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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                   
Commission file number: 001-31321
NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)
Washington 94-3002667
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

17750 S.E. 6th Way
Vancouver, Washington 98683
(Address of principal executive offices, including zip code)

(360) 859-2900
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
 Common Stock, no par valueNLSNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer[ ]Accelerated filer[x]Non-accelerated filer[ ]Smaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  [x]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
The number of shares outstanding of the registrant's common stock as of November 6, 2020 was 30,258,840 shares.



NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.




Table of Contents
PART I.    FINANCIAL INFORMATION
    
Item 1.     Financial Statements

NAUTILUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
 As of
 September 30, 2020December 31, 2019
Assets
Cash and cash equivalents$70,072 $11,070 
Restricted cash
2,197  
Trade receivables, net of allowances of $85 and $45
68,619 54,600 
Inventories33,715 54,768 
Prepaids and other current assets9,735 8,283 
Income taxes receivable6,600 472 
Current assets held-for-sale28,701  
Total current assets219,639 129,193 
Property, plant and equipment, net
23,168 22,755 
Operating lease right-of-use assets20,637 20,778 
Other intangible assets, net9,553 43,243 
Other assets6,015 4,510 
Total assets$279,012 $220,479 
Liabilities and Shareholders' Equity
Trade payables$83,403 $74,255 
Accrued liabilities15,943 7,633 
Operating lease liabilities, current portion3,126 3,720 
Warranty obligations, current portion3,219 3,100 
Debt payable, current portion, net of unamortized debt issuance costs of $83 and $0
2,417  
Current liabilities held-for-sale9,710  
Total current liabilities117,818 88,708 
Operating lease liabilities, non-current19,592 18,982 
Warranty obligations, non-current306 2,617 
Income taxes payable, non-current3,989 3,676 
Deferred income tax liabilities, non-current1,550 1,783 
Other non-current liabilities801 46 
Debt payable, non-current, net of unamortized debt issuance costs of $277 and $230
11,510 14,071 
Total liabilities155,566 129,883 
Commitments and contingencies (Note 17)
Shareholders' equity:
Common stock - no par value, 75,000 shares authorized, 30,257 and 29,781 shares issued and outstanding
3,004 1,261 
Retained earnings121,184 90,272 
Accumulated other comprehensive loss(742)(937)
Total shareholders' equity123,446 90,596 
Total liabilities and shareholders' equity$279,012 $220,479 

See accompanying Notes to Condensed Consolidated Financial Statements.
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NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net sales$155,391 $61,708 $363,301 $205,112 
Cost of sales87,453 42,641 212,370 132,686 
Gross profit
67,938 19,067 150,931 72,426 
Operating expenses:
Selling and marketing19,207 17,472 56,339 69,146 
General and administrative8,841 6,726 25,812 23,824 
Research and development4,240 3,122 11,783 11,282 
(Gain) loss on disposal group, goodwill and other intangible impairment charge(8,345) 20,668 72,008 
Total operating expenses23,943 27,320 114,602 176,260 
Operating income (loss)43,995 (8,253)36,329 (103,834)
Other expense:
Interest income1  4 162 
Interest expense(253)(293)(1,218)(721)
Other, net(376)(129)(220)(351)
Total other expense, net(628)(422)(1,434)(910)
Income (loss) from continuing operations before income taxes43,367 (8,675)34,895 (104,744)
Income tax expense (benefit)(1)
9,398 55 3,610 (8,786)
Income (loss) from continuing operations33,969 (8,730)31,285 (95,958)
Discontinued operations:
Loss from discontinued operations before income taxes
(34)(39)(97)(104)
Income tax expense of discontinued operations
97 75 276 225 
Loss from discontinued operations(131)(114)(373)(329)
Net income (loss)$33,838 $(8,844)$30,912 $(96,287)
Basic income (loss) per share from continuing operations$1.13 $(0.29)$1.05 $(3.24)
Basic loss per share from discontinued operations
 (0.01)(0.02)(0.01)
Basic net income (loss) per share$1.13 $(0.30)$1.03 $(3.25)
Diluted income (loss) per share from continuing operations$1.05 $(0.29)$0.98 $(3.24)
Diluted loss per share from discontinued operations
(0.01)(0.01)(0.01)(0.01)
Diluted net income (loss) per share$1.04 $(0.30)$0.97 $(3.25)
Shares used in per share calculations:
Basic30,038 29,728 29,914 29,660 
Diluted32,401 29,728 31,792 29,660 
(1) Income tax expense (benefit) for the quarter and nine months 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.



See accompanying Notes to Condensed Consolidated Financial Statements.
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NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net income (loss)$33,838 $(8,844)$30,912 $(96,287)
Other comprehensive income (loss):
Unrealized gain on available-for-sale securities, net of income tax expense of $0, $0, $0 and $6   6 
Loss on derivative securities, effective portion, net of income tax benefit of $0, $0, $0 and $(139)   (223)
Foreign currency translation, net of income tax expense (benefit) of $13, $(37), $(34) and $(101)217 (177)195 23 
Other comprehensive income (loss)217 (177)195 (194)
Comprehensive income (loss)$34,055 $(9,021)$31,107 $(96,481)


See accompanying Notes to Condensed Consolidated Financial Statements.
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NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited and in thousands)
Common StockRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Shareholders' Equity
SharesAmount
Balances at December 31, 2019
29,781 $1,261 $90,272 $(937)$90,596 
Net income— — 2,184 — 2,184 
Foreign currency translation adjustment,
net of income tax benefit of $32
— — — (375)(375)
Stock-based compensation expense— 564  — 564 
Common stock issued under equity
compensation plan, net of shares withheld
for tax payments
36 (44)— — (44)
Balances at March 31, 2020
29,817 1,781 92,456 (1,312)92,925 
Net loss— — (5,110)— (5,110)
Foreign currency translation adjustment,
net of income tax benefit of $15
— — — 353 353 
Stock-based compensation expense— 865  — 865 
Common stock issued under equity
compensation plan, net of shares withheld
for tax payments
87  — —  
Common stock issued under employee stock purchase plan
63 83 — — 83 
Balances at June 30, 2020
29,967 2,729 87,346 (959)89,116 
Net income— — 33,838 — 33,838 
Foreign currency translation adjustment,
net of income tax expense of $13
— — — 217 217 
Stock-based compensation expense— 1,071  — 1,071 
Common stock issued under equity
compensation plan, net of shares withheld
for tax payments
290 (796)— — (796)
Balances at September 30, 2020
30,257 $3,004 $121,184 $(742)$123,446 


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Common StockRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Shareholders' Equity
SharesAmount
Balances at December 31, 2018
29,545 $215 $183,290 $(909)$182,596 
Net loss— — (8,575)— (8,575)
Unrealized gain on marketable securities, net of income tax expense of $5
— — — 15 15 
Loss on derivative securities, effective portion, net of income tax benefit of $33
— — — (100)(100)
Foreign currency translation adjustment,
net of income tax benefit of $55
— — — 128 128 
Stock-based compensation benefit— (147)(218)— (365)
Common stock issued under equity
compensation plan, net of shares withheld
for tax payments
48 (68)— — (68)
Balances at March 31, 2019
29,593  174,497 (866)173,631 
Net loss— — (78,868)— (78,868)
Unrealized loss on marketable securities, net of income tax expense of $1
— — — (9)(9)
Loss on derivative securities, effective portion, net of income tax benefit of $106
— — — (123)(123)
Foreign currency translation adjustment,
net of income tax benefit of $9
— — — 72 72 
Stock-based compensation expense— 9  — 9 
Common stock issued under equity
compensation plan, net of shares withheld
for tax payments
87 36 — — 36 
Common stock issued under employee stock purchase plan
48 168 — — 168 
Balances at June 30, 2019
29,728 213 95,629 (926)94,916 
Net loss— — (8,844)— (8,844)
Foreign currency translation adjustment,
net of income tax benefit of $37
— — — (177)(177)
Stock-based compensation expense— 412  — 412 
Balances at September 30, 2019
29,728 $625 $86,785 $(1,103)$86,307 

See accompanying Notes to Condensed Consolidated Financial Statements.
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NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)  
Nine Months Ended September 30,
 2020 2019
Cash flows from operating activities:
Income (loss) from continuing operations$31,285  $(95,958)
Loss from discontinued operations(373) (329)
Net income (loss)30,912  (96,287)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: 
Depreciation and amortization7,307  8,045 
Provision for allowance for doubtful accounts986  52 
Inventory lower-of-cost-or-market/NRV adjustments2,119 692 
Stock-based compensation expense2,500  56 
Loss on asset dispositions980 1,127 
Loss on debt extinguishment230  
Loss on disposal group, goodwill and other intangible impairment charge20,668 72,008 
Deferred income taxes, net of valuation allowance 1,144  (9,301)
Other(1,411)(115)
Changes in operating assets and liabilities:
Trade receivables(19,108) 15,079 
Inventories8,598  18,284 
Prepaids and other assets1,066  4,168 
Income taxes receivable(6,129) 2,906 
Trade payables12,324  (48,973)
Accrued liabilities and other liabilities, including warranty obligations7,746  (3,325)
Net cash provided by (used in) operating activities69,932  (35,584)
Cash flows from investing activities: 
Proceeds from sales and maturities of available-for-sale securities 25,271 
Purchases of property, plant and equipment(7,962) (6,630)
Purchases of other investments in non-controlled affiliates (3,500)
Net cash (used in) provided by investing activities(7,962) 15,141 
Cash flows from financing activities: 
Proceeds from long-term debt45,285 20,218 
Payments on long-term debt(43,852)(31,667)
Payments of debt issuance costs(1,823) 
Proceeds from employee stock purchases83 168 
Proceeds from exercise of stock options47 75 
Tax payments related to stock award issuances(887)(107)
Net cash used in financing activities(1,147) (11,313)
Effect of exchange rate changes on cash and cash equivalents484  (613)
Increase (decrease) in cash, cash equivalents and restricted cash61,307  (32,369)
Less: Net change in cash balances classified as assets held-for-sale(108) 
Net change in cash, cash equivalents and restricted cash61,199 (32,369)
Cash, cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period11,070  38,125 
Cash, cash equivalents and restricted cash at end of period$72,269  $5,756 
Supplemental disclosure of cash flow information: 
Cash paid for interest$704 $963 
Cash paid (received) for income taxes, net5,670  (2,203)
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred but not yet paid$989 $415 
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above:
Nine Months Ended September 30,
2020 2019
Cash and cash equivalents$70,072 $5,756 
Restricted cash
2,197  
Total cash, cash equivalents and restricted cash$72,269 $5,756 
See accompanying Notes to Condensed Consolidated Financial Statements.
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NAUTILUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) GENERAL INFORMATION
 
Basis of Consolidation and Presentation
 
The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Nautilus, Inc. and its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
 
The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).

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. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results could differ from those estimates. These uncertainties will be heightened by the COVID-19 pandemic, as we may be unable to accurately predict the impact of COVID-19 going forward and as a result our estimates may change in the near term. Further information regarding significant estimates can be found in our 2019 Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 30, 2020 and December 31, 2019, and our results of operations, comprehensive income (loss) and shareholders' equity for the three and nine month periods ended September 30, 2020 and 2019 and our cash flows for the nine month periods ended September 30, 2020 and 2019. Interim results are not necessarily indicative of results for a full year. Our revenues typically vary seasonally, and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.

Unless indicated otherwise, all information regarding our operating results pertain to our continuing operations.

Updates to Significant Accounting Policies

Restricted Cash
We are required by our banking partner to maintain a restricted bank account to cover for exposures on corporate credit cards and letters of credits. The use of these funds are restricted until the exposure with the banking partner is closed. 

Long-Lived Assets
We apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment, where applicable to all long-lived assets. ASC 360 addresses accounting and reporting for impairment and disposal of long-lived assets. We periodically evaluate the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. For a long-lived assets or disposal group classified as held-for-sale to be disposed of, the carrying value is determined in a similar manner, except that fair values are reduced for the cost to sell. The assets and liabilities of a disposal group classified as held-for-sale should be presented separately in the asset and liability sections, respectively, of the balance sheet. The disposal group is expected to be structured as a sale of the subsidiary shares and asset sale for the international assets.




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Recent Accounting Pronouncements

Recently Adopted Pronouncements

ASU 2019-01
In March 2019, the FASB issued Accounting Standards Update (“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. Our adoption of ASU 2019-01 as of January 1, 2020 had no material impact on our financial position, results of operations or 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. Our adoption of ASU 2018-13 as of January 1, 2020 had no material impact on our financial position, results of operations or cash flows.

Recently Issued Pronouncements Not Yet Adopted

ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance related to reference rate reform and provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use London Inter-bank Offered Rate (“LIBOR”) as a reference rate, which is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. 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.
ASU 2020-01
In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, 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 would have a material impact on our financial position, results of operations and cash flows.

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 introduce 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 make changes to the following current guidance: (1) making an intraperiod allocation if there is a loss in continuing operations and a gain 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 business entities' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020 with early adoption
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permitted. We are currently assessing the impact of adopting this standard but do not expect the adoption of this guidance would have a material impact 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. In May 2019, the FASB issued ASU 2019-05, which provides entities to have certain instruments with an option to irrevocably elect the fair value option. In November 2019, the FASB issued ASU 2019-11, which provides clarification and addresses specific issues about certain aspects of ASU 2016-13. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for smaller reporting companies until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In March 2020, the FASB issued ASC 2020-03, which provides an update to clarify or address specific issues. We are currently assessing the impact of adopting this standard and updates but do not expect the adoption of this guidance would have a material impact on our financial position, results of operations and cash flows.

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(2) ASSETS AND LIABILITIES HELD-FOR-SALE

As part of our strategic decision to renew our focus on connect in-home fitness we are selling Octane Fitness®. The Octane Fitness disposal group is reported within our Retail segment.

We met the relevant criteria for reporting the assets and liabilities of Octane Fitness® as held-for-sale as of June 30, 2020, as a result, assessed the disposal group for losses in accordance with ASC 360. The net carrying value of Octane Fitness® was compared to its fair value less estimated costs to sell as of June 30, 2020 and September 30, 2020. The Octane Fitness® disposal group resulted in a gain on disposal group within continuing operations for the three months ended September 30, 2020 of $8.3 million and a loss on disposal group for the same period ended June 30, 2020 of $29.0 million.

In the second quarter of 2020 the original estimate of fair value was based upon a range of fair value estimates determined using a combination of a discounted cash flow and market multiples that existed as of that original valuation date. During the third quarter, we received several letters of intent that were consistent with the range of fair values estimated during the second quarter. Prior to the end of the third quarter, management selected a single buyer to negotiate with exclusively and therefore had new information based upon the negotiated purchase price that supported a higher fair value.

For additional information related to assets and liabilities held-for-sale, see Notes 4 and 18.

The assets and liabilities of the Octane Fitness® disposal group were recorded on the condensed consolidated balance sheets as current assets held-for-sale of $28.7 million and current liabilities held-for-sale of $9.7 million as follows (in thousands):

As of
September 30, 2020
Assets:
Cash and cash equivalents$108 
Trade receivables3,937 
Inventories10,703 
Prepaids and other current assets586 
Property, plant and equipment, net1,571 
Other intangible assets32,045 
Loss on disposal group(20,272)
Other assets23 
Total current assets held-for-sale$28,701 
Liabilities:
Trade payables$4,659 
Accrued liabilities759 
Warranty obligations2,779 
Deferred income tax liabilities1,513 
Total current liabilities held-for-sale$9,710 



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(3) REVENUES

Our revenues from contracts with customers disaggregated by revenue source, excluding sales-based taxes, were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Product sales$150,639 $59,323 $351,116 $195,781 
Extended warranties and services1,905 993 5,305 4,630 
Other(1)
2,847 1,392 6,880 4,701 
Net sales$155,391 $61,708 $363,301 $205,112 
(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):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
United States$130,289 $50,447 $307,602 $169,532 
Canada12,744 5,649 25,241 17,135 
All other12,358 5,612 30,458 18,445 
Net sales$155,391 $61,708 $363,301 $205,112 

As of September 30, 2020, estimated revenue expected to be recognized in the future totaled $72.8 million, including certain held-for-sale orders of $5.2 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. Direct orders of $23.0 million and Retail orders of $49.8 million, including certain held-for-sale orders of $5.2 million comprised our backlog as of September 30, 2020, compared to Direct orders of $20.6 million and Retail orders of $13.6 million as of June 30, 2020. 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):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Balance, beginning of period$3,503 $562 $1,225 $816 
Cash additions1,182 611 5,652 1,123 
Revenue recognition(1,046)(279)(3,238)(1,045)
Balance, end of period$3,639 $894 $3,639 $894 


(4) 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;
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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):
September 30, 2020
Level 1Level 2Level 3Total
Assets:
Derivatives
Foreign currency forward contracts$ $637 $ $637 
Total assets measured at fair value$ $637 $ $637 
December 31, 2019
Level 1Level 2Level 3Total
Assets:
Derivatives
Foreign currency forward contracts$ $295 $ $295 
Total assets measured at fair value$ $295 $ $295 
Liabilities:
Derivatives
Foreign currency forward contracts$ $9 $ $9 
Total liabilities measured at fair value$ $9 $ $9 

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 nine month period ended September 30, 2020, nor for the year ended December 31, 2019.

We did not have any changes to our valuation techniques during the nine month period ended September 30, 2020, nor for the year ended December 31, 2019.

The fair values of 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.
 
We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangible assets and certain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

As of September 30, 2020, there were held-for-sale assets of $28.7 million and liabilities of $9.7 million that were recorded at fair value on a nonrecurring basis. As of September 30, 2020, there were no liabilities that were recorded at fair value on a recurring basis.

In accordance with ASC 360 — Property, Plant and Equipment (“ASC 360”), we met the criteria for classification of held-for-sale for the Octane Fitness® disposal group as of the reporting date. We performed an evaluation during the second and third quarter of 2020 to determine the held-for-sale fair values of assets and liabilities less related costs to sell, which resulted in a non-cash charge for loss on disposal group of $20.7 million. The disposal group was sold in October for $25.0 million with related disposal costs of $3.0 million. For additional information related to asset and liabilities held-for-sale, see Notes 2 and 18.

The held-for-sale valuation was performed using a quantitative assessment of the disposal group and we determined the fair value less costs to sell of the disposal group was less than the carrying amount. We assigned assets and liabilities to the disposal group either by specific identification or assumptions for the assets and liabilities that are specific to the held-for-sale disposal
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group. As of September 30, 2020, we determined the fair value of the disposal group using the market approach because we estimated there was a high likelihood that our disposal group would sell in an orderly transaction to market participants. In addition, we observed a range of offers to determine the reasonableness of assumptions and the estimated fair value of the disposal group. These quoted prices were used as observable market data from Level 2 inputs. As of June 30, 2020, we determined the fair value of the disposal group using the income approach and the market approach. In addition, we determined observed recent transactions of comparable multiples from publicly traded companies in our industry to determine the reasonableness of assumptions and the fair values of the disposal group estimated. 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 and discount rates. We compared the carrying amount of the disposal group to its respective fair value. We reconciled the aggregate fair values of the disposal group determined (as described above) to the carrying value less related costs to sell.

As of December 31, 2019, there were no assets or liabilities that were recorded at fair value on a nonrecurring basis.

The carrying values of cash and cash equivalents, restricted cash, 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.

(5) DERIVATIVES

From time to time, we enter into 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 foreign currency exposure. That is, we do not engage in currency exchange rate speculation using derivative instruments.

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 September 30, 2020, total outstanding contract notional amounts were $48.0 million. As of September 30, 2020, these outstanding balance sheet hedging derivatives had maturities of 78 days or less.

The fair value of our derivative instruments was included in our condensed consolidated balance sheets as follows (in thousands):
Balance Sheet ClassificationAs of
September 30, 2020December 31, 2019
Derivative instruments not designated as cash flow hedges:
Foreign currency forward contractsPrepaids and other current assets$637 $295 
Accrued liabilities 9 

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The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):
Statement of Operations ClassificationThree Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Derivative instruments designated as cash flow hedges:
Loss recognized in other comprehensive loss before reclassifications---$ $(93)$ $(128)
Gain reclassified from accumulated other comprehensive loss to earnings for the effective portionInterest expense 44  125 
Income tax benefit
Income tax expense (benefit)(1)
 (14) (30)
Derivative instruments not designated as cash flow hedges:
Gain recognized in earningsOther, net$(284)$(388)$(438)$(101)
Income tax expense
Income tax expense (benefit)(1)
71 91 109 22 

For additional information related to our derivatives, see Notes 4 and 12.

(6) INVENTORIES

Inventories are stated at the lower of cost and net realizable value, with cost determined based on the first-in, first-out method. Our inventories consisted of the following (in thousands):
As of
September 30, 2020December 31, 2019
Finished goods$29,498 $49,853 
Parts and components4,217 4,915 
Total inventories$33,715 $54,768 

For additional information related to asset and liabilities held-for-sale, see Notes 2 and 4.

(7) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):
Estimated
Useful Life
(in years)
As of
September 30, 2020December 31, 2019
Automobiles5$23 $23 
Leasehold improvements4to203,056 3,830 
Computer software and equipment2to732,229 26,816 
Machinery and equipment3to515,170 18,551 
Furniture and fixtures5to202,586 2,808 
Work in progress(1)
N/A1,854 2,747 
Total cost54,918 54,775 
Accumulated depreciation(31,750)(32,020)
Total property, plant and equipment, net$23,168 $22,755 
(1) Work in progress includes information technology assets and production tooling.
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For additional information related to asset and liabilities held-for-sale, see Notes 2 and 4.

Depreciation expense was as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Depreciation expense$1,815 $2,046 $5,665 $