BowFlex (BFX) - 2021 Q1 - Quarterly Report

PART I Financial Statements The financial statements for the period ended June 30, 2020, reflect significant revenue growth and improved profitability, driven by strong home fitness demand Condensed Consolidated Balance Sheets As of June 30, 2020, the balance sheet reflects a significant increase in cash to $45.7 million and a sharp decrease in inventories, with Octane Fitness® reclassified as held-for-sale Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $45,656 | $11,070 | | Inventories | $21,310 | $54,768 | | Current assets held-for-sale | $29,054 | $— | | Total assets | $204,971 | $220,479 | | Liabilities & Equity | | | | Trade payables | $45,207 | $74,255 | | Total liabilities | $115,855 | $129,883 | | Total shareholders' equity | $89,116 | $90,596 | Condensed Consolidated Statements of Operations For Q2 2020, net sales surged 93.5% to $114.2 million, gross profit increased 170.6%, and net loss significantly narrowed to $5.1 million from $78.9 million year-over-year Q2 2020 vs Q2 2019 Performance (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net sales | $114,188 | $59,004 | | Gross profit | $47,396 | $17,517 | | Loss on disposal group / impairment | $29,013 | $72,008 | | Operating loss | $(7,106) | $(85,414) | | Net loss | $(5,110) | $(78,868) | | Diluted net loss per share | $(0.17) | $(2.66) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash provided by operating activities was $46.5 million, a significant reversal from the prior year, driven by improved working capital and a smaller net loss Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $46,538 | $(37,216) | | Net cash (used in) provided by investing activities | $(4,659) | $17,897 | | Net cash used in financing activities | $(520) | $(11,002) | | Net change in cash, cash equivalents and restricted cash | $36,782 | $(30,204) | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies and events, including the classification of Octane Fitness® as held-for-sale, strong revenue growth across all regions and channels, a new financing agreement, and a tax benefit from the CARES Act - The company classified its Octane Fitness® business as held-for-sale as of June 30, 2020, resulting in a loss on the disposal group of $29.0 million[32] - On January 31, 2020, the company entered into a new Credit Agreement with Wells Fargo, providing a $55.0 million asset-based revolving loan facility and a $15.0 million term loan facility[79] - As a result of the CARES Act, the company recorded a $3.2 million income tax benefit in the first quarter of 2020 associated with the remeasurement of its net operating loss (NOL) carryback[88] - Non-cancelable purchase obligations increased significantly to $127.7 million as of June 30, 2020, from $28.4 million at year-end 2019, primarily to secure factory capacity for inventory[90] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the nearly doubled Q2 sales to strong home-fitness demand driven by COVID-19, leading to expanded gross margins, improved liquidity, and a strategic focus on digital transformation and the potential sale of Octane Fitness® Overview The company experienced continued strong demand for home-fitness products in Q2 2020 due to COVID-19, leading to nearly doubled sales, a focus on digital transformation via JRNY®, and the classification of Octane Fitness® as held-for-sale - Q2 2020 sales were nearly double Q2 2019 sales, driven by strong demand for home-fitness products due to the COVID-19 pandemic[102] - The company is continuing its digital transformation by integrating its JRNY® platform into key new products with the goal of offering digital experiences for a subscription fee[103] - The Octane Fitness® disposal group was classified as held-for-sale, resulting in a non-cash charge of $29.0 million[105] Results of Operations Net sales for Q2 2020 increased 93.5% to $114.2 million, driven by strong growth in both Direct and Retail segments, with gross margin expanding to 41.5% and operating expenses decreasing due to lower charges and reduced media spend Q2 2020 Net Sales Growth by Segment | Segment | Q2 2020 Net Sales | YoY Change ($) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Direct | $50,433 | +$29,599 | +142.1% | | Retail | $62,948 | +$25,495 | +68.1% | | Total | $114,188 | +$55,184 | +93.5% | - Direct segment cardio product sales grew 183.4% in Q2, led by connected-fitness bikes (Bowflex® C6, Schwinn® IC4) and the Max Trainer®[124] - Selling and marketing expenses decreased by 29.4% in Q2 2020, primarily due to a $4.2 million reduction in media spend as the company pulled back on paid advertising given strong organic demand and inventory scarcity[127][138][139] Liquidity and Capital Resources The company's liquidity strengthened significantly, with cash reaching $47.9 million and $28.6 million available under its ABL facility, driven by $46.5 million in cash from operations and a sharp decrease in inventory due to high demand - As of June 30, 2020, the company had $47.9 million in cash, cash equivalents, and restricted cash, plus $28.6 million available for borrowing[155] - Cash provided by operating activities was $46.5 million for the first six months of 2020, compared to cash used of $37.2 million in the same period of 2019[156] - Inventory decreased to $21.3 million from $54.8 million at year-end 2019 due to a surge in demand for home-fitness products[158] - The company had approximately $127.7 million in non-cancelable purchase obligations as of June 30, 2020, to secure additional factory capacity for inventory purchases[168] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on variable-rate debt and foreign exchange rate volatility, which are mitigated by foreign exchange forward contracts with a notional amount of $35.8 million as of June 30, 2020 - The company is exposed to interest rate risk as its credit facilities charge interest based on benchmark rates such as LIBOR[176] - To manage foreign currency exposure, the company enters into foreign exchange forward contracts, with total notional amounts of $35.8 million outstanding as of June 30, 2020[177] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter - Management, including the Principal Executive Officer and Principal Financial Officer, concluded that disclosure controls and procedures were effective as of the end of the period[179] - There were no material changes in internal control over financial reporting during the three months ended June 30, 2020[180] PART II. OTHER INFORMATION Legal Proceedings As of the filing date, Nautilus, Inc. was not involved in any material legal proceedings, though it may be involved in ordinary course claims and lawsuits - As of the date of filing this Quarterly Report on Form 10-Q, the company was not involved in any material legal proceedings[181] Risk Factors This section updates risk factors to address the significant and ongoing adverse impact of the COVID-19 pandemic on operations, supply chains, and distribution systems, noting the uncertainty of its ultimate effect - A new risk factor has been added concerning health epidemics, specifically the COVID-19 pandemic, which has had and could continue to have an adverse impact on operations, supply chains, and distribution systems[183] - The COVID-19 pandemic is adversely affecting operations, and the company has experienced and expects to continue to experience unpredictable reductions in demand for certain products and services[186] - Due to the pandemic, the company has been unable to satisfy certain customer orders, leading to delays, and the ultimate impact on the business cannot be reasonably estimated at this time[187] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files for interactive data submission - The exhibits filed include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and XBRL interactive data files (Exhibits 101.INS, 101.SCH, etc.)[191] Signatures The Quarterly Report on Form 10-Q was duly authorized and signed on August 10, 2020, on behalf of Nautilus, Inc. by its principal executive and financial officers - The report was signed on August 10, 2020, by James Barr IV, Chief Executive Officer, and Aina E. Konold, Chief Financial Officer[194]