BowFlex (BFX) - 2019 Q4 - Annual Report

Part I Item 1. Business Nautilus, Inc. is a global fitness solutions company operating through Direct and Retail segments, focusing on product innovation and connected-fitness Overview and Business Strategy Nautilus is a global fitness company focused on enhancing product lines with personalized connected-fitness and expanding international sales - The company operates through two distinct business segments: Direct (direct-to-consumer) and Retail (through a network of independent companies)[7] - Long-term strategy includes enhancing product lines with personalized connected-fitness, investing in the JRNY digital platform, expanding international retail sales, and maximizing royalty revenues from brand licensing[9] Products and Business Segments The company markets cardiovascular and strength fitness products under key brands, with consumer cardio products driving 77% of 2019 revenue - Key brands include Nautilus®, Bowflex®, Octane Fitness®, Schwinn®, and the new digital platform JRNY™[13] - Sales of consumer cardio products accounted for approximately 77% of the company's revenue in 2019[14] Sales, Marketing, and Innovation The Direct segment primarily sells Bowflex® cardio products, while the Retail segment offers a comprehensive line, with innovation focused on connected-fitness and the JRNY digital platform - Cardio product sales represented 82% of Direct channel revenues in 2019[16] Research and Development Expenses | Year | R&D Expense (in millions) | | :--- | :--- | | 2019 | $14.3 | | 2018 | $16.8 | Operations and Competition The company's sales are seasonal, products are sourced from third-party Asian manufacturers, and the fitness market is highly competitive - Sales are typically strongest in the fourth quarter and weakest in the second quarter[24] - All products are produced by third-party manufacturers, primarily located in Asia, with inventory lead times of two to three months[25] - Principal competitors include ICON Health & Fitness, Johnson Health Tech, Peloton, Beach Body, Life Fitness, Precor, and Technogym[33] Intellectual Property, Backlog, and Significant Customers Nautilus holds numerous trademarks and patents, experienced a doubled customer order backlog in 2019, and relies on Amazon.com and Dick's Sporting Goods as major customers - The company owns key trademarks such as Nautilus®, Bowflex®, Max Trainer®, and Octane Fitness®, and holds patents with expiration dates ranging from 2021 to 2037[36][40][41] - Customer order backlog increased from $2.9 million in 2018 to $5.8 million in 2019, primarily due to strong demand for new connected fitness products[44] Significant Customer Sales as % of Total Net Sales | Customer | 2019 | 2018 | | :--- | :--- | :--- | | Amazon.com | 15.2% | 11.5% | | Dick's Sporting Goods | 11.7% | 13.8% | Item 1A. Risk Factors The company faces significant risks including multi-year revenue decline, reliance on key customers and products, supply chain disruptions, data privacy concerns, and intense market competition - The company is experiencing a multi-year revenue decline, primarily in its Direct business, and faces unprecedented competition Strategic initiatives to address these challenges are underway but success is not guaranteed[61][62] - A significant portion of revenue is derived from a few large retail customers and the Max Trainer® product line, making the company vulnerable to customer loss or a decline in this product's sales[57][58][59] - Substantially all products are manufactured by third parties in Asia, exposing the company to risks from supply chain disruptions, such as the novel coronavirus (COVID-19), and changes in international trade policy and tariffs[87][89] - The company faces risks related to data privacy and security, as its digital platforms process personal health and fitness information, making it subject to regulations like HIPAA and GDPR[73][74] - The market is highly competitive with limited barriers to entry Competitors may have greater resources or develop superior products, limiting the company's ability to compete effectively[100][101] Item 2. Properties Nautilus, Inc. leases all its properties, including corporate headquarters, R&D facilities, and distribution centers, which are deemed adequate for current operations Summary of Leased Properties | Company | Location | Primary Function(s) | | :--- | :--- | :--- | | Nautilus | Washington | Corporate headquarters, call center, retail store, R&D | | Octane | Minnesota | Design, sales, service, R&D | | Nautilus | Ohio | Warehouse and distribution | | Nautilus | Oregon | Warehouse and distribution | | Nautilus | China | Quality assurance and software engineering | | Octane | Netherlands | Sales and service office | Item 3. Legal Proceedings As of the filing date of this Form 10-K, Nautilus, Inc. was not involved in any material legal proceedings - The company was not involved in any material legal proceedings as of the filing date[121] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Nautilus's common stock trades on the NYSE under 'NLS', with no dividends paid in 2019 or 2018, and $14.0 million remaining for share repurchases - The company's common stock is listed on the New York Stock Exchange under the symbol "NLS"[123] - No dividends were paid on common stock in 2019 or 2018[124] - As of December 31, 2019, approximately $14.0 million remained available for share repurchases under the program authorized through February 21, 2020[125] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, Nautilus experienced a significant 22.0% net sales decrease and a $100.5 million operating loss, driven by impairment charges and segment declines, leading to reduced liquidity and a debt covenant breach Overview of 2019 Performance The company's 2019 performance saw a 22.0% decrease in net sales to $309.3 million and an operating loss of $100.5 million, primarily due to a $72.0 million impairment charge 2019 vs 2018 Key Financial Metrics | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $309.3M (-22.0%) | $396.8M | | Operating (Loss) Income | ($100.5M) | $20.8M | | Net (Loss) Income per Diluted Share | ($3.13) | $0.48 | - The increase in operating expenses and the resulting operating loss were primarily driven by a goodwill and intangible impairment charge of $72.0 million[133][134] Results of Operations Net sales decreased 22.0% to $309.3 million in 2019, with Direct segment sales down 35.3% and Retail down 10.3%, leading to a 39.2% decline in gross profit and a $100.5 million operating loss Net Sales by Segment (in thousands) | Segment | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Direct | $119,651 | $184,925 | (35.3)% | | Retail | $186,584 | $208,092 | (10.3)% | | Total | $309,285 | $396,753 | (22.0)% | Gross Profit and Margin by Segment | Segment | 2019 Gross Profit | 2019 Gross Margin | 2018 Gross Profit | 2018 Gross Margin | | :--- | :--- | :--- | :--- | :--- | | Direct | $59.6M | 49.8% | $111.5M | 60.3% | | Retail | $48.0M | 25.7% | $66.5M | 32.0% | - A non-cash goodwill and indefinite-lived intangible assets impairment charge of $72.0 million was recognized in the second quarter of 2019, significantly impacting operating results[165] Liquidity and Capital Resources The company's liquidity significantly decreased in 2019, with cash and cash equivalents falling to $11.1 million and $22.6 million cash used in operating activities, leading to a debt covenant breach Cash and Liquidity Position (Year-End) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $11.1M | $63.5M | | Cash (Used in) Provided by Operating Activities | ($22.6M) | $21.3M | - Inventories decreased by $13.7 million to $54.8 million as of December 31, 2019, reflecting efforts to align inventory levels with sales trends[173] - The company breached the minimum fixed charge coverage ratio covenant on its 2019 Chase Credit Agreement at year-end, but cured this post-balance sheet by obtaining new financing in January 2020[184][410] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate and foreign currency fluctuations, which it mitigates using derivative instruments like foreign exchange forward contracts totaling $33.2 million - Primary market risks are from changes in interest rates affecting debt and investments, and foreign currency exchange rate fluctuations[195] - The company uses foreign exchange forward contracts to hedge against currency fluctuations, with total notional amounts of $33.2 million outstanding at year-end 2019[197] - Derivative instruments are used solely for managing interest rate or foreign currency exposure, not for speculative purposes[198] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019 and 2018, reflecting a $92.8 million net loss in 2019, a substantial asset reduction, and negative operating cash flow Consolidated Financial Statements The consolidated financial statements for 2019 show a significant downturn, with total assets decreasing to $220.5 million and a net loss of $92.8 million, alongside negative operating cash flow Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $129,193 | $191,462 | | Goodwill | $0 | $63,452 | | Total Assets | $220,479 | $332,944 | | Total Liabilities | $129,883 | $150,348 | | Total Shareholders' Equity | $90,596 | $182,596 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $309,285 | $396,753 | | Gross Profit | $110,583 | $181,740 | | Operating (Loss) Income | ($100,544) | $20,769 | | Net (Loss) Income | ($92,800) | $14,658 | | Diluted (Loss) Income per Share | ($3.13) | $0.48 | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($22,573) | $21,251 | | Net cash provided by investing activities | $12,819 | $18,713 | | Net cash used in financing activities | ($17,490) | ($28,582) | Notes to Consolidated Financial Statements The notes detail accounting policies, including the adoption of new lease standards, a $63.5 million goodwill impairment, and a subsequent new $70.0 million credit facility in January 2020 - The company adopted the new lease accounting standard (ASU 2016-02, Topic 842) on January 1, 2019, recognizing additional operating lease liabilities of approximately $25 million with corresponding right-of-use assets[278][283] - A non-cash goodwill impairment charge of $63.5 million was recorded in the second quarter of 2019, reducing the goodwill balance to zero[332] - An $8.5 million non-cash impairment charge was recorded in Q2 2019 on the indefinite-lived Octane Fitness brand name trademark[245][315] - Subsequent to year-end, on January 31, 2020, the company entered into a new credit agreement with Wells Fargo for a $55.0 million revolving facility and a $15.0 million term loan, refinancing its previous facility with Chase[407] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[413] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[416] Part III Items 10, 11, 13, and 14 Information regarding directors, executive officers, corporate governance, executive compensation, related transactions, and accounting fees is incorporated by reference from the 2020 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, related transactions, and accounting fees is incorporated by reference from the 2020 Proxy Statement[421][422][426][427] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This item details the company's equity compensation plans as of December 31, 2019, showing 855,000 securities to be issued at a $2.30 weighted-average exercise price Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 855,000 | $2.30 | 1,058,000 | | Not approved by security holders | 0 | N/A | 0 | | Total | 855,000 | $2.30 | 1,058,000 | Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including the auditor's report and various corporate governance documents - This section provides an index to the financial statements and a list of all exhibits filed with the Form 10-K[428][430]