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 are committed to providing innovative, quality solutions to help people achieve their fitness goals through 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, and Europe. 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, 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 income taxes receivable from "prepaids and other current assets."
Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.
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 2019, 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 goodwill, 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 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, 2019, we did not have any cash equivalents. As of December 31, 2018, cash equivalents consisted of money market funds and commercial paper and totaled $7.6 million.
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 available 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 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 assessments of goodwill in the fourth quarter of 2018 and determined no impairments was indicated in that year. For further information regarding goodwill, see Note 5, Fair Value Measurements and Note 11, Goodwill.
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 review our indefinite-lived trademarks for impairment in the fourth quarter of each year and 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 2019 and 2018. 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 5, Fair Value Measurements and Note 12, 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. Our long-lived assets were recoverable, and step two impairment charge was not required in 2019 and 2018.
Equity Investments
ASU 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 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.
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. For additional information, see Note 20, Stock Repurchase Programs.
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):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
4,419
|
|
|
$
|
6,920
|
|
Charges to reserve
|
18,311
|
|
|
15,058
|
|
Reductions for sales discounts and returns
|
(18,345
|
)
|
|
(17,559
|
)
|
Balance, December 31
|
$
|
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 $46.8 million and $65.7 million for the years ended December 31, 2019 and 2018, respectively. Prepaid advertising and promotion costs were $1.3 million and $2.7 million as of December 31, 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.
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 of existing assets and liabilities and their respective tax bases. 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 and cash equivalents, 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, 2018 , 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
ASUs 2018-11, 2018-10, 2018-01 and 2016-02
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)." ASU 2016-02 replaces the existing guidance in Accounting Standards Codification ("ASC") 840, Leases. The new standard requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, "Land Easement Practical Expedient for Transition to Topic 842"; ASU 2018-10, "Codification Improvements to Topic 842, Leases;" and ASU 2018-11, "Targeted Improvements." The new standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating. For finance leases, the lessee recognizes interest expense and amortizes the ROU asset, and, for operating leases, the lessee recognizes lease expense on a straight-line basis.
The new standard was effective for us on January 1, 2019. A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard were not provided for dates and periods prior to January 1, 2019.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permitted us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification, and initial direct costs. We elected the use-of-hindsight with respect to determining lease terms. We did not elect the practical expedient pertaining to land easements as it is not applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Variable payments, including payments for the Company's proportionate share of the building's property taxes, insurance, and common area maintenance, are treated as non-lease components and are recognized in earnings in the period for which the costs occur.
The new standard had a material effect on our financial statements with the most significant effects relating to the recognition of new ROU assets and lease liabilities on our balance sheet for our facilities operating leases, and providing significant new disclosures about our leasing activities.
We reviewed our existing vendor contracts for potential embedded leases, as well as renewal options and whether exercises of renewal options were reasonably certain. Based on our analyses of our existing operating and financing leases, we recognized at the adoption date, January 1, 2019, additional operating lease liabilities of approximately $25 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum lease payments under current leasing standards for existing operating leases, net of reductions for the impacts of deferred rents and lease incentives. The additional disclosures required by the ASU are included in Note 10, Leases.
ASU 2018-09
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements." The FASB has a standing project to address suggestions received from stakeholders on the ASC and to make other incremental improvements to GAAP. This perpetual project facilitates ASC updates for technical corrections, clarifications, and other minor improvements, and these amendments are referred to as Codification improvements. ASU 2018-09 includes amendments affecting a wide variety of topics and applies to all reporting entities within the scope of the affected accounting guidance. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in the ASU do not require transition guidance and are effective upon issuance of the ASU. However, many of the amendments in the ASU have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. Our adoption of ASU 2018-09 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.
ASU 2018-07
In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting." ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee
awards with certain exceptions. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Further, Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. ASU 2018-07 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Our adoption of ASU 2018-07 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.
ASU 2018-02
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA, thereby eliminating the stranded tax effects and improving the usefulness of reported information to financial statement users. ASU 2018-02 is effective for all entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for public business entities for which financial statements have not yet been issued. Our adoption of ASU 2018-02 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.
ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 provides better alignment of an entity's risk management activities and financial reporting of hedges through changes to both the designation and measurement guidance for qualifying hedging relationships. In addition, the amendments in ASU 2017-12 also simplify the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity's intended hedging strategies. ASU 2017-12 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. For cash flow and net investment hedges existing as of the adoption date, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income and opening retaining earnings. Amended presentation and disclosure guidance is required only prospectively, and certain transition elections are available upon adoption. Our adoption of ASU 2017-12 as of January 1, 2019 had no material impact on our financial position, results of operations or cash flows.
Recently Issued Pronouncements Not Yet Adopted
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 introduces 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 makes changes to the following current guidance (1) making an intraperiod allocation, if there is a loss in continuing operations and gains 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 companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. While we do not expect the adoption of ASU 2019-12 to have a material effect on our business, we are evaluating the potential impact that ASU 2019-12 may have on our financial position, results of operations and cash flows.
ASU 2019-01
In March 2019, the FASB issued 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. While we do not expect the adoption of ASU 2019-01 to have a material effect on our business, we are evaluating the potential impact that ASU 2019-01 may have on our financial position, results of operations and 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. Early adoption is permitted, and an entity may early adopt upon issuance of ASU 2018-13 those amendments that remove or modify disclosures and delay adoption of the additional disclosures until the effective date. While we do not expect the adoption of ASU 2018-13 to have a material effect on our business, we are evaluating the potential impact that the new ASU may have 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. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently assessing the impact of adopting this standard but do not expect the adoption of this guidance to have a material impact on our financial position, results of operations and cash flows.
(2) BUSINESS ACQUISITION
On December 6, 2018, we acquired certain assets of Paofit Holdings Pte Limited, its subsidiaries and related companies (collectively, "Paofit") for an aggregate purchase price of $2.8 million. The acquisition was funded with cash on hand. Based primarily in Singapore, the Paofit business is focused on developing and distributing software applications known as RunSocial® and RideSocial™. The Paofit acquisition broadened our digital platform applications and deepened our talent pool. We accounted for the transaction as a business combination.
Since the acquisition occurred on December 6, 2018, net sales and net income related to the Paofit business was immaterial to the overall financial results. We categorize Paofit's results of operations in our Direct segment.
Total acquisition costs incurred through December 31, 2018 were $0.2 million and were expensed in general and administrative costs.
Purchase Price Allocation
Acquired assets were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of identifiable net assets resulted in the recognition of goodwill of $1.6 million, all of which was assigned to the Direct segment, and is attributed primarily to Paofit's intellectual property base, employee workforce and application to future digital technologies. The goodwill is not expected to be deductible for income tax purposes. No liabilities were acquired as part of the transaction. During the second quarter of 2019, 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 which resulted in a non-cash goodwill impairment charge of $1.6 million on this acquisition.
The purchase price allocation was determined based on the preliminary fair values of the assets identified as of the acquisition date and no adjustments were made within 12 months from the acquisition date.
The following table summarizes the final fair values of the assets acquired as of the December 6, 2018 acquisition date (in thousands):
|
|
|
|
|
|
Valuation at
December 6, 2018
|
Inventories
|
$
|
8
|
|
Intangible assets
|
1,140
|
|
Identifiable assets acquired
|
1,148
|
|
Goodwill
|
1,602
|
|
Total assets acquired
|
$
|
2,750
|
|
The following table sets forth the components of identifiable intangible assets and their estimated fair values and useful lives as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
Weighted-average amortization period (years)
|
Trademark - RunSocial
|
|
$
|
250
|
|
|
5
|
Patents
|
|
410
|
|
|
7
|
Developed technology
|
|
480
|
|
|
5
|
|
|
$
|
1,140
|
|
|
5.7
|
This acquisition is not material to our net sales, results of operations or total assets during any period presented. Accordingly, our consolidated results from operations do not differ materially from historical performance as a result of this acquisition, and, therefore, proforma results are not presented.
(3) DISCONTINUED OPERATIONS
Following is a summary of certain financial information regarding our discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Loss from discontinued operations before income taxes
|
$
|
(206
|
)
|
|
$
|
(206
|
)
|
Income tax expense
|
299
|
|
|
246
|
|
Total loss from discontinued operations
|
$
|
(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,
|
|
|
2019
|
|
2018
|
Product sales
|
|
$
|
296,447
|
|
|
$
|
380,489
|
|
Extended warranties and services
|
|
6,691
|
|
|
9,226
|
|
Other(1)
|
|
6,147
|
|
|
7,038
|
|
Net sales
|
|
$
|
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,
|
|
|
2019
|
|
2018
|
United States
|
|
$
|
256,183
|
|
|
$
|
348,712
|
|
Canada
|
|
24,768
|
|
|
20,489
|
|
All other
|
|
28,334
|
|
|
27,552
|
|
Net sales
|
|
$
|
309,285
|
|
|
$
|
396,753
|
|
As of December 31, 2019, estimated revenue expected to be recognized in the future totaled $5.8 million primarily related to customer order backlog which includes firm orders for future shipment to our Retail customers, as well as unfulfilled consumer orders within the Direct channel. Retail orders of $2.3 million and Direct orders of $3.5 million comprise our backlog as of December 31, 2019. 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):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, January 1
|
|
$
|
816
|
|
|
$
|
1,084
|
|
Cash additions
|
|
2,330
|
|
|
1,794
|
|
Revenue recognition
|
|
(1,921
|
)
|
|
(2,062
|
)
|
Balance, December 31
|
|
$
|
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7,646
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,646
|
|
Total cash equivalents
|
|
7,646
|
|
|
—
|
|
|
—
|
|
|
7,646
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
Certificates of deposit(1)
|
|
—
|
|
|
10,379
|
|
|
—
|
|
|
10,379
|
|
Corporate bonds
|
|
—
|
|
|
7,522
|
|
|
—
|
|
|
7,522
|
|
U.S. government bonds
|
|
—
|
|
|
7,491
|
|
|
—
|
|
|
7,491
|
|
Total available-for-sale securities
|
|
—
|
|
|
25,392
|
|
|
—
|
|
|
25,392
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
—
|
|
|
363
|
|
|
—
|
|
|
363
|
|
Foreign currency forward contracts
|
|
—
|
|
|
240
|
|
|
—
|
|
|
240
|
|
|
|
—
|
|
|
603
|
|
|
—
|
|
|
603
|
|
Total assets at fair value
|
|
$
|
7,646
|
|
|
$
|
25,995
|
|
|
$
|
—
|
|
|
$
|
33,641
|
|
(1) All certificates of deposit are within current FDIC insurance limits.
We did not have any liabilities measured at fair value on a recurring basis as of December 31, 2018.
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, 2019 and 2018. Additionally, we did not have any changes to our valuation techniques during the years ended December 31, 2019 and 2018.
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.
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 Step 1 evaluation and a market capitalization reconciliation during the second quarter of 2019.
The goodwill evaluation was performed using a quantitative assessment at each reporting unit level and we determined that is was more-likely-than-not that the fair value of goodwill assigned to our reporting units was less than the carrying amount. We assigned assets and liabilities to each reporting unit based on either specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit. We determined the fair value of our reporting units in Step 1 of the ASC 350 analysis using the income approach and the market approach. In addition, we determined the fair value by adding a control premium observed from recent transactions of comparable companies to determine the reasonableness of that assumption and the fair values of the reporting units estimated in Step 1. Significant unobservable inputs and assumptions inherent in the valuation methodologies from Level 3 inputs were employed and include, but were not limited to, prospective financial information, growth rates, terminal value, royalty rates, discount rates, and comparable multiples from publicly traded companies in our industry. We compared the carrying amount of each reporting unit to its respective fair value. We reconciled the aggregate fair values of the reporting units determined in Step 1 (as described above) to the enterprise market capitalization plus a reasonable control premium. We determined both reporting units were impaired and recorded a $63.5 million non-cash goodwill impairment.
The indefinite-lived intangible assets evaluation was performed using the relief from royalty method during the second quarter of 2019. This analysis was based on the estimated future cash flows generated for each separate brand/trademark. We compared the carrying amount to the estimated fair values. Based on our evaluation, the Octane trademark with a carrying value of $14.2 million was written down to its fair value of $5.7 million, resulting in an $8.5 million non-cash intangible asset impairment.
During the year ended December 31, 2018, there were no assets or liabilities that were recorded at fair value on a nonrecurring basis.
The carrying values of cash and cash equivalents, 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.
As of June 30, 2019, we terminated a $20.0 million interest rate swap outstanding with Chase. The termination of this interest rate swap discontinued the cash flow hedging relationship for our line of credit and had unrealized gains. As of June 30, 2019, we reclassified $0.1 million, net of tax, of unrealized gains from accumulated other comprehensive losses to other income.
We typically designate all interest rate swaps as cash flow hedges and, accordingly, record the change in fair value for the effective portion of these interest rate swaps in accumulated other comprehensive income rather than current period earnings until the underlying hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. For the years ended December 31, 2019 and 2018, there was no ineffectiveness.
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, 2019, total outstanding contract notional amounts were $33.2 million. At December 31, 2019, these outstanding balance sheet hedging derivatives had maturities of 107 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,
|
|
|
|
2019
|
|
2018
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Interest rate swap contract
|
|
Prepaids and other current assets
|
|
$
|
—
|
|
|
$
|
291
|
|
|
|
Other assets
|
|
—
|
|
|
72
|
|
|
|
|
|
$
|
—
|
|
|
$
|
363
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaids and other current assets
|
|
$
|
295
|
|
|
$
|
240
|
|
|
|
Accrued liabilities
|
|
9
|
|
|
—
|
|
|
|
|
|
$
|
286
|
|
|
$
|
240
|
|
The effect of derivative instruments on our consolidated statements of operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
Loss (gain) 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 (benefit) expense
|
|
(30
|
)
|
|
(61
|
)
|
|
|
|
|
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
|
Loss recognized in earnings
|
|
Other, net
|
|
$
|
458
|
|
|
$
|
(743
|
)
|
Income tax (expense) benefit
|
|
Income tax (benefit) expense
|
|
(43
|
)
|
|
185
|
|
For additional information related to our derivatives, see Notes 5 and 18.
(7) TRADE RECEIVABLES
Trade receivables, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Trade receivables
|
$
|
54,645
|
|
|
$
|
45,946
|
|
Allowance for doubtful accounts
|
(45
|
)
|
|
(99
|
)
|
Trade receivables, net of allowance
|
$
|
54,600
|
|
|
$
|
45,847
|
|
Changes in our allowance for doubtful trade receivables were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
99
|
|
|
$
|
119
|
|
Charges to bad debt expense
|
19
|
|
|
27
|
|
Write-offs, net
|
(73
|
)
|
|
(47
|
)
|
Balance, December 31
|
$
|
45
|
|
|
$
|
99
|
|
(8) INVENTORIES
Our inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Finished goods
|
$
|
49,853
|
|
|
$
|
63,257
|
|
Parts and components
|
4,915
|
|
|
5,208
|
|
Total inventories
|
$
|
54,768
|
|
|
$
|
68,465
|
|
(9) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Automobiles
|
5
|
|
$
|
23
|
|
|
$
|
23
|
|
Leasehold improvements
|
4
|
to
|
20
|
|
3,830
|
|
|
3,782
|
|
Computer software and equipment
|
2
|
to
|
7
|
|
26,816
|
|
|
23,776
|
|
Machinery and equipment
|
3
|
to
|
5
|
|
18,551
|
|
|
16,756
|
|
Furniture and fixtures
|
5
|
to
|
20
|
|
2,808
|
|
|
2,827
|
|
Work in progress (1)
|
N/A
|
|
2,747
|
|
|
1,590
|
|
Total cost
|
|
|
|
|
54,775
|
|
|
48,754
|
|
Accumulated depreciation
|
|
|
|
|
(32,020
|
)
|
|
(26,538
|
)
|
Total property, plant and equipment, net
|
|
|
|
|
$
|
22,755
|
|
|
$
|
22,216
|
|
(1) Work in progress includes information technology assets and production tooling.
Depreciation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Depreciation expense
|
$
|
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, 2019
|
Operating lease expense
|
$
|
4,518
|
|
Leases with an initial term of 12 months or less ("short-term lease") are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. The short-term lease expense for 2019 was $0.2 million.
Other information related to leases was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2019
|
Supplemental cash flow information:
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
Operating cash flow from operating leases
|
|
$
|
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
|
|
$
|
3,428
|
|
Weighted average remaining operating lease term
|
|
4.0 years
|
|
Weighted average discount rate on operating leases
|
|
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, 2019
|
Year ending:
|
|
2020
|
$
|
4,682
|
|
2021
|
4,711
|
|
2022
|
4,566
|
|
2023
|
3,812
|
|
2024
|
3,899
|
|
Thereafter
|
4,167
|
|
Total undiscounted lease payments
|
25,837
|
|
Less imputed interest
|
(3,135
|
)
|
Total lease liabilities
|
$
|
22,702
|
|
Under ASC 840, Leases, future minimum lease payments under noncancelable operating leases payments were as follows (in thousands):
|
|
|
|
|
|
As of
|
|
December 31, 2018
|
Year ending:
|
|
2019
|
$
|
5,366
|
|
2020
|
5,279
|
|
2021
|
4,147
|
|
2022
|
2,729
|
|
2023
|
1,698
|
|
Thereafter
|
2,647
|
|
Total minimum lease payments
|
$
|
21,866
|
|
Minimum rental lease payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of rent abatement and incentives. Rental expense for operating leases for 2018 was $5.2 million.
(11) GOODWILL
The rollforward of goodwill was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Retail
|
|
Total
|
Balance, January 1, 2018
|
$
|
2,335
|
|
|
$
|
59,695
|
|
|
$
|
62,030
|
|
Currency exchange rate adjustment
|
(185
|
)
|
|
5
|
|
|
(180
|
)
|
Business acquisition (Note 2)
|
1,602
|
|
|
—
|
|
|
1,602
|
|
Balance, December 31, 2018
|
3,752
|
|
|
59,700
|
|
|
63,452
|
|
Currency exchange rate adjustment
|
55
|
|
|
—
|
|
|
55
|
|
Goodwill impairment
|
(3,807
|
)
|
|
(59,700
|
)
|
|
(63,507
|
)
|
Balance, December 31, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
(12) OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
(in years)
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Indefinite-lived trademarks(1)
|
N/A
|
|
$
|
14,752
|
|
|
$
|
23,252
|
|
Definite-lived trademarks
|
5
|
to
|
15
|
|
2,850
|
|
|
2,850
|
|
Patents
|
7
|
to
|
24
|
|
14,243
|
|
|
14,243
|
|
Customer relationships
|
10
|
to
|
15
|
|
24,700
|
|
|
24,700
|
|
|
|
|
|
|
56,545
|
|
|
65,045
|
|
Accumulated amortization - definite-lived intangible assets
|
|
|
|
|
(13,302
|
)
|
|
(9,805
|
)
|
|
|
|
|
|
$
|
43,243
|
|
|
$
|
55,240
|
|
(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.
Amortization expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Amortization expense
|
$
|
3,497
|
|
|
$
|
3,164
|
|
Future amortization of definite-lived intangible assets is as follows (in thousands):
|
|
|
|
|
2020
|
$
|
3,198
|
|
2021
|
3,168
|
|
2022
|
3,168
|
|
2023
|
3,168
|
|
2024
|
3,118
|
|
Thereafter
|
12,671
|
|
|
$
|
28,491
|
|
(13) INVESTMENTS
During 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. As of December 31, 2019, we had elected the practicability exception for equity investments without readily determinable fair values of $3.5 million and have not recognized any impairments or any upward adjustments on either an annual or cumulative basis due to observable price changes.
As of December 31, 2019, the carrying values of our equity securities were included in the following line item in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
Measurement Alternative - No Readily Determinable Fair Value
|
Other assets
|
$
|
3,500
|
|
(14) ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Payroll and related liabilities
|
$
|
2,929
|
|
|
$
|
3,620
|
|
Other
|
4,704
|
|
|
4,750
|
|
Total accrued liabilities
|
$
|
7,633
|
|
|
$
|
8,370
|
|
(15) PRODUCT WARRANTIES
Changes in our product warranty obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
5,575
|
|
|
$
|
6,117
|
|
Accruals
|
5,103
|
|
|
3,884
|
|
Payments
|
(4,961
|
)
|
|
(4,426
|
)
|
Balance, December 31
|
$
|
5,717
|
|
|
$
|
5,575
|
|
(16) BORROWINGS
Line of Credit
On March 29, 2019, we entered into a Credit Agreement with Chase that provides for a $40.0 million revolving line of credit. The term of the 2019 Chase Credit Agreement expires on March 29, 2022 and is secured by substantially all of our assets.
The 2019 Chase 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 2019 Chase 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.
As of December 31, 2019, we had $14.3 million of outstanding borrowings under the line of credit resulting primarily from our term loan payoff. Any outstanding balance is due and payable on March 29, 2022. As of December 31, 2019, we had $1.7 million standby letters of credit. The interest rate applicable to each advance under the revolving line of credit is based on either Chase's floating prime rate or adjusted LIBOR, plus an applicable margin. As of December 31, 2019, our borrowing rate for line of credit advances was 3.69%.
The Company concluded a breach of the minimum fixed charge coverage ratio covenant on the 2019 Chase Credit Agreement at the December 31, 2019 measurement date. The Company classified the 2019 Chase Credit Agreement as a non-current liability as of the December 31, 2019 financial statements as the covenant being breached at the balance sheet date was cured with alternative sources of funding obtained to terminate the 2019 Chase Credit Agreement as of the issuance of these financial statements. See Note 26, Subsequent Events to the consolidated financial statements in Part II, Item 8 of this report.
Term Loan and Line of Credit
As of December 31, 2019, we had closed our term loan and the related line of credit and no letters of credit were issued under the 2014 Chase Credit Agreement.
On December 31, 2015 we entered into an amendment (the “Amendment”) to our existing 2014 Chase Credit Agreement, dated December 5, 2014, with Chase that provided for an $80 million term loan to finance the acquisition of Octane Fitness (the “Term Loan”), which was scheduled to mature on December 31, 2020. The Term Loan and a $20 million revolving line of credit with Chase were secured by substantially all of the assets of Nautilus. The 2014 Chase Credit Agreement was amended on December 21, 2018, which, among other changes, extended the term of the $20.0 million revolving line of credit to December 31, 2021. This credit facility was terminated on March 29, 2019 in connection with entering into the $40.0 million line of credit agreement discussed above.
(17) INCOME TAXES
Income Tax Expense
(Loss) income from continuing operations before income taxes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
U.S.
|
$
|
(102,004
|
)
|
|
$
|
19,109
|
|
Non-U.S.
|
172
|
|
|
1,892
|
|
(Loss) income from continuing operations before income taxes
|
$
|
(101,832
|
)
|
|
$
|
21,001
|
|
Income tax (benefit) expense from continuing operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Current:
|
|
|
|
U.S. federal
|
$
|
164
|
|
|
$
|
1,750
|
|
U.S. state
|
419
|
|
|
477
|
|
Non-U.S.
|
453
|
|
|
435
|
|
Total current
|
1,036
|
|
|
2,662
|
|
Deferred:
|
|
|
|
U.S. federal
|
(9,431
|
)
|
|
2,235
|
|
U.S. state
|
(540
|
)
|
|
1,059
|
|
Non-U.S.
|
(602
|
)
|
|
(65
|
)
|
Total deferred
|
(10,573
|
)
|
|
3,229
|
|
Income tax (benefit) expense
|
$
|
(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,
|
|
2019
|
|
2018
|
U.S. statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
State tax, net of U.S. federal tax benefit
|
3.8
|
|
|
5.7
|
|
Non-U.S. income taxes
|
—
|
|
|
0.1
|
|
Nondeductible operating expenses
|
(0.4
|
)
|
|
3.1
|
|
Research and development credit
|
0.5
|
|
|
(3.1
|
)
|
Change in deferred tax measurement rate
|
(0.1
|
)
|
|
0.1
|
|
Change in uncertain tax positions
|
0.1
|
|
|
0.8
|
|
Excess tax benefits from stock plans
|
(0.2
|
)
|
|
(0.7
|
)
|
Change in valuation allowance
|
(1.5
|
)
|
|
1.8
|
|
Impairment of intangibles
|
(13.6
|
)
|
|
—
|
|
Other
|
(0.2
|
)
|
|
(0.7
|
)
|
Effective income tax rate
|
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,
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
Accrued liabilities
|
$
|
2,152
|
|
|
$
|
2,453
|
|
Allowance for doubtful accounts
|
10
|
|
|
23
|
|
Inventory valuation
|
509
|
|
|
424
|
|
Capitalized indirect inventory costs
|
299
|
|
|
442
|
|
Stock-based compensation expense
|
548
|
|
|
811
|
|
Deferred rent
|
478
|
|
|
520
|
|
Net operating loss carryforward
|
7,580
|
|
|
1,137
|
|
Basis difference on long-lived assets
|
1,228
|
|
|
608
|
|
Credit carryforward
|
1,221
|
|
|
747
|
|
Other
|
426
|
|
|
219
|
|
Gross deferred income tax assets
|
14,451
|
|
|
7,384
|
|
Valuation allowance
|
(2,743
|
)
|
|
(1,247
|
)
|
Deferred income tax assets, net of valuation allowance
|
11,708
|
|
|
6,137
|
|
Deferred income tax liabilities:
|
|
|
|
Prepaid advertising
|
(320
|
)
|
|
(674
|
)
|
Other prepaids
|
(858
|
)
|
|
(762
|
)
|
Basis difference of long-lived assets
|
(11,628
|
)
|
|
(16,474
|
)
|
Other
|
(55
|
)
|
|
(4
|
)
|
Deferred income tax liabilities
|
(12,861
|
)
|
|
(17,914
|
)
|
Net deferred income tax liabilities
|
$
|
(1,153
|
)
|
|
$
|
(11,777
|
)
|
Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Deferred income tax assets, non-current (recorded in "other assets")
|
630
|
|
|
111
|
|
Deferred income tax liabilities, non-current
|
(1,783
|
)
|
|
(11,888
|
)
|
Net deferred income tax liabilities
|
$
|
(1,153
|
)
|
|
$
|
(11,777
|
)
|
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. Based on our analysis during the fourth quarter of 2019, we determined that an additional $1.6 million of valuation allowance was necessary against the U.S. state net operating loss carryforward deferred tax assets, and, accordingly, the amount is included as a component of income tax expense from continuing operations in 2019.
As of December 31, 2019, we had a valuation allowance against net deferred income tax assets of $2.7 million. Of the valuation allowance, $2.5 million primarily relates to domestic 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 primarily 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. There have been no material changes to our foreign operations since December 31, 2018, and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2019.
Income Tax Carryforwards
As of December 31, 2019, we had the following income tax carryforwards (in millions):
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Expires in
|
Net operating loss carryforwards
|
|
|
|
|
U.S. federal
|
|
$
|
25.0
|
|
|
Indefinite
|
U.S. state
|
|
$
|
39.3
|
|
|
2020 - 2039
|
China
|
|
$
|
0.1
|
|
|
2022
|
Income tax credit carryforwards
|
|
|
|
|
U.S. federal
|
|
$
|
0.5
|
|
|
2039
|
U.S. state
|
|
$
|
1.0
|
|
|
2020 - 2034
|
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):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance, January 1
|
$
|
2,330
|
|
|
$
|
2,194
|
|
Additions for tax positions taken in prior years
|
44
|
|
|
41
|
|
Reductions for tax positions taken in prior years
|
(81
|
)
|
|
(4
|
)
|
Additions for tax positions related to the current year
|
87
|
|
|
116
|
|
Lapses of statutes of limitations
|
(42
|
)
|
|
(12
|
)
|
Other
|
—
|
|
|
(5
|
)
|
Balance, December 31
|
$
|
2,338
|
|
|
$
|
2,330
|
|
Of the $2.3 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2019, $2.1 million would affect our effective tax rate if recognized.
We recorded tax-related interest and penalty expense of $0.4 million for both 2019 and 2018. We had a cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2019 and 2018 of $1.7 million and $1.3 million, respectively.
Our U.S. federal income tax returns for 2010 through 2019 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2008 through 2019 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, 2019, we believe it is reasonably likely that, within the next twelve months, $0.8 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.
(18) ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income, 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, 2017
|
|
$
|
(64
|
)
|
|
$
|
216
|
|
|
$
|
(411
|
)
|
|
$
|
(259
|
)
|
Current period other comprehensive income (loss) before reclassifications
|
|
58
|
|
|
165
|
|
|
(715
|
)
|
|
(492
|
)
|
Reclassification of amounts to earnings
|
|
—
|
|
|
(158
|
)
|
|
—
|
|
|
(158
|
)
|
Net other comprehensive income (loss) during period
|
|
58
|
|
|
7
|
|
|
(715
|
)
|
|
(650
|
)
|
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
|
)
|
(19) 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 and 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. At December 31, 2019, we had 1.1 million shares available for future grant under our 2015 Plan, and a total of 3.2 million shares of our common stock are reserved for future issuance pursuant to awards currently outstanding under the 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, 2018
|
166
|
|
|
$
|
6.97
|
|
Granted
|
682
|
|
|
1.79
|
|
Forfeited, canceled or expired
|
(81
|
)
|
|
7.44
|
|
Exercised
|
(27
|
)
|
|
2.76
|
|
Outstanding at December 31, 2019
|
740
|
|
|
$
|
2.30
|
|
Certain information regarding options outstanding at December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Options Vested and Expected to Vest
|
Number (in thousands)
|
740
|
|
|
58
|
|
|
740
|
|
Weighted-average exercise price
|
$
|
2.30
|
|
|
$
|
8.30
|
|
|
$
|
2.30
|
|
Aggregate intrinsic value (in thousands)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Weighted average remaining contractual term (in years)
|
7.1
|
|
|
1.4
|
|
|
7.1
|
|
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, 2018
|
50
|
|
|
$
|
15.18
|
|
Granted
|
55
|
|
|
5.32
|
|
Vested
|
(20
|
)
|
|
14.65
|
|
Outstanding at December 31, 2019
|
85
|
|
|
$
|
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, 2018
|
368
|
|
|
$
|
13.98
|
|
Granted
|
1,113
|
|
|
1.80
|
|
Forfeited, canceled or expired
|
(123
|
)
|
|
13.35
|
|
Vested
|
(48
|
)
|
|
18.69
|
|
Outstanding at December 31, 2019
|
1,310
|
|
|
$
|
3.52
|
|
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 December 2015, in connection with the acquisition of Octane Fitness, we granted PSU awards to a certain executive officer and management team personnel covering a total of 117,230 shares of our common stock. As of December 31, 2019, these awards had been forfeited or were replaced by comparable awards and were no longer outstanding.
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, 2019, approximately 115,000 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, 2018
|
221
|
|
|
$
|
14.73
|
|
Granted and additional goal shares awarded
|
—
|
|
|
—
|
|
Forfeited, canceled or expired
|
(106
|
)
|
|
14.90
|
|
Vested
|
—
|
|
|
—
|
|
Outstanding at December 31, 2019
|
115
|
|
|
$
|
14.57
|
|
Stock-Based Compensation
Stock-based compensation expense, primarily included in general and administrative expense, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Stock options
|
$
|
61
|
|
|
$
|
6
|
|
RSAs
|
289
|
|
|
292
|
|
RSUs
|
609
|
|
|
1,527
|
|
PSUs
|
(410
|
)
|
|
52
|
|
ESPP
|
70
|
|
|
104
|
|
|
$
|
619
|
|
|
$
|
1,981
|
|
Certain other information regarding our stock-based compensation was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Total intrinsic value of stock options exercised
|
$
|
84
|
|
|
$
|
1,451
|
|
Fair value of RSUs vested
|
354
|
|
|
655
|
|
Fair value of PSUs vested
|
—
|
|
|
614
|
|
As of December 31, 2019, unrecognized compensation expense for outstanding, but unvested stock-based awards was $2.9 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, 2018
|
394
|
|
|
|
|
|
Employee shares purchased
|
(101
|
)
|
|
$
|
2.39
|
|
|
$
|
0.26
|
|
Balance at December 31, 2019
|
293
|
|
|
|
|
|
Assumptions used in calculating the fair value of employee stock purchases were as follows:
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Dividend yield
|
—%
|
|
—%
|
Risk-free interest rate
|
2.3%
|
|
1.7%
|
Expected life (years)
|
N/A
|
|
N/A
|
Expected volatility
|
64%
|
|
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.
(20) STOCK REPURCHASE PROGRAMS
On April 25, 2017, our Board of Directors authorized a $15.0 million share repurchase program. Under this program, shares of common stock may be repurchased from time to time through April 25, 2019. During 2018, repurchases under this program totaled $12.0 million. As of November 2018, the stock repurchases under this program were completed in full and the program expired.
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, 2019, repurchases under this program totaled $1.0 million and $14.0 million remaining available for future share repurchases under the existing program.
Cumulative repurchases for 2018 through 2019 for all programs were as follows:
|
|
|
|
|
|
|
|
Year Ended
|
|
Number of Shares
|
|
Repurchased Amount
|
|
Average Price per Share
|
December 31, 2018
|
|
990,229
|
|
$12,995,791
|
|
$13.12
|
|
|
990,229
|
|
$12,995,791
|
|
$13.12
|
Repurchases may be made in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases are funded with existing cash balances, and the repurchased shares are retired and returned to unissued authorized shares.
(21) (LOSS) INCOME PER SHARE
Basic per share amounts were computed using the weighted average number of common shares outstanding. Diluted per share amounts were calculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, as determined by the treasury stock method.
The weighted average numbers of shares outstanding used to compute (loss) income per share amounts were as follows (in thousands):
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Shares used for basic per share calculations
|
29,684
|
|
|
30,099
|
|
Dilutive effect of outstanding options, RSUs, and PSUs
|
—
|
|
|
256
|
|
Shares used for diluted per share calculations
|
29,684
|
|
|
30,355
|
|
The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted per share due to loss from continuing operations, as such, the exercise or conversion of any potential shares would increase the number of shares in the denominator and results in a lower loss per share (in thousands):
|
|
|
|
|
|
|
|
As of December 31,
|
|
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 (loss) income 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 dilutive potential common shares in the future (in thousands):
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Stock options
|
76
|
|
|
10
|
|
RSUs
|
228
|
|
|
1
|
|
(22) 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,
|
|
2019
|
|
2018
|
401(k) matching contributions
|
$
|
976
|
|
|
$
|
1,105
|
|
(23) 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, 2019.
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,
|
|
2019
|
|
2018
|
Net Sales:
|
|
|
|
Direct
|
$
|
119,651
|
|
|
$
|
184,925
|
|
Retail
|
186,584
|
|
|
208,092
|
|
Unallocated royalty
|
3,050
|
|
|
3,736
|
|
Consolidated net sales
|
$
|
309,285
|
|
|
$
|
396,753
|
|
Contribution:
|
|
|
|
Direct
|
$
|
(24,569
|
)
|
|
$
|
6,865
|
|
Retail
|
16,043
|
|
|
31,516
|
|
Unallocated royalty
|
3,050
|
|
|
3,733
|
|
Consolidated contribution
|
$
|
(5,476
|
)
|
|
$
|
42,114
|
|
|
|
|
|
Reconciliation of consolidated contribution to (loss) income from continuing operations:
|
|
|
|
Consolidated contribution
|
$
|
(5,476
|
)
|
|
$
|
42,114
|
|
Amounts not directly related to segments:
|
|
|
|
Operating expenses
|
(95,068
|
)
|
|
(21,345
|
)
|
Other expense, net
|
(1,288
|
)
|
|
232
|
|
Income tax (benefit) expense
|
(9,537
|
)
|
|
5,891
|
|
(Loss) income from continuing operations
|
$
|
(92,295
|
)
|
|
$
|
15,110
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
Direct
|
$
|
2,919
|
|
|
$
|
1,537
|
|
Retail
|
5,657
|
|
|
5,098
|
|
Unallocated corporate
|
2,235
|
|
|
2,307
|
|
Total depreciation and amortization expense
|
$
|
10,811
|
|
|
$
|
8,942
|
|
|
|
|
|
|
As of December 31,
|
Assets:
|
2019
|
|
2018
|
Direct
|
$
|
47,377
|
|
|
$
|
50,907
|
|
Retail
|
148,965
|
|
|
204,921
|
|
Unallocated corporate
|
24,137
|
|
|
77,116
|
|
Total assets
|
$
|
220,479
|
|
|
$
|
332,944
|
|
There are no material long-lived assets held outside of the U.S.
In 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,
|
|
|
2019
|
|
2018
|
Amazon.com
|
|
15.2
|
%
|
|
11.5
|
%
|
Dick's Sporting Goods
|
|
11.7
|
%
|
|
13.8
|
%
|
(24) COMMITMENTS AND CONTINGENCIES
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, 2019, we had approximately $28.4 million 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, 2019, 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, 2019.
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, 2019.
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.
(25) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes our unaudited quarterly financial data for 2019 and 2018 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Total
|
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(1)
|
(10,167
|
)
|
|
(85,414
|
)
|
|
(8,253
|
)
|
|
3,290
|
|
|
(100,544
|
)
|
(Loss) income from continuing operations(2)
|
(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
|
)
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
114,813
|
|
|
$
|
75,498
|
|
|
$
|
91,057
|
|
|
$
|
115,385
|
|
|
$
|
396,753
|
|
Gross profit
|
58,871
|
|
|
33,648
|
|
|
38,506
|
|
|
50,715
|
|
|
181,740
|
|
Operating income
|
10,697
|
|
|
1,202
|
|
|
6,160
|
|
|
2,710
|
|
|
20,769
|
|
Income from continuing operations
|
8,140
|
|
|
1,007
|
|
|
4,503
|
|
|
1,460
|
|
|
15,110
|
|
Loss from discontinued operations
|
(81
|
)
|
|
(79
|
)
|
|
(194
|
)
|
|
(98
|
)
|
|
(452
|
)
|
Net income
|
8,059
|
|
|
928
|
|
|
4,309
|
|
|
1,362
|
|
|
14,658
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.27
|
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.05
|
|
|
$
|
0.49
|
|
Diluted
|
0.26
|
|
|
0.03
|
|
|
0.14
|
|
|
0.05
|
|
|
0.48
|
|
(1) Operating (loss) income for the quarter ended June 30, 2019 included a $72.0 million non-cash goodwill and intangible impairment charge.
(2) (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.
(26) SUBSEQUENT EVENTS
On January 31, 2020 the Company entered into a Credit Agreement by and among the Company and certain of its subsidiaries from time to time party thereto, as borrowers (collectively, the “Borrowers”), Wells Fargo Bank, National Association, a national banking association and lenders from time to time party thereto (“Wells Fargo” or collectively the "Lenders"), as administrative agent, pursuant to which the Lenders have agreed, among other things, to make available to the Borrowers 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, collectively the "Financing"), in each case, as such amounts may increase or decrease in accordance with the terms of the Credit Agreement. The principal amount of the loan will bear interest based on the base rate or the London Interbank Offer Rate ("LIBOR") rate, plus an applicable margin. Interest on the ABL Revolver 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%.
Borrowings under the Credit Agreement will mature, and all outstanding amounts thereunder will be payable on January 31, 2025, unless the maturity is accelerated subject to the terms set forth in the Credit Agreement. Each Borrower’s obligations under the Credit Agreement are guaranteed by the Company and each of the Company’s subsidiaries that are party to the Credit Agreement from time to time. Repayment of obligations under the Credit Agreement is secured by a pledge over substantially all assets and proceeds thereof now owned or hereafter acquired by the Company and certain of its subsidiaries. The Company will use proceeds from the Financing to refinance the existing $40.0 million asset-based revolving facility with Chase, pay transaction expenses, and for general corporate purposes. The Company’s existing credit facilities and agreements with Chase and all guarantees and liens existing in connection with those facilities and agreements were terminated upon the closing of the transaction contemplated by 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 the Company’s and each of its participating subsidiaries’ 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).
The Company’s credit facilities and agreements with Chase, and all guarantees and liens existing in connection with those facilities and agreements, was terminated upon the closing of the transactions contemplated by the Credit Agreement. The Company concluded a breach of the minimum fixed charge coverage ratio covenant on the 2019 Chase Credit Agreement at the December 31, 2019 measurement date. The Company classified the 2019 Chase Credit Agreement as a non-current liability as of the December 31, 2019 financial statements as the covenant being breached at the balance sheet date was cured with alternative sources of funding obtained to terminate the 2019 Chase Credit Agreement as of the issuance of these financial statements.