital needs and resource
utilization.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies have not changed from those discussed in our 2019 Form 10-K.


NEW ACCOUNTING PRONOUNCEMENTS

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

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