Nautilus
Annual Report 2015

Plain-text annual report

NAUTILUS, INC. FORM 10-K (Annual Report) Filed 02/25/16 for the Period Ending 12/31/15 Address Telephone 17750 SE 6TH WAY VANCOUVER, WA 98683 360-859-2900 CIK 0001078207 Symbol NLS SIC Code 3949 - Sporting and Athletic Goods, Not Elsewhere Classified Industry Recreational Products Sector Consumer Cyclical Fiscal Year 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.  UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One)[x]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015OR[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR 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 ofincorporation or organization) (I.R.S. EmployerIdentification No.)17750 S.E. 6th WayVancouver, Washington 98683(Address of principal executive offices, including zip code)(360) 859-2900(Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, no par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [x]Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]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 12months (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 past90 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 andposted 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 submitand post such files). Yes [x] No [ ]Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ] Smaller reporting company [ ](do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last sales price ($ 21.51 ) as reported on the NewYork Stock Exchange as of the last business day of the registrant's most recently completed second fiscal quarter ( June 30, 2015 ) was $663,336,780 .The number of shares outstanding of the registrant's common stock as of February 24, 2016 was 31,005,367 shares.Documents Incorporated by ReferenceThe registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for its 2016 Annual Meeting of Shareholders. NAUTILUS, INC.2015 FORM 10-K ANNUAL REPORT PART I Item 1.Business 1Item 1A.Risk Factors 6Item 1B.Unresolved Staff Comments 12Item 2.Properties 12Item 3.Legal Proceedings 12Item 4.Mine Safety Disclosures 13 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 14Item 6. Selected Financial Data 16Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 17Item 7A.Quantitative and Qualitative Disclosures About Market Risk 29Item 8.Financial Statements and Supplementary Data 30Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 61Item 9A.Controls and Procedures 61Item 9B.Other Information 63 PART III Item 10.Directors, Executive Officers and Corporate Governance 63Item 11.Executive Compensation 63Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 63Item 13.Certain Relationships and Related Transactions, and Director Independence 64Item 14.Principal Accounting Fees and Services 64 PART IV Item 15.Exhibits and Financial Statement Schedules 64Signatures 67 PART IForward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as"plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-lookingstatements. The forward-looking statements in this report include, without limitation: our prospects, resources or capabilities; current or future financial trends;future operating results; future plans for introduction of new products; anticipated demand for our new and existing products; anticipated benefits of the acquisitionof Octane Fitness; maintenance of appropriate inventory levels; growth in revenues and profits; leverage of operating expenses; future revenues from licenses ofour intellectual property; results of increased media investment in the Direct segment; continued improvement in operating margins; expectations for increasedresearch and development expenses; anticipated capital expenditures; fluctuations in net sales due to seasonality; and our ability to continue to fund our operatingand capital needs for the following twelve-month period. Forward-looking statements also include any statements related to our expectations regarding futurebusiness and financial performance or conditions, anticipated sales growth across markets, distribution channels and product categories, expenses and grossmargins, profits or losses, losses from discontinued operations, settlements of warranty obligations, the anticipated outcome of litigation to which we are a party,new product introductions, financing and working capital requirements and resources. These forward-looking statements, and others we make from time-to-time,are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements,including the risks described in Part I, Item 1A of this report and in other reports we file with the Securities and Exchange Commission. We do not undertake anyduty to update forward-looking statements after the date they are made or conform them to actual results or to changes in circumstances or expectations.Item 1. BusinessOVERVIEWFounded in 1986, Nautilus, Inc. and subsidiaries (collectively, "Nautilus" or the "Company") is a consumer fitness products company headquartered in Vancouver,Washington and incorporated in the State of Washington in January 1993. We are committed to providing innovative, quality solutions to help people achieve theirfitness goals through a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio andstrength fitness products and related accessories for consumer use, primarily in the United States and Canada, but also in international markets outside NorthAmerica. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus ® , Bowflex ® , Octane Fitness ® , Schwinn ® andUniversal ® .We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct businessoffers products directly to consumers through television advertising, catalogs and the Internet. Our Retail business offers our products through a network ofindependent companies to reach consumers in both the home use as well as commercial use markets in the United States and internationally. We also derive aportion of our revenue from the licensing of our brands and intellectual property.BUSINESS STRATEGYWe are focused on developing and marketing consumer fitness equipment and related products to help people enjoy healthier lives. Our products are targeted tomeet the needs of a broad range of consumers, including fitness enthusiasts and individuals who are seeking the benefits of regular exercise. We have diversifiedour business by expanding our portfolio of high quality fitness equipment into multiple product lines utilizing our well-recognized brand names. We are focused onconsumer markets and specialty and commercial distribution channels, and view the continual innovation of our product offerings as a key aspect of our businessstrategy. We regularly refresh our existing product lines with new technologies and finishes, and focus significant effort and resources on the development oracquisition of innovative new fitness products for introduction to the marketplace at periodic intervals. Our strategies incorporate the individual characteristics of our Direct and Retail businesses. Our Direct business focuses on: (i) the development of, or acquisitionof rights to, unique products; (ii) the application of creative, cost-effective ways to communicate the benefits of their use; and (iii) making various payment optionsavailable to our customers. We are particularly attentive to Direct business metrics that provide feedback regarding the effectiveness of our media marketingprograms and attractiveness of third-party consumer financing programs.1In our Retail business, we strive to develop long-term relationships with key retailers of sports or fitness equipment. The primary objectives of our Retail businessare (i) to offer a selection of products at key price-points; and (ii) to utilize the strength of our brands and long-standing customer relationships to secure more floorspace with our Retail customers for our products, as well as support efforts to gain share in multi-user environments.Our long-term strategy involves:•creatively marketing our equipment, both directly to consumers and through our Retail customers, while leveraging our well-known brand names;•enhancing our product lines by designing fitness equipment that meets or exceeds the high expectations of our customers;•utilizing our strengths in product engineering to reduce product costs;•continuing our investment in research and development activities aimed at acquiring or creating new technologies;•increasing our international Retail sales and distribution; and•maximizing available royalty revenues from the licensing of our brands and intellectual property.RECENT DEVELOPMENTSOn December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane" or "Octane Fitness"),for an aggregate base purchase price of $115.0 million, plus adjustments for working capital and cash on the closing date. The Company funded the acquisitionthrough an $80.0 million term loan and cash on hand. Based in Brooklyn Park, Minnesota, Octane is a leader in zero-impact training with a line of fitnessequipment focused on Retail specialty and commercial channels. The acquisition of Octane is expected to strengthen and diversify our brand portfolio, broaden ourdistribution and deepen our talent pool. Octane's business is anticipated to be highly complementary to our existing business from both product and channelperspectives and is expected to create numerous revenue synergies for us.PRODUCTSWe market quality cardiovascular, strength and nutrition fitness products that cover a broad range of price points and features. Our products are designed for homeuse by individuals with varying exercise needs. From the person who works out occasionally to the serious athlete, we have products that will help them achievetheir fitness objectives.•Nautilus ® is our corporate umbrella brand and is also used to differentiate certain specialized cardio, treadmills, ellipticals and bike products.•Our Bowflex ® brand represents a highly-regarded line of fitness equipment comprised of both cardio and strength products, including the Max Trainer ®and TreadClimber ® specialized cardio machines, PowerRod ® and Revolution ® home gyms and SelectTech ® dumbbells.•Our Octane Fitness ® brand is known for its innovation around low-impact cardio products, including the perfection of the traditional elliptical machine,along with the creation of new categories of exercise, including the xRide ® recumbent elliptical, the LateralX ® elliptical, and the Zero Runner ® .•Our Schwinn ® brand is known for its popular line of exercise bikes, including the Airdyne ® , treadmills, and ellipticals.•Our Universal ® brand, one of the oldest and most recognized names in the fitness industry, currently offers a line of kettlebell weights and weightbenches along with a recently launched cardio line. We generally differentiate the product models offered in our Direct and Retail sales channels. Currently, our Max Trainer ® and TreadClimber ® product lines areoffered for sale primarily through our Direct sales channel.Approximately 82% of our revenue in 2015 was derived from sales of consumer cardio products. While we continue to be a leader in the consumer strengthproduct category, we believe the much larger market for cardio products offers us greater opportunity for growth. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATIONWe conduct our business in two segments, Direct and Retail. For further information regarding our segments and geographic information, see Note 19, Segmentand Enterprise-Wide Information , to our consolidated financial statements in Part II, Item 8 of this report.2SALES AND MARKETINGDirectIn our Direct business, we market and sell our products, principally Bowflex ® cardio and strength products, directly to consumers. While we are, and plan tocontinue to be, a large direct marketer of strength products in the United States, our advertising emphasis has shifted toward cardio products, especially the MaxTrainer ® and TreadClimber ® , as cardio products represent the largest component of the fitness equipment market and a majority of our business. Sales of cardioproducts represented 93% of our Direct channel revenues in 2015 , compared to 91% in 2014 and 84% in 2013 .Our marketing efforts are based on an integrated combination of media and direct consumer contact. In addition to television advertising, which ranges in lengthfrom 30 seconds to as long as three minutes, we utilize Internet advertising, product websites, inquiry-response mailings, catalogs and inbound/outbound callcenters. Marketing and media effectiveness is measured continuously based on sales inquiries generated, cost-per-lead, conversion rates, return on investment andother performance metrics and we strive to optimize the efficiency of our marketing and media expenditures based on this data. Almost all of our Direct customerorders are received either on our Internet websites or through company-owned and third-party call centers.In order to facilitate consumer purchases, we partner with several third party credit providers. Credit approval rates are an important variable in the number ofDirect products we sell in a given period. Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers increased to48% in 2015 from 41% in 2014 and 36% in 2013 , which is primarily due to our marketing and media strategies, as well as growing sales of Max Trainer ® , whichsince launch has driven higher credit demographic responders.RetailIn our Retail business, we market and sell a comprehensive line of consumer fitness equipment under the Nautilus ® , Octane Fitness ® , Schwinn ® , Universal ®and Bowflex ® brands. Our products are marketed through a network of retail companies, consisting of sporting goods stores, Internet retailers, large-format andwarehouse stores, smaller specialty retailers, independent bike dealers, and multi-user environments.We offer programs that provide price discounts to our Retail customers for ordering container-sized shipments or placing orders early enough in the season toallow for more efficient manufacturing by our Asian suppliers. These programs are designed to reduce our shipping and handling costs, with much of the savingsbeing passed on to our customers. In addition, we often offer other types of sales incentives to our Retail customers, including volume discounts and various formsof rebates or allowances, which generally are intended to increase product exposure and availability for consumers, reduce transportation costs, and encouragemarketing and promotion of our brands or specific products.PRODUCT DESIGN AND INNOVATIONInnovation is a vital part of our business, and we continue to expand and diversify our product offerings by leveraging our research and development capabilities.We constantly search for new technologies and innovations that will help us grow our business, either through higher sales or increased production efficiencies. Toaccomplish this objective, we seek out ideas and concepts both within our company and from outside inventors.We rely on financial and engineering models to assist us in assessing the potential operational and economic impacts of adopting new technologies andinnovations. If we determine that a third-party technology or innovation concept meets certain technical and financial criteria, we may enter into a licensingarrangement to utilize the technology or, in certain circumstances, purchase the technology for our own use. Our product design and engineering teams also investconsiderable effort to improve product design and quality. As a consumer-driven company, we invest from time-to-time in qualitative and quantitative consumerresearch to help us assess new product concepts, optimal features and anticipated consumer adoption.Our research and development expenses were $9.9 million , $7.2 million and $5.6 million in 2015 , 2014 and 2013 , respectively, as we increased our investment innew product development resources and capabilities, including the 2015 openings of our innovation center and retail store at our corporate headquarters. We expectour research and development expenses to increase in 2016 as we continue to supplement our investment in new product development and engineering capabilities.SEASONALITYWe expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the third quarter,and are generally weakest in the second quarter. We believe that, during the spring and summer3months, consumers tend to be involved in outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality canhave a significant effect on our inventory levels, working capital needs and resource utilization. MERCHANDISE SOURCINGAll of our products are produced by third-party manufacturers, and, in 2015 , all of our manufacturing partners were primarily located in Asia. Although multiplefactories bid on and are able to produce most of our products, we typically select one factory to produce any given product. Lead times for inventory purchasesfrom our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit time representsthree-to-four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demand for ourproducts. We attempt to compensate for our long replenishment lead times by maintaining adequate levels of inventory at our warehousing facilities.We monitor our suppliers' ability to meet our product needs and we participate in quality assurance activities to reinforce adherence to our quality standards. Ourthird-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchase orders.Our manufacturing relationships are non-exclusive, and we are permitted to procure our products from other sources at our discretion. None of our manufacturingcontracts include production volume or purchase commitments on the part of either party. Our third-party manufacturers are responsible for the sourcing of rawmaterials and producing parts and finished products to our specifications.LOGISTICSOur warehousing and distribution facilities are located in Oregon and Ohio. In addition to Company-operated distribution centers, we utilize third-partywarehouses and logistics providers to fulfill orders. In our Direct business, we strive to maintain inventory levels that will allow us to ship our products shortlyafter receiving a customer's order. We use common carriers for substantially all of our merchandise shipments to Direct customers.In our Retail business, we manage our inventory levels to accommodate anticipated seasonal changes in demand. Generally, we maintain higher inventory levels atthe end of the third and fourth quarters to satisfy relatively higher consumer demand in the fourth and first quarters of each year. Many of our Retail customersplace orders well in advance of peak periods of consumer demand to ensure an adequate supply for the anticipated selling season.In 2015 approximately 51% of our Retail customers' orders were shipped by our contract manufacturers in Asia directly to our Retail customer locations, typicallyin container loads. The use of such direct shipments allows us to maintain lower levels of inventory in our warehouses, resulting in lower storage, handling, freight,insurance and other costs. We use various commercial truck lines for our merchandise shipments to Retail customers.COMPETITIONThe markets for all of our products are highly competitive. We believe the principal competitive factors affecting our business are quality, brand recognition,innovation and pricing. We believe we are well positioned to compete in markets in which we can take advantage of our strong brand names, and that our focus oninnovative product design, quality, and performance distinguishes our products from the competition.Our products compete directly with those offered by a large number of companies that market consumer fitness equipment and fitness programs. As the use ofInternet websites for product sales by traditional retailers has increased, our competitors have become increasingly similar across our Direct and Retail saleschannels.Our principal competitors include: Fitness Quest , ICON Health & Fitness, Johnson Health Tech, Beach Body, American Telecast, Life Fitness, and Precor. Wealso compete with marketers of computer-based physical activity products, such as the Nintendo Wii ® and Microsoft Xbox ® Kinect ® , and weight managementcompanies, such as Weight Watchers, each of which offers alternative solutions for a fit and healthy lifestyle.EMPLOYEESAs of February 24, 2016, we had approximately 470 employees, substantially all of whom were full-time. None of our employees are subject to collectivebargaining agreements. We have not experienced a material interruption of our operations due to labor disputes.4INTELLECTUAL PROPERTYTrademarks, patents and other forms of intellectual property are vital to the success of our business and are an essential factor in maintaining our competitiveposition in the health and fitness industry.TrademarksWe own many trademarks including Nautilus ® , Bowflex ® , Max Trainer ® , TreadClimber ® , Power Rod ® , Bowflex Revolution ® , SelectTech ® , Octane Fitness® , LateralX ® , xRide ® , Zero Runner ® , Airdyne ® , and Universal ® . Nautilus is the exclusive licensee under the Schwinn ® mark for indoor fitness products. Webelieve that having distinctive trademarks that are readily identifiable by consumers is an important factor in creating a market for our products, maintaining astrong company identity and developing brand loyalty among our customers. In addition, we have granted licenses to certain third-parties to use the Nautilus,Schwinn and TreadClimber trademarks on commercial fitness products, for which we receive royalty income and expanded consumer awareness of our brands.Each federally registered trademark is renewable indefinitely if the trademark is still in use at the time of renewal.Patents and DesignsBuilding our intellectual property portfolio is an important factor in maintaining our competitive position in the health and fitness equipment industry. We havefollowed a policy of filing applications for U.S. and non-U.S. patents on utility and design inventions that we deem valuable to our business.We own or license patents and design registrations covering a variety of technologies, some of which are utilized in our selectorized dumbbells, treadmills,exercise bikes, and elliptical machines. Patent and design protection for these technologies, which are utilized in products sold in both the Direct and Retailsegments, extends as far as 2028.We maintain a portfolio of patents related to our TreadClimber ® specialized cardio machines, which are sold primarily in our Direct segment. The portfolioincludes approximately 25 issued U.S. patents covering various product features and other technologies associated with our TreadClimber ® products and 1 issuedU.S. patent and additional pending patents covering various product features of our Max Trainer ® products. Nautilus is also the licensee of patents that cover theBowflex Revolution ® home gyms.A patent covering certain aspects of our TreadClimber ® products expired in 2013. Additional individual U.S. patents covering elements of our TreadClimber ®products have expiration dates ranging from 2021 to 2027. Expiration or invalidity of patents within our TreadClimber ® portfolio could trigger the introduction ofsimilar products by our competitors. Although we view each of the patents within our portfolio as valuable, we do not view any single patent as critical to oursuccess or ability to differentiate our TreadClimber ® products from similar products that may be introduced by competitors in the future. We regularly monitorcommercial activity in our industry to guard against potential infringement. We protect our proprietary rights and take prompt, reasonable actions to preventcounterfeit products and other infringement on our intellectual property.BACKLOGWe define our customer order backlog to include firm orders for future shipment to our Retail customers, whether or not subject to cancellation, as well asunfulfilled consumer orders within the Direct segment.Backlog as of a given date fluctuates based on specific timing of product shipment within the typical shipment timeframes for each of our segments. Retail orderscomprise the larger portion of our order backlog, while Direct orders comprise a smaller portion of our backlog due to shorter fulfillment timeframes.Our customer order backlog as of December 31, 2015 and 2014 was approximately $5.0 million and $21.1 million , respectively. The decrease in the overallbacklog as of December 31, 2015 compared to 2014 resulted from delays in 2014 in the receipt of merchandise due to the west coast port slow down and lowerinventory position.SIGNIFICANT CUSTOMERSIn 2015 , 2014 and 2013 , Amazon.com accounted for 11.1% , 11.3% and 11.2% , respectively, of our net sales.5ENVIRONMENTAL AND OTHER REGULATORY MATTERSOur operations are subject to various laws and regulations both domestically and abroad. In the United States, federal, state and local regulations impose standardson our workplace and our relationship with the environment. For example, the U.S. Environmental Protection Agency, Occupational Safety and HealthAdministration and other federal agencies have the authority to promulgate regulations that may impact our operations. In particular, we are subject to legislationplacing restrictions on our generation, emission, treatment, storage and disposal of materials, substances and wastes. Such legislation includes: the ToxicSubstances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water Act; and theComprehensive Environmental Response and the Compensation and Liability Act (also known as Superfund). We are also subject to the requirements of theConsumer Product Safety Commission and the Federal Trade Commission, in addition to regulations concerning employee health and safety matters.Our operations and certain disposed components of our former Commercial business expose us to claims related to environmental matters. Although compliancewith federal, state, local and international environmental legislation has not had a material adverse effect on our financial condition or results of operations in thepast, there can be no assurance that material costs or liabilities will not be incurred in connection with such environmental matters in the future.AVAILABLE INFORMATIONOur common stock is listed on the New York Stock Exchange and trades under the symbol “NLS.” Our principal executive offices are located at 17750 SE 6thWay, Vancouver, Washington 98683, and our telephone number is (360) 859-2900. The Internet address of our corporate website is http://www.nautilusinc.com.We file annual reports, quarterly reports, current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”) underthe Securities Exchange Act of 1934, as amended. You can inspect and obtain a copy of our reports, proxy statements and other information filed with the SEC atthe offices of the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549, on official business days during the hours of 10 a.m. to 3 p.m. EST.Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet website at http://www.sec.govwhere you can access copies of most of our SEC filings.We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, and other informationas filed with the SEC, available free of charge on our corporate website. In addition, our Code of Business Conduct and Ethics, corporate governance policies, andthe charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on our corporate website. Theinformation presented on our corporate website is not part of this report.Item 1A. Risk FactorsNautilus operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in this Annual Report on Form 10-Kare not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, andtherefore are not mentioned herein, may impair our business operations. If any of the risks described in this Annual Report on Form 10-K actually occur, ourbusiness, operating results and financial position could be adversely affected.Our revenues and profitability can fluctuate from period to period and are often difficult to predict due to factors beyond our control. Our results of operations in any particular period may not be indicative of results to be expected in future periods, and have historically been, and are expected tocontinue to be, subject to periodic fluctuations arising from a number of factors, including:•Introduction and market acceptance of new products and sales trends affecting specific existing products;•Variations in product selling prices and costs and the mix of products sold;•Size and timing of Retail customer orders, which, in turn, often depend upon the success of our customers' businesses or specific products;•Changes in the market conditions for consumer fitness equipment;•Changes in macroeconomic factors;•Availability of consumer credit;•Timing and availability of products coming from our offshore contract manufacturing suppliers;6•Seasonality of markets, which vary from quarter-to-quarter and are influenced by outside factors such as overall consumer confidence and theavailability and cost of television advertising time;•Effectiveness of our media and advertising programs;•Customer consolidation in our Retail segment, or the bankruptcy of any of our larger Retail customers;•Restructuring charges;•Goodwill and other intangible asset impairment charges; and•Legal and contract settlement charges. These trends and factors could adversely affect our business, operating results, financial position and cash flows in any particular period. Intense competition or loss of one or more of our large Retail customers could negatively impact our sales and operating results. Our products are sold in highly competitive markets with limited barriers to entry. As a result, introduction by competitors of lower-priced or more innovativeproducts could result in a significant decline in our revenues and have a material adverse effect on our operating results, financial position and cash flows.Additionally, we derive a significant portion of our revenue from a small number of Retail customers. A loss of business from one or more of these largecustomers, if not replaced with new business, could negatively affect our operating results and cash flow.A decline in sales of TreadClimber ® and/or Max Trainer ® products without a corresponding increase in sales of other products would negatively affectour future revenues and operating results.Sales of cardio products, especially TreadClimber ® and Max Trainer ® products, represent a substantial portion of our Direct segment revenues. Introduction bycompetitors of comparable products at lower price-points, a maturing product lifecycle or other factors could result in a decline in our revenues derived from theseproducts. A significant decline in our sales of these products would have a material adverse effect on our operating results, financial position and cash flows.Portions of our operating expenses and costs of goods sold are relatively fixed, and we may have limited ability to reduce expenses sufficiently in responseto any revenue shortfalls.Many of our operating expenses are relatively fixed. We may not be able to adjust our operating expenses or other costs sufficiently to adequately respond to anyrevenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any declines in revenue, it would negatively impact ouroperating results, financial condition and cash flows.If we are unable to anticipate consumer preferences or to effectively develop, market and sell future products, our future revenues and operating resultscould be adversely affected. Our future success depends on our ability to effectively develop, market and sell new products that respond to new and evolving consumer preferences.Accordingly, our revenues and operating results may be adversely affected if we are unable to develop or acquire rights to new products that satisfy consumerpreferences. In addition, any new products that we market may not generate sufficient revenues to recoup their acquisition, development, production, marketing,selling and other costs.Decline in consumer spending would likely negatively affect our product revenues and earnings. Success of each of our products depends substantially on the amount of discretionary funds available to our customers. Global credit and financial markets haveexperienced extreme disruptions in the recent past, including severely diminished liquidity and credit availability, declines in consumer confidence, declines ineconomic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur inthe future. Deterioration in general economic conditions may depress consumer spending, especially spending for discretionary consumer products such as ours.Poor economic conditions could in turn lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial positionand cash flows.Our business is affected by seasonality which results in fluctuations in our operating results. We experience fluctuations in aggregate sales volume during the year. Sales are typically strongest in the first and fourth quarters, followed by the third quarter,and are generally weakest in the second quarter. However, the mix of product sales may vary7considerably from time to time as a result of changes in seasonal and geographic demand for particular types of fitness equipment. In addition, our customers maycancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict ourquarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. Government regulatory actions could disrupt our marketing efforts and product sales. Various international and U.S. federal, state and local governmental authorities, including the Federal Trade Commission, the Consumer Product SafetyCommission, the Securities and Exchange Commission and the Consumer Financial Protection Bureau, regulate our product and marketing efforts. Our sales andprofitability could be significantly harmed if any of these authorities commence a regulatory enforcement action that interrupts our marketing efforts, results in aproduct recall or negative publicity, or requires changes in product design.Substantially higher advertising rates or a significant decline in availability of media time may hinder our ability to effectively market our products andmay reduce profitability. We depend on television advertising to market certain products sold directly to consumers. Consequently, a marked increase in the price we must pay for ourpreferred media time and/or a reduction in its availability may adversely impact our financial performance. We may be unable to adapt to significant changes in media consumption habits, which could diminish the effectiveness or efficiency of our advertising.New television technologies and services, such as video-on-demand, digital video recorders and Internet streaming services are changing traditional patterns oftelevision viewing. Additionally, consumer attention is increasingly fragmented across a variety of games, apps, the Internet and other digital media. If we areunable to successfully adapt our media strategies to new television viewing and media consumption habits, the effectiveness and efficiency of our mediaplacements could be adversely affected, and our operating results may be harmed.Our revenues could decline due to changes in credit markets and decisions made by credit providers. Historically, a significant portion of our Direct sales have been financed for our customers under various programs offered by third-party consumer credit financingsources. Reductions in consumer lending and the availability of consumer credit could limit the number of customers with the financial means to purchase ourproducts. Higher interest rates could increase monthly payments for consumer products financed through one of our financing partners or through other sources ofconsumer financing. In the past, we have partnered with financial service companies to assist our customers in obtaining financing to purchase our products. Ourpresent agreements with our third party consumer credit financing providers enable certain customers to obtain financing if they qualify for the provider's privatelabel revolving credit card. We cannot be assured that our third party financing providers will continue to provide consumers with access to credit or that creditlimits under such arrangements will not be reduced. Such restrictions or reductions in the availability of consumer credit could have a material adverse impact onour results of operations, financial position and cash flows.We may encounter difficulties in integrating acquired businesses and anticipated benefits of acquisitions may not be realized.On December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane. The ultimate success of our acquisition ofOctane, and any future acquisitions we may complete, depends, in part, on our ability to realize the anticipated synergies, channel and product diversification andgrowth opportunities from integrating newly-acquired businesses or assets into our existing businesses. However, the acquisition and successful integration ofindependent businesses or assets is a complex, costly and time-consuming process, and the benefits we realize may not meet targeted expectations. The risk anddifficulties associated with acquiring and integrating companies and other assets include, among others:•consolidating research and development, logistics, product sourcing, human resources, information technology and other aspects of thecombined operations, where appropriate;•integrating newly-acquired businesses and product lines into a uniform financial reporting system;•coordinating sales, distribution and marketing functions and strategies across new and existing channels of trade;•establishing or expanding manufacturing, research and development, sales, distribution and marketing functions in order to accommodate newly-acquired businesses or product lines or rationalizing these functions to take advantage of synergies;8•preserving the important licensing, research and development, manufacturing and supply, distribution, marketing, customer and otherrelationships of acquired businesses;•minimizing the diversion of management’s attention from ongoing business concerns;•the potential loss of key employees of the acquired business;•coordinating geographically separate operations; and•regulatory and legal issues relating to the integration of legacy and newly-acquired businesses.The purchase consideration and other costs and expenses of acquisitions could negatively impact our net income and earnings per share and a failure to realize theanticipated benefits of acquisitions would have a material adverse effect on our business, results of operations or financial condition.If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose revenues, and ourreputation and market share may be harmed. We have outsourced the production of all of our products to third-party manufacturers. We rely on our contract manufacturers to procure components and providespare parts in support of our warranty and customer service obligations. We generally commit the manufacturing of each product to a single contract manufacturer. Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control:•Unexpected increases in manufacturing and repair costs;•Interruptions in shipments if our contract manufacturer is unable to complete production;•Inability to completely control the quality of finished products;•Inability to completely control delivery schedules;•Changes in our contract manufacturer's business models or operations;•Potential increases in our negotiated product costs as a result of fluctuations in currency exchange rates;•Impact of the global market and economic conditions on the financial stability of our contract manufacturers and their ability to operate withoutrequesting earlier payment terms or letters of credit;•Potential lack of adequate capacity to manufacture all or a part of the products we require; and•Potential unauthorized reproduction or counterfeiting of our products. Substantially all of our contract manufacturers are located in Asia, primarily China and Taiwan, and may be subject to disruption by natural disasters, as well aspolitical, social or economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could cause a significantdisruption in our product supply chain and operations and delays in product shipments. Our third-party manufacturing contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchaseorders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements with otherthird-party manufacturers on commercially reasonable terms. Further, while we maintain an active quality control, factory inspection and qualification program, wecannot assure that their manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertentsale of substandard products. While we believe that products manufactured by our current third-party manufacturers could generally be procured from alternativesources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain and operations. Our inventory purchases are subject to long lead times, which could negatively impact our sales, cash flows and liquidity. All of our products are produced by third-party manufacturers, substantially all of which are located in Asia, primarily China and Taiwan. Lead times for inventorypurchases from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit timerepresents three-to-four weeks. The length of our lead times requires us to place advance manufacturing orders based on management forecasts of future demandfor our products. Due to the length of our lead times, our sales and cash flows may be negatively impacted if we do not have sufficient inventory on hand to meetcustomer demand for such items. In addition, our liquidity and cash flows may be negatively affected, and inventory obsolescence may increase, if the quantity ofproducts we order exceeds customer demand for such items. A delay in getting non-U.S.-sourced products through port operations and customs in a timely manner could result in reduced sales, canceled sales ordersand unanticipated inventory accumulation. Most of our imported products are subject to duties or tariffs that affect the cost and quantity of various types of goods imported into the U.S. or our other markets.The countries in which our products are produced or sold may adjust or impose new quotas,9duties, tariffs or other restrictions. Further, our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the freeflow of goods through open and operational ports worldwide. Labor disputes at various ports create significant risks for our business, particularly if these disputesresult in work slowdowns, lockouts, strikes or other disruptions during our peak importing seasons. Any of these factors could result in reduced sales, canceledsales orders and unanticipated inventory accumulation and have a material adverse effect on our operating results, financial position and cash flows. Unpredictable events and circumstances relating to our international operations, including our use of non-U.S. manufacturers, could have a materialadverse effect on our business.Substantially all of our products are manufactured outside of the U.S. and a portion of our revenue is derived from sales outside the U.S., primarily in Canada, butalso in markets outside North America. Accordingly, our future results could be materially adversely affected by a variety of factors pertaining to internationaltrade, including: changes in a specific country's or region's political or economic conditions; trade restrictions; import and export licensing requirements; changesin regulatory requirements; additional efforts to comply with a variety of foreign laws and regulations; and longer payment cycles in certain countries, thusrequiring us to finance customer purchases over a longer period than those made in the U.S. In addition, we rely on the performance of our employees located inforeign countries. Our ability to control the actions of these employees may be limited by the laws and regulations in effect in each country. Changes in any of theabove factors could have a material adverse effect on our operating results, financial position and cash flows.Currency exchange rate fluctuations could result in higher costs, reduced margins or decreased international sales. Substantially all of our products are manufactured outside of the U.S. and, therefore, currency exchange rate fluctuations could result in higher costs for ourproducts, or could disrupt the business of independent manufacturers that produce our products, by making their purchases of raw materials more expensive andmore difficult to finance. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which we,our customers or our suppliers conduct business. Past fluctuations in currency exchange rates versus the U.S. dollar have caused our costs for certain products toincrease, reducing our margins and cash flows. Similar fluctuations and cost increases may occur in the future. If we are unable to increase our selling prices tooffset such cost increases, or if such increases have a negative impact on sales of our products, our revenues and margins would be reduced and our operatingresults and cash flows would be negatively impacted. In addition, a portion of our revenue is derived from sales outside the U.S., primarily in Canada and Europe.Currency rate fluctuations could make our products more expensive for foreign consumers and reduce our sales, which would negatively affect our operatingresults and cash flows. We may face competition from providers of comparable products in categories where our patent protection is limited or reduced due to patentexpiration. Increased competition in those product categories could negatively affect our future revenues and operating results.While we own a number of patents covering aspects of our TreadClimber ® products, the introduction of comparable products designed to compete with ourTreadClimber ® line of specialized cardio machines may increase in the future as a result of certain patent expirations. Sales of cardio products, includingTreadClimber ® and Max Trainer ® products, represent a substantial portion of our Direct segment revenues. Introduction by competitors of comparable products, amaturing product lifecycle or other factors could result in a decline in our revenues derived from these products. A significant decline in our sales of theseproducts, without offsetting sales gains, would have a material adverse effect on our operating results, financial position and cash flows.Failure or inability to protect our intellectual property could significantly harm our competitive position. Protecting our intellectual property is an essential factor in maintaining our competitive position in the health and fitness industry. Failure to maximize or tosuccessfully assert our intellectual property rights could impact our competitiveness. We rely on trademark, trade secret, patent and copyright laws to protect ourintellectual property rights. Many factors bear upon the exclusive ownership and right to exploit intellectual properties, including, without limitation, prior rights ofthird parties and nonuse and/or nonenforcement by us and/or related entities. While we make efforts to develop and protect our intellectual property, the validity,enforceability and commercial value of our intellectual property rights may be reduced or eliminated. We cannot be sure that our intellectual property rights will bemaximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own or, where appropriate, license intellectualproperty rights necessary to compete successfully within the marketplace for our products. We cannot be sure that these rights, if obtained, will not be invalidated,circumvented or challenged in the future. If we do not, or are unable to, adequately protect our intellectual property, then we may face difficulty in differentiatingour products from those of our competitors and our business, operating results and financial condition may be adversely affected. 10Trademark infringement or other intellectual property claims relating to our products could increase our costs. Our industry is susceptible to litigation regarding trademark and patent infringement and other intellectual property rights. We could become a plaintiff ordefendant in litigation involving trademark or patent infringement claims or claims of breach of license. The prosecution or defense of intellectual propertylitigation is both costly and disruptive of the time and resources of our management, regardless of the claim's merit. We could also be required to pay substantialdamages or settlement costs to resolve intellectual property litigation or related matters.We also may not be able to successfully acquire intellectual property rights, protect existing rights, or potentially prevent others from claiming that we haveviolated their proprietary rights. We could incur substantial costs in defending against such claims even if they are without basis, and we could become subject tojudgments or settlements requiring us to pay substantial damages, royalties or other charges.Future impairments of intangible assets could negatively impact our operating results.We had goodwill of $60.5 million and other intangible assets of $73.4 million as of December 31, 2015 . Any future impairment charges, if significant, couldmaterially and adversely affect our operating results. An unexpected decline in revenue, changes in market conditions, changes in competitive products ortechnologies or a change in management's intentions regarding utilization of intangible assets could lead to future impairment charges.We are subject to periodic litigation, product liability risk and other regulatory proceedings which could result in unexpected expense of time andresources. From time to time, we may be a defendant in lawsuits and regulatory actions relating to our business or the former operations of our discontinued Commercialbusiness segment. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any suchproceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations. In addition, anysignificant litigation in the future, regardless of its merits, could divert management's attention from our operations and may result in substantial legal costs. We are subject to warranty claims for our products which could result in unexpected expense. Many of our products carry warranties for defects in quality and workmanship. We may experience significant expense as the result of product quality issues,product recalls or product liability claims which may have a material adverse effect on our business. We maintain a warranty reserve for estimated future warrantyclaims. However, the actual costs of servicing future warranty claims may exceed the reserve and have a material adverse effect on our results of operations,financial condition and cash flows. Disruption to our information and communication systems could result in interruptions to our business and potential implementation of new systems forcritical business functions may heighten the risk of disruption. Our business is reliant on information and communication technology, and a substantial portion of our revenues are generated with the support of information andcommunication systems. The success of our Direct business is heavily dependent on our ability to respond to customer sales inquiries and process salestransactions using our call center communication systems, Internet websites and similar data monitoring and communication systems provided and supported bythird-parties. If such systems were to fail, or experience significant or lengthy interruptions in availability or service, our revenues could be materially affected. Wealso rely on information systems in all stages of our product cycle, from design to distribution, and we use such systems as a method of communication betweenemployees, suppliers and customers. In addition, we use information systems to maintain our accounting records, assist in trade receivables collection andcustomer service efforts, and forecast operating results and cash flows. System failures or service interruptions may occur as the result of a number of factors, including: computer viruses; hacking or other unlawful activities by thirdparties; disasters; equipment, hardware or software failures; ineffective design or implementation of new systems or systems upgrades; cable outages, extendedpower failures, or our inability or failure to properly protect, repair or maintain our communication and information systems. To mitigate the risk of businessinterruption, we have in place a disaster recovery program that targets our most critical operational systems. If our disaster recovery system is ineffective, in wholeor in part, or efforts conducted by us or third-parties to prevent or respond to system interruptions in a timely manner are ineffective, our ability to conductoperations would be significantly affected. If we do not consider the potential impact of critical decisions related to systems or process design and implementation,this could lead to operational challenges and increased costs. Any of the aforementioned factors could have a material adverse effect on our operating results,financial position and cash flows.11System security risks, data protection breaches and cyber attacks could disrupt our operations.We manage and store various proprietary information and sensitive or confidential data relating to our business, including sensitive and personally identifiableinformation. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive orconfidential data about us, or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms ofdeception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us,damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protectionmeasures could be significant.Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information orthat of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms andother malicious software programs that attack or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operatingsystem software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that couldunexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicioussoftware programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result ininterruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other criticalfunctions.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesFollowing is a summary of each of our properties as of December 31, 2015 :Company Location Primary Function(s) Owned orLeasedNautilus Washington Corporate headquarters, customer call center, retail store and R&D facility LeasedOctane Minnesota Design, sales, service and R&D facility LeasedNautilus Ohio Warehouse and distribution facility LeasedNautilus Oregon Warehouse and distribution facility LeasedNautilus China Quality assurance office LeasedOctane Netherlands Sales and service office LeasedOctane United Kingdom Sales office LeasedThe Nautilus properties are used by both our Direct and Retail segments, and the Octane properties are primarily used for our Retail segment. The propertiesgenerally are well-maintained, adequate and suitable for their intended purposes, and we believe our existing properties will meet our operational needs for theforeseeable future. If we require additional warehouse or office space in the future, we believe we will be able to obtain such space on commercially reasonableterms.Item 3. Legal ProceedingsPatent Infringement CaseIn 2004, we were sued in the Southern District of New York by BioSig Instruments, Inc. for alleged patent infringement in connection with our incorporation ofheart rate monitors into certain cardio products. No significant activity in the litigation occurred until 2008. In 2012, the United States District Court grantedsummary judgment to us on grounds that BioSig’s patentswere invalid as a matter of law. BioSig appealed the grant of summary judgment and, in April 2013, the United States Court of Appeals for the Federal Circuitreversed the District Court’s decision on summary judgment and remanded the case to the District Court for further proceedings. On January 10, 2014, the U. S.Supreme Court granted our petition for a writ of certiorari to address the legal standard applied by the Federal Circuit in determining whether the patents may bevalid under applicable law. The case was argued before the Supreme Court on April 28, 2014. By decision dated June 2, 2014, the Supreme Court unanimouslyreversed the Federal Circuit, holding that its standard of when a patent may be “indefinite” was incorrect and remanding to the Federal Circuit for reconsiderationunder the correct standard. The remand hearing in the Federal Circuit was held on October 29, 2014.12By decision dated April 27, 2015, the same panel of the Federal Circuit affirmed its earlier reversal of the District Court’s decision on summary judgment. On May27, 2015, we filed a petition for a rehearing en banc in the Federal Circuit, which was denied on August 4, 2015 and a Petition for Review by the U. S. SupremeCourt which was also denied. The case will be returned to the District Court for further proceedings. We do not believe that our use of heart rate monitors utilizedor purchased from third parties, and otherwise, infringes the BioSig patents.Licensor DisputeIn August 2014, we initiated an arbitration proceeding to resolve a dispute with the licensor under a 1999 license agreement pursuant to which we had licensedcertain rights relating to our TreadClimber ® products. We asserted that our obligation to pay royalties under the license agreement ceased in the fourth quarter of2013 and sought a declaratory ruling in the arbitration that there is no continuing royalty obligation and that we had performed all of our obligations under thelicense agreement. The licensor disputed this and asserted various intellectual property and contract claims. The matter proceeded to mediation by agreement of theparties and was settled in December 2015. Under the settlement agreement, we agreed to pay certain cash amounts and sales-based royalties over a period ofmultiple years. In connection with this settlement, in the fourth quarter of 2015, we recorded a charge of $2.5 million as a component of cost of sales. Futureroyalty payments under the settlement agreement are not expected to have a material impact on our financial position, results of operations or cash flows.In addition to the matters described above, from time to time we are subject to litigation, claims and assessments that arise in the ordinary course of business,including disputes that may arise from intellectual property related matters. Management believes that any liability resulting from such additional matters will nothave a material adverse effect on our financial position, results of operations or cash flows.Item 4. Mine Safety DisclosuresNot applicable.13PART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket for our Common StockOur common stock is listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “NLS.” As of February 24, 2016 , there were 48 holdersof record of our common stock and approximately 7,500 beneficial shareholders. The following table sets forth the high and low sales prices of our common stockfor each period presented: High Low2015 Quarter 1$15.97 $14.13Quarter 2$22.81 $15.42Quarter 3$22.63 $14.15Quarter 4$19.68 $14.572014 Quarter 1$9.66 $7.71Quarter 2$11.99 $7.94Quarter 3$13.31 $9.75Quarter 4$15.48 $10.72We did not pay any dividends on our common stock in 2015 or 2014 , and we currently have no plans to pay dividends on our common stock in future periods.Payment of any future dividends, in accordance with our borrowing arrangements, is at the discretion of our Board of Directors, which considers various factorssuch as our financial condition, operating results, current and anticipated cash needs and future expansion plans.Equity Compensation PlansSee Part III, Item 12 for equity compensation plan information.Issuer Purchases of Equity SecuritiesThere were no repurchases of our equity securities during the fourth quarter ended December 31, 2015 . See Note 16 of Notes to Consolidated Financial Statementsfor information regarding our share repurchase program.14Stock Performance GraphThe graph below compares the cumulative total stockholder return of our common stock with the cumulative total return of the NYSE Composite Index and theS&P SmallCap 600 index for the period commencing December 31, 2010 and ending on December 31, 2015 . The S&P SmallCap 600 was chosen because we donot believe we can reasonably identify an industry index or specific peer issuer that would offer a meaningful comparison. The S&P SmallCap 600 represents abroad-based index of companies with similar market capitalization. The graph assumes $100 was invested, on December 31, 2010, in our common stock and each index presented. The comparisons in the table below are notintended to forecast or be indicative of future performance of our common stock.15Item 6. Selected Financial DataThe following selected consolidated financial data should be read in connection with our audited consolidated financial statements and related notes thereto andwith Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. The consolidatedstatements of operations data for fiscal years 2015 , 2014 and 2013 , and the selected consolidated balance sheets data as of December 31, 2015 and 2014 arederived from, and are qualified by reference to, the audited consolidated financial statements which are included in this Form 10-K. The consolidated statements ofoperations data for fiscal 2012 and 2011 and the consolidated balance sheets data as of December 31, 2013 , 2012 and 2011 are derived from audited consolidatedfinancial statements which are not included in this Form 10-K. For the Year Ended December 31,(In thousands, except per share amounts) 2015 2014 2013 2012 2011Consolidated Statements of Operations Data Net sales $335,764 $274,447 $218,803 $193,926 $180,412Cost of sales 162,530 133,872 112,326 102,889 101,953Gross profit 173,234 140,575 106,477 91,037 78,459 Operating expenses: Selling and marketing 101,618 81,059 66,486 58,617 54,494 General and administrative 21,441 22,131 18,705 17,669 17,143 Research and development 9,904 7,231 5,562 4,163 3,223 Total operating expenses 132,963 110,421 90,753 80,449 74,860 Operating income 40,271 30,154 15,724 10,588 3,599 Other income (expense): Interest income 218 63 14 18 65 Interest expense (22) (25) (36) 56 (466) Other, net (445) 32 337 (246) (11) Total other income (expense) (249) 70 315 (172) (412) Income from continuing operations before income taxes 40,022 30,224 16,039 10,4163,187Income tax expense (benefit) (1) 13,219 9,841 (32,085) (226) 686Income from continuing operations 26,803 20,383 48,124 10,642 2,501Income (loss) from discontinued operations (201) (1,588) (170) 6,241 (1,081)Net income $26,602 $18,795 $47,954 $16,883 $1,420 Basic income per share from continuing operations $0.86 $0.65 $1.55 $0.34 $0.08Basic income (loss) per share from discontinued operations (0.01) (0.05) (0.01) 0.21 (0.03)Basic net income per share $0.85 $0.60 $1.54 $0.55 $0.05 Diluted income per share from continuing operations $0.85 $0.64 $1.53 $0.34 $0.08Diluted income (loss) per share from discontinued operations (0.01) (0.05) (0.01) 0.21 (0.03)Diluted net income per share $0.84 $0.59 $1.52 $0.55 $0.05 Shares used in per share calculations: Basic 31,288 31,253 31,072 30,851 30,746 Diluted 31,589 31,688 31,457 30,974 30,776 As of December 31,Consolidated Balance Sheets Data 2015 2014 2013 2012 2011Cash and investments (2) $60,776 $72,190 $40,979 $23,207 $17,427Working capital (2) 69,373 83,080 45,662 25,410 19,439Total assets 315,912 175,654 143,567 94,311 82,813Long-term note payable, net of current portion (3) 63,971 — — — 5,598Other long-term liabilities 29,432 4,911 4,077 6,508 6,614Total shareholders' equity 126,991 111,072 91,565 43,326 31,95316(1) Income tax benefit in 2013 includes a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance. (2) The decreases in cash and investments and working capital at December 31, 2015 compared to December 31, 2014 were primarily due to our purchase ofOctane on December 31, 2015. See Note 2 of Notes to Consolidated Financial Statements for additional information. (3) The increase in long-term notes payable at December 31, 2015 compared to December 31, 2014 was due to our purchase of Octane on December 31, 2015.See Notes 2 and 12 of Notes to Consolidated Financial Statements for additional information.Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements andrelated notes that are included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements based upon current expectations thatinvolve risks and uncertainties.Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buyingpatterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the levelof spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. Inaddition, our revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability ofconsumer credit in both the United States and Canada. Our profit margins may vary in response to the aforementioned factors and our ability to manage productcosts. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, product warranty costs, the costof fuel, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency andeffectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and distribute advertisements of ourproducts on television, the Internet and other media, facility costs, operating costs of our information and communications systems, product supply chainmanagement, customer support and new product development activities. In addition, our operating expenses have been affected from time-to-time by assetimpairment charges, restructuring charges and other significant unusual or infrequent expenses.As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue relianceon our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, bothwithin and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you any future growthor profitability. For more information, see our discussion of Risk Factors located at Part I, Item 1A of this Form 10-K.OVERVIEW We are committed to providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. Our principal business activities include designing,developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use, primarily in the United States,Canada and Europe. Our products are sold under some of the most-recognized brand names in the fitness industry: Nautilus ® , Bowflex ® , Octane Fitness ® ,Schwinn ® and Universal ® .We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct businessoffers products directly to consumers through television advertising, catalogs and the Internet. Our Retail business offers our products through a network ofindependent retail companies and specialty retailers with stores and websites located in the United States and internationally. We also derive a portion of ourrevenue from the licensing of our brands and intellectual property. Our net sales in 2015 were $335.8 million , an increase of $61.3 million , or 22.3% , compared to net sales of $274.4 million in 2014 . Net sales of our Directsegment increased $50.0 million , or 28.5% , compared to 2014 , primarily due to increased consumer demand for our cardio products, especially the Max Trainer® . Net sales of our Retail segment increased by $13.0 million , or 13.9% in 2015 , compared to 2014 , primarily due to growth in the lineup of cardio productslaunched in late 2013 and fall of 2014.Income from continuing operations was $26.8 million , or $0.85 per diluted share, in 2015 , compared to $20.4 million , or $0.64 per diluted share, in 2014 .Income from continuing operations in 2015 and 2014 included a $2.4 million and a $1.2 million credit related to the reversal of our deferred tax asset valuationallowance, respectively. Results for 2015 were also negatively impacted17by several unusual items including the following: settlement expense related to a licensing arbitration ($2.5 million); write-off of nutrition inventory ($1.4 million);unrecorded current period royalty revenue and reversal of prior period royalty revenue related to a dispute with the licensee ($1.4 million); an accounts receivablereserve related to potentially uncollectible balances from a large sporting goods retailer ($0.9 million); and transaction expenses related to the acquisition of Octane($0.6 million). Without consideration of the reversals of deferred tax asset valuation allowances and the other unusual items noted above, the improvement in ourresults from continuing operations in 2015 , compared to 2014 , was driven primarily by higher sales and increased operating income in both our Direct and Retailsegments.Net income was $26.6 million , or $0.84 per diluted share, in 2015 , compared to $18.8 million , or $0.59 per diluted share, in 2014 .BUSINESS ACQUISITIONOn December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane for an aggregate base purchase price of $115.0million, plus adjustments for working capital and cash on the closing date. The Company funded the acquisition through an $80.0 million term loan and cash onhand. Based in Brooklyn Park, Minnesota, Octane is a leader in zero-impact training with a line of fitness equipment focused on Retail specialty and commercialchannels. The acquisition of Octane is expected to strengthen and diversify our brand portfolio, broaden our distribution and deepen our talent pool. Octane'sbusiness is anticipated to be highly complementary to our existing business from both product and channel perspectives and to create numerous revenue synergiesfor us.DISCONTINUED OPERATIONSResults from discontinued operations relate to the disposal of our former commercial business, which was completed in April 2011. We reached substantialcompletion of asset liquidation at December 31, 2012. Although there was no revenue related to the Commercial business in 2015 , 2014 or 2013 , we continue tohave legal and accounting expenses as we work with authorities on final deregistration of each international entity, and product liability and other legal expensesassociated with product previously sold into the Commercial channel.CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reportedamounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. Anaccounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highlyuncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonablylikely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition or results ofoperations.Our critical accounting policies and estimates are discussed below. We have not made any material changes in the methodologies we use in our critical accountingestimates during the past three fiscal years. If our assumptions or estimates change in future periods, the impact on our financial position and operating resultscould be material.Revenue RecognitionDirect and Retail product sales and shipping revenues are recorded when products are shipped and title passes to customers. In most instances, Retail sales tocustomers are made pursuant to a sales contract that provides for transfer of both title and risk of loss to the customer upon our delivery to the carrier. For Directsales, revenue is generally recognized when product is shipped. Revenue is recognized net of applicable sales incentives, such as promotional discounts, rebatesand return allowances. We estimate the revenue impact of incentive programs based on the planned duration of the program and historical experience.Sales Discounts and AllowancesProduct sales and shipping revenues are reported net of promotional discounts and return allowances. We estimate the revenue impact of retail sales incentiveprograms based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of suchincentives 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 returnsbased on historical experience and record the expected obligation as a reduction of revenue. If actual return costs differ from previous estimates, the amount of theliability and corresponding revenue are adjusted in the period in which such costs occur. 18Our calculations of amounts owed for sales discounts and allowances contain uncertainties because they require management to make assumptions in interimperiods and to apply judgment regarding a number of factors, including estimated future customer inventory purchases and returns.Goodwill and Other Long-Term Assets ValuationWe evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their carrying valuemay be impaired. Definite-lived intangible assets, including acquired trade names, customer relationships, patents and patent rights, and other long-lived assets,primarily property, plant and equipment, are evaluated for impairment when events or circumstances indicate the carrying value may be impaired. No goodwill orother long-term asset impairment charges were recognized in 2015 , 2014 or 2013 .Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate futurecash flows and asset fair values. Our judgments regarding potential impairment are based on a number of factors including: the timing and amount of anticipatedcash flows; market conditions; relative levels of risk; the cost of capital; terminal values; royalty rates; and the allocation of revenues, expenses and assets andliabilities to business segments. Each of these factors can significantly affect the value of our goodwill or other long-term assets and, thereby, could have a materialadverse effect on our financial position and results of operations.Product Warranty ObligationsOur products carry defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for the cost of replacementparts, cost of shipping the parts to our customers and, in certain instances, service labor costs. At the time of sale, we record a liability for the estimated costs offulfilling future warranty claims. The estimated warranty costs are recorded as a component of cost of sales, based on historical warranty claim experience andavailable product quality data. If necessary, we adjust our liability for specific warranty matters when they become known and are reasonably estimable. Ourestimates of warranty expenses are based on significant judgment, and the frequency and cost of warranty claims are subject to variation. Warranty expenses areaffected 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 variances in expected repair costs.Litigation and Loss ContingenciesFrom time to time, we may be involved in claims, lawsuits and other proceedings. Such matters involve uncertainty as to the eventual outcomes and any losses orgains we may ultimately realize when one or more future events occur or fail to occur. We record expenses for litigation and loss contingencies when it is probablethat a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the probability of such losses based on the advice of internaland external counsel, outcomes from similar litigation, 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 losscontingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomesknown, we may change our estimates accordingly.Deferred Tax Assets - Valuation AllowanceWe account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred tax assets and liabilities aremeasured using the enacted tax rates that are expected to be in effect when the temporary differences are expected to be included, as income or expense, in theapplicable tax return. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized in the period of the enactment.We have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Each quarter, weassess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxable income and re-evaluatewhether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, in 2014, we determined that a portionof the existing valuation allowance against state net operating loss deferred tax assets was no longer necessary. Accordingly, an income tax benefit of $1.2 millionwas recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance. Further, in the fourth quarter of 2015, after re-evaluating thepotential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2015, the existing valuation allowance against theforeign tax credit deferred tax assets, as well as substantially all of the remaining state net operating loss deferred tax assets, were no longer necessary. As such, anincome tax benefit of $2.4 million was recorded in the fourth quarter of 2015 related to the reduction of our existing valuation allowance.19As of December 31, 2015 we have a valuation allowance against net deferred income tax assets of $0.9 million . If our assumptions change and we determine wewill be able to realize these deferred income tax assets, the tax benefits related to any reversal of the valuation allowance will be accounted for in the period inwhich we make such determination. Likewise, should we determine that we would not be able to realize our deferred income tax assets in the future, an adjustmentto the valuation allowance to reserve for the deferred income tax assets would increase expense in the period such determination was made.Unrecognized Tax BenefitsSignificant judgments are required in determining tax provisions and evaluating tax positions. Such judgments require us to interpret existing tax law and otherpublished guidance as applied to our circumstances. If our financial results or other relevant facts change, thereby impacting the likelihood of realizing the taxbenefit of an uncertain tax position, significant judgment would be applied in determining the effect of the change. A tax benefit from an uncertain tax positionmay be recognized when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination, includingresolutions of any related appeals or litigation.20RESULTS OF OPERATIONSThe discussion that follows should be read in conjunction with our consolidated financial statements and the related notes in this report. All comparisons to prioryear results are in reference to continuing operations only in each period, unless otherwise indicated.Results of operations information was as follows (in thousands): Year Ended December 31, 2015 2014 Change % ChangeNet sales$335,764 $274,447 61,317 22.3 %Cost of sales162,530 133,872 28,658 21.4 %Gross profit173,234 140,575 32,659 23.2 %Operating expenses: Selling and marketing101,618 81,059 20,559 25.4 %General and administrative21,441 22,131 (690) (3.1)%Research and development9,904 7,231 2,673 37.0 %Total operating expenses132,963 110,421 22,542 20.4 %Operating income40,271 30,154 10,117 33.6 %Other income (expense): Interest income218 63 155 Interest expense(22) (25) 3 Other, net(445) 32 (477) Total other income (expense), net(249) 70 (319) Income before income taxes40,022 30,224 9,798 Income tax expense13,219 9,841 3,378 Income from continuing operations26,803 20,383 6,420 Loss from discontinued operations, net of income taxes(201) (1,588) 1,387 Net income$26,602 $18,795 $7,807 Year Ended December 31, 2014 2013 Change % ChangeNet sales$274,447 $218,803 $55,644 25.4%Cost of sales133,872 112,326 21,546 19.2%Gross profit140,575 106,477 34,098 32.0%Operating expenses: Selling and marketing81,059 66,486 14,573 21.9%General and administrative22,131 18,705 3,426 18.3%Research and development7,231 5,562 1,669 30.0%Total operating expenses110,421 90,753 19,668 21.7%Operating income30,154 15,724 14,430 91.8%Other income (expense): Interest income63 14 49 Interest expense(25) (36) 11 Other, net32 337 (305) Total other income (expense), net70 315 (245) Income before income taxes30,224 16,039 14,185 Income tax expense (benefit)9,841 (32,085) 41,926 Income from continuing operations20,383 48,124 (27,741) Loss from discontinued operations, net of income taxes(1,588) (170) (1,418) Net income$18,795 $47,954 $(29,159) 21Results of operations information by segment was as follows (in thousands): Year Ended December 31, 2015 2014 Change % ChangeNet sales: Direct$225,595 $175,593 $50,002 28.5 %Retail106,195 93,223 12,972 13.9 %Royalty income3,974 5,631 (1,657) (29.4)% $335,764 $274,447 $61,317 22.3 % Cost of sales: Direct$83,238 $64,362 $18,876 29.3 %Retail79,292 69,510 9,782 14.1 %Royalty income— — — $162,530 $133,872 $28,658 21.4 %Gross profit: Direct$142,357 $111,231 $31,126 28.0 %Retail26,903 23,713 3,190 13.5 %Royalty income3,974 5,631 (1,657) (29.4)% $173,234 $140,575 $32,659 23.2 %Gross margin: Direct63.1% 63.3% (20) basis pointsRetail25.3% 25.4% (10) basis points Year Ended December 31, 2014 2013 Change % ChangeNet sales: Direct$175,593 $136,663 $38,930 28.5%Retail93,223 76,775 16,448 21.4%Royalty income5,631 5,365 266 5.0% $274,447 $218,803 $55,644 25.4% Cost of sales: Direct$64,362 $55,008 $9,354 17.0%Retail69,510 57,318 12,192 21.3%Royalty income— — — $133,872 $112,326 $21,546 19.2%Gross profit: Direct$111,231 $81,655 $29,576 36.2%Retail23,713 19,457 4,256 21.9%Royalty income5,631 5,365 266 5.0% $140,575 $106,477 $34,098 32.0%Gross margin: Direct63.3% 59.7% 360 basis pointsRetail25.4% 25.3% 10 basis points22The following tables compare the net sales of our major product lines within each business segment (in thousands): Year Ended December 31, 2015 2014 Change % ChangeDirect net sales: Cardio products (1)$210,578 $160,249 $50,329 31.4 %Strength products (2)15,017 15,344 (327) (2.1)% 225,595 175,593 50,002 28.5 %Retail net sales: Cardio products (1)63,762 56,262 7,500 13.3 %Strength products (2)42,433 36,961 5,472 14.8 % 106,195 93,223 12,972 13.9 % Royalty income3,974 5,631 (1,657) (29.4)% $335,764 $274,447 $61,317 22.3 % Year Ended December 31, 2014 2013 Change % ChangeDirect net sales: Cardio products (1)$160,249 $114,846 $45,403 39.5 %Strength products (2)15,344 21,817 (6,473) (29.7)% 175,593 136,663 38,930 28.5 %Retail net sales: Cardio products (1)56,262 36,692 19,570 53.3 %Strength products (2)36,961 40,083 (3,122) (7.8)% 93,223 76,775 16,448 21.4 % Royalty income5,631 5,365 266 5.0 % $274,447 $218,803 $55,644 25.4 % (1) Cardio products include: TreadClimber ® , Max Trainer ® , treadmills, exercise bikes and ellipticals.(2) Strength products include: home gyms, selectorized dumbbells, kettlebell weights and accessories.Net Sales and Cost of SalesDirectThe 28.5% increases in year-over-year Direct net sales for both 2015 compared to 2014 and 2014 compared to 2013 were primarily related to a 31.4% and 39.5%increase, respectively, in Direct sales of our cardio products that were due primarily to growth of the Max Trainer ® , partially offset by declines in theTreadClimber ® and strength products. The business also benefited from higher U.S. consumer credit approval rates in both years.The increases in Direct net sales of cardio products in 2015 compared to 2014 , and in 2014 compared to 2013 , were partially offset by a 2.1% and a 29.7%decline, respectively, in Direct net sales of strength products, primarily rod-based home gyms. The declines in sales of rod-based home gyms were attributable, inpart, to the reduction of advertising for these products over time, as management determined that television advertising spending on this mature product categorywas generating suboptimal returns. We continue to market and sell rod-based home gyms through more cost efficient online media and through the Retail channel.Combined consumer credit approvals by our primary and secondary U.S. third-party financing providers were 48.1% in 2015 compared to 41.4% in 2014 and36.1% in 2013 .23The increases in Direct cost of sales in 2015 compared to 2014 , and in 2014 compared to 2013 , were almost entirely related to the growth in Direct net sales. Inaddition, unusual items including an arbitration settlement of $2.5 million and write-off of nutrition inventory of $1.4 million contributed to the increase in theyear-over-year cost of sales for 2015 compared to 2014.The 20 basis point decrease in the gross margin of our Direct business for 2015 compared to 2014 was primarily driven by the arbitration settlement and reservesfor nutrition product inventory discussed above, partially offset by improvements in product mix and improved supply chain efficiencies.The 360 basis point increase in the gross margin of our Direct business for 2014 compared to 2013 was primarily driven by improvements in product mix coupledwith lower product costs related to lower royalty expenses.RetailThe 13.9% increase in Retail net sales in 2015 compared to 2014 was driven primarily by increased sales of our cardio products. The 13.3% increase in Retailcardio sales for 2015 compared to 2014 was primarily due to the strong acceptance of our new line of cardio products introduced in the third quarter of 2013, alongwith additional cardio products launched in the third quarter of 2014. Net sales of strength products in the Retail business increased 14.8% in 2015 compared to2014 , primarily driven by higher sales of SelectTech ® dumbbells.The 21.4% increase in Retail net sales in 2014 compared to 2013 was driven primarily by increased sales of our cardio products. Net sales of strength products inthe Retail business decreased 7.8% in 2014 compared to 2013 , primarily driven by lower sales of home gyms. The 53.3% increase in Retail cardio sales for 2014compared to 2013 was primarily due to the strong acceptance of our new line of cardio products introduced in the third quarter of 2013, along with additionalcardio products launched in the third quarter of 2014.The increases in Retail cost of sales in 2015 compared to 2014 , and in 2014 compared to 2013 , were due to the increases in Retail net sales mentioned above.The 10 basis point decrease in Retail gross margin in 2015 compared to 2014 was primarily due to unfavorable product and customer mix as increased treadmillsales drove product mix and currency exchange rates negatively impacted international sales.The 10 basis point increase in Retail gross margin in 2014 compared to 2013 was primarily due to greater absorption of fixed supply chain costs due to higher salesvolume, partially offset by higher allowances related to discontinued inventory and a less favorable product mix.Selling and MarketingDollars in thousandsYear Ended December 31, Change 2015 2014 $ %Selling and marketing$101,618 $81,059 $20,559 25.4%As % of net sales30.3% 29.5% Dollars in thousandsYear Ended December 31, Change 2014 2013 $ %Selling and marketing$81,059 $66,486 $14,573 21.9%As % of net sales29.5% 30.4% The increases in selling and marketing in 2015 compared to 2014 , and in 2014 compared to 2013 , were primarily due to increases in media advertising of $12.1million and $6.8 million , respectively, as well as increased variable sales expenses and program costs of $7.3 million and $4.8 million , respectively. In addition,production costs for creative media increased $1.6 million in 2014 compared to 2013 .The increase in sales and marketing as a percentage of net sales in 2015 compared to 2014 was primarily due to the increased investment in media advertising, aswell as new marketing initiatives intended to broaden the reach of Direct products to the consumer. The decrease in sales and marketing as a percentage of net salesin 2014 compared to 2013 was primarily due to slower growth of media advertising compared to revenue.24Media advertising expense of our Direct business is the largest component of selling and marketing and was as follows:Dollars in thousandsYear Ended December 31, Change 2015 2014 $ %Media advertising$54,756 $42,643 $12,113 28.4%Dollars in thousandsYear Ended December 31, Change 2014 2013 $ %Media advertising$42,643 $35,819 $6,824 19.1%We continued to increase investment in media during 2015 to grow sales of the Max Trainer ® and launch the refreshed TreadClimber ® line.General and AdministrativeDollars in thousandsYear Ended December 31, Change 2015 2014 $ %General and administrative$21,441 $22,131 $(690) (3.1)%As % of net sales6.4% 8.1% Dollars in thousandsYear Ended December 31, Change 2014 2013 $ %General and administrative$22,131 $18,705 $3,426 18.3%As % of net sales8.1% 8.5% The decrease in general and administrative in 2015 compared to 2014 was due to reduced spending on intellectual property registration and legal fees for patentenforcement of $0.7 million and state business tax refunds and credits of $0.6 million , offset by increased employee-related costs of $0.8 million , and transactioncosts related to the Octane acquisition of $0.6 million .The increase in general and administrative in 2014 compared to 2013 was primarily due to increased employee-related costs of $0.9 million , higher spendingintellectual property registration and legal fees for patent enforcement of $0.8 million , product liability and other legal costs of $0.8 million , increased technologyand facilities infrastructure costs of $0.6 million , and higher general insurance and business taxes expenses of $0.3 million .The decreases in general and administrative as a percentage of net sales in 2015 compared to 2014 and in 2014 compared to 2013 were primarily due to higher netsales.Research and DevelopmentDollars in thousandsYear Ended December 31, Change 2015 2014 $ %Research and development$9,904 $7,231 $2,673 37.0%As % of net sales2.9% 2.6% Dollars in thousandsYear Ended December 31, Change 2014 2013 $ %Research and development$7,231 $5,562 $1,669 30.0%As % of net sales2.6% 2.5% The increases in research and development in 2015 compared to 2014 and in 2014 compared to 2013 were primarily due to our investment in additionalengineering and product development headcount as we continue to supplement our new product development resources required to innovate and broaden ourproduct portfolio.25Interest ExpenseInterest expense in 2015 , 2014 and 2013 was less than $0.1 million each year, and was for financing costs associated with capital equipment lease payments.Other, NetOther, net primarily relates to the effect of exchange rate fluctuations between the U.S. and Canada. In addition, 2015 included losses on asset dispositions of $0.3million , and 2014 and 2013 included gains of $0.1 million and $0.3 million , respectively, related to refunds of state sales taxes previously paid by us.Income Tax Expense (Benefit)Dollars in thousandsYear Ended December 31, Change 2015 2014 $ %Income tax expense$13,219 $9,841 $3,378 34.3%Effective tax rate33.0% 32.6% Dollars in thousandsYear Ended December 31, Change 2014 2013 $ %Income tax expense (benefit)$9,841 $(32,085) $41,926 n/mEffective tax rate32.6% n/m n/m - not meaningful.Our income tax expense in 2015 was primarily attributable to the income generated domestically and in Canada, partially offset by a $2.4 million release of ourdomestic valuation allowance. Income tax expense for 2014 included a $1.2 million release of our domestic valuation allowance. Income tax benefit for 2013 wasprimarily related to a $38.9 million credit related to the reversal of our deferred tax asset valuation allowance. Generally, we did not recognize U.S. income taxexpense associated with our income from continuing operations for 2013 due to the valuation allowance against the net deferred tax asset.Each quarter, we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxableincome and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, in 2014, wedetermined that a portion of the existing valuation allowance against state net operating loss deferred tax assets was no longer necessary. Accordingly, an incometax benefit of $1.2 million related to the reduction of our existing valuation allowance was recorded in the fourth quarter of 2014 . Further, in 2015 , after re-evaluating the potential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2015 , the existing valuationallowance against the foreign tax credit deferred tax assets as well as substantially all remaining valuation allowance against the state net operating loss deferredtax assets were no longer necessary. Accordingly, an income tax benefit of $2.4 million was recorded in the fourth quarter of 2015 related to the reduction of ourexisting valuation allowance. The amount of valuation allowance offsetting our deferred tax assets was $0.9 million as of December 31, 2015 . Of the total remaining valuation allowance, $0.6million primarily relates to domestic credit carryforwards as we currently do not anticipate generating income of appropriate character to utilize those credits.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 allowancewould be released during the period in which such an assessment is made. In addition, $0.3 million of the remaining valuation allowance relates to foreign netoperating loss carryforwards. There have been no material changes to our foreign operations since December 31, 2014 and, accordingly, we maintain our existingvaluation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2015 .Refer to Note 13, Income Taxes , to our Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.26LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2015 , we had $60.8 million of cash and investments, compared to $72.2 million as of December 31, 2014 . The balance sheet as ofDecember 31, 2015 included unaudited balances for Octane which was acquired on December 31, 2015 . For additional information on the acquisition, see Note 2of Notes to Consolidated Financial Statements.Cash provided by operating activities was $41.1 million for 2015 , compared to cash provided by operating activities of $34.4 million for 2014 . We expect ourcash, cash equivalents and available-for-sale securities at December 31, 2015 , along with cash expected to be generated from operations, to be sufficient to fundour operating and capital requirements for at least twelve months from December 31, 2015 .The increase in cash flows from operating activities for 2015 , compared to 2014 , was primarily due to improved operating performance and the changes in ouroperating assets and liabilities as discussed below.Trade receivables increased $18.9 million to $45.2 million as of December 31, 2015 , compared to $26.3 million as of December 31, 2014 , due to the acquisitionof Octane and higher revenue within our Retail business.Inventories increased $17.8 million to $42.7 million as of December 31, 2015 , compared to $24.9 million as of December 31, 2014 , due to the acquisition ofOctane and higher revenue and the addition of new products.Net deferred income tax decreased by $31.4 million to net income tax liabilities of $9.5 million as of December 31, 2015 , compared to $21.9 million of net incometax assets as of December 31, 2014 . $19.6 million of net deferred tax liability arose as a result of the acquisition of Octane. The remainder of the decrease isprimarily due to the utilization of net operating loss deferred tax assets in 2015.Trade payables increased $14.2 million to $61.7 million as of December 31, 2015 , compared to $47.6 million as of December 31, 2014 , primarily due to increasedinventory purchases and media expense to support the growth in net sales coupled with the acquisition of Octane.Accrued liabilities increased $3.2 million to $13.0 million as of December 31, 2015 compared to $9.9 million as of December 31, 2014 , primarily due to theacquisition of Octane and increases in accrued payroll, commissions and incentive compensation.Warranty obligations increased $6.3 million to $8.5 million as of December 31, 2015 compared to $2.2 million as of December 31, 2014 , primarily due to theacquisition of Octane and increased year-over-year sales in both our business segments.Cash used in investing activities of $122.8 million for 2015 was primarily related to $114.1 million used for the purchase of Octane and the net purchases of $3.0million of marketable securities. Additionally, $5.7 million was used for capital expenditures during 2015 , primarily for implementation of new software andhardware information system upgrades. We anticipate spending $7.0 million to $8.0 million in 2016 for software, equipment and product tooling.Cash provided by financing activities of $68.9 million for 2015 was primarily related to the proceeds from our new term loan of $80.0 million for the Octaneacquisition, partially offset by the share repurchase program spending of $11.6 million .Financing ArrangementsOn December 31, 2015 we entered into an amendment (the “Amendment”) to our existing Credit Agreement, dated December 5, 2014, with JPMorgan ChaseBank, N.A. (“Chase Bank”) that provided for an $80.0 million term loan (the “Term Loan”) to finance the acquisition of Octane. The Term Loan and our existing$20.0 million revolving line of credit with Chase Bank are secured by substantially all of the assets of Nautilus. The Term Loan matures on December 31, 2020.Under the terms of the Amendment, the maturity date of our existing revolving line of credit was extended to December 31, 2020.The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, andlimitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also containscustomary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligations and exercise itsremedies under the continuing security agreement.Borrowing availability under the Credit Agreement is subject to our compliance with certain financial and operating covenants at the time borrowings arerequested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.27The interest rate applicable to the Term Loan, as well as each advance under the revolving line of credit, is based on either Chase Bank's floating prime rate oradjusted LIBOR, plus an applicable margin. As of December 31, 2015 our borrowing rate for both the Term Loan and line of credit advances was 1.68% .As of December 31, 2015 , we had outstanding borrowings of $80.0 million on our term loan and $0.5 million in letters of credit issued under the CreditAgreement with expiration dates through April 2016 . As of December 31, 2015 , we were in compliance with the financial covenants of the Credit Agreement andapproximately $19.5 million was available for borrowing under the line of credit.Stock Repurchase ProgramOn November 3, 2014 , our Board of Directors approved a stock repurchase program that authorized us to repurchase outstanding shares of our common stock foran aggregate purchase price of up to $15.0 million from time to time over a period of 24 months. The repurchase program expires November 3, 2016 . Sharerepurchases will be funded with existing cash balances and repurchased shares will be retired and returned to our pool of unissued authorized shares. During 2015 ,we repurchased 711,708 shares at an average price of $16.25 per share for an aggregate purchase price of $11.6 million . As of December 31, 2015 , $3.4 millionremains available for future repurchases.Commitments and ContingenciesFor a description of our commitments and contingencies, refer to Note 20, Commitments and Contingencies , to our Consolidated Financial Statements in Part II,Item 8 of this report. Non-Cancellable Contractual ObligationsOur operating cash flows include the effect of certain non-cancellable, contractual obligations. A summary of such obligations as of December 31, 2015 , includingthose related to our discontinued Commercial operations, is as follows (in thousands): Payments due by period Total Less than 1year 1-3 years 3-5 years More than 5yearsLong-term debt obligations$85,010 $17,848 $34,355 $32,807 $—Purchase obligations (1)32,037 32,037 — — —Operating lease obligations30,272 5,327 8,331 7,883 8,731Minimum royalty obligations3,213 2,213 1,000 — —Total$150,532 $57,425 $43,686 $40,690 $8,731(1)Our purchase obligations are comprised primarily of inventory purchase commitments. Because substantially all of our inventory is sourced from Asia, wehave long lead times and therefore need to secure factory capacity from our vendors in advance.Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2015 , we are unable to makereasonably reliable estimates of the timing of any cash settlements with the respective taxing authorities. Therefore, approximately $5.0 million of liabilities relatedto unrecognized tax benefits, including interest and penalties on uncertain tax positions, have been excluded from the contractual table above. For furtherinformation, refer to Note 13, Income Taxes , to our Consolidated Financial Statements in Part II, Item 8 of this report.Off-Balance Sheet ArrangementsIn the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreementswith vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or services; agreements with customers,under which we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we mayindemnify lessors against third party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify thelicensee or licensor against claims arising from their use of our intellectual property or our use of their intellectual property; and agreements with parties to debtarrangements, under which we may indemnify them against claims relating to their participation in the transactions.The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold insurance policies thatmitigate potential losses arising from certain types of indemnifications. Because we are unable to28estimate our potential obligation, and because management does not expect these obligations to have a material adverse effect on our consolidated financialposition, results of operations or cash flows, no liabilities are recorded at December 31, 2015 .SEASONALITY We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, followed by the third quarter,and are generally weakest in the second quarter. We believe that, during the spring and summer months, consumers tend to be involved in outdoor activities,including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capitalneeds and resource utilization.INFLATIONWe do not believe that inflation had a material effect on our business, financial condition or results of operations in 2015 , 2014 or 2013 . Inflation pressures doexist in countries where our contract manufacturers are based, however we have largely mitigated these increases through cost improvement measures.NEW ACCOUNTING PRONOUNCEMENTSSee Note 1, Significant Accounting Polices , to our Consolidated Financial Statements in Part II, Item 8 of this report.Item 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskOur exposure to market risk from changes in interest rates relates primarily to our cash equivalents and substantially all our marketable securities. As ofDecember 31, 2015 , we had cash equivalents of $0.7 million held in a combination of money market funds and corporate bonds, and marketable securities of$30.0 million , held in a combination of certificates of deposit and corporate bonds. Our cash equivalents mature within three months or less from the date ofpurchase. Marketable securities with original maturities of greater than three months and remaining maturities of less than one year are classified as short-terminvestments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketablesecurities represent the investment of cash that is available for current operations. We have classified our marketable securities as available-for-sale and, therefore,we may choose to sell or hold them as changes in the market occur. Because of the short-term nature of the instruments in our portfolio, a decline in interest rateswould reduce our interest income over time, and an increase in interest rates may negatively affect the market price or liquidity of certain securities within theportfolio, but a change in interest rates would not have a material impact on our results of operations, financial position or cash flows.Our negotiated credit facilities generally charge interest based on a benchmark rate such as LIBOR. Fluctuations in short-term interest rates may cause interestpayments on term loan principal and drawn amounts on the revolving line to increase or decrease. As of December 31, 2015, the outstanding balances on our creditfacilities totaled $80.0 million .29Item 8. Financial Statements and Supplementary DataREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofNautilus, Inc.Vancouver, WashingtonWe have audited the accompanying consolidated balance sheets of Nautilus, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014 , and therelated consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period endedDecember 31, 2015 . These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nautilus, Inc. and subsidiaries as ofDecember 31, 2015 and 2014 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 , inconformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control overfinancial reporting as of December 31, 2015 , based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company's internalcontrol over financial reporting./s/ Deloitte & Touche LLPPortland, OregonFebruary 25, 201630NAUTILUS, INC.CONSOLIDATED BALANCE SHEETS(In thousands) As of December 31, 2015 2014Assets Cash and cash equivalents$30,778 $45,206Available-for-sale securities29,998 26,984Trade receivables, net of allowances of $918 and $10845,155 26,260Inventories42,729 24,896Prepaids and other current assets6,888 6,987Income taxes receivable439 50Deferred income tax assets8,904 12,368 Total current assets164,891 142,751Property, plant and equipment, net16,764 9,634Goodwill60,470 2,520Other intangible assets, net73,354 10,575Long-term deferred income tax assets— 9,546Other assets433 628Total assets$315,912 $175,654Liabilities and Shareholders' Equity Trade payables$61,745 $47,574Accrued liabilities13,027 9,851Warranty obligations, current portion4,753 2,246Note payable, current portion, net of unamortized debt issuance costs of $715,993 — Total current liabilities95,518 59,671Warranty obligations, non-current3,792—Income taxes payable, non-current4,116 3,725Deferred income tax liabilities, non-current18,380 —Other long-term liabilities3,144 1,186Note payable, non-current, net of unamortized debt issuance costs of $2963,971 —Total liabilities188,921 64,582Commitments and contingencies (Note 20) Shareholders' equity: Common stock - no par value, 75,000 shares authorized, 31,005 and 31,333 shares issued and outstanding796 8,033Retained earnings127,522 103,347Accumulated other comprehensive loss(1,327) (308)Total shareholders' equity126,991 111,072Total liabilities and shareholders' equity$315,912 $175,654See accompanying Notes to Consolidated Financial Statements.31NAUTILUS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Year Ended December 31, 2015 2014 2013Net sales$335,764 $274,447 $218,803Cost of sales162,530 133,872 112,326Gross profit173,234 140,575 106,477Operating expenses: Selling and marketing101,618 81,059 66,486General and administrative21,441 22,131 18,705Research and development9,904 7,231 5,562Total operating expenses132,963 110,421 90,753Operating income40,271 30,154 15,724Other income (expense): Interest income218 63 14Interest expense(22) (25) (36)Other, net(445) 32 337Total other income (expense), net(249) 70 315Income from continuing operations before income taxes40,022 30,224 16,039Income tax expense (benefit)13,219 9,841 (32,085)Income from continuing operations26,803 20,383 48,124Discontinued operations: Loss from discontinued operations before income taxes(601) (1,134) (559)Income tax expense (benefit) of discontinued operations(400) 454 (389)Loss from discontinued operations(201) (1,588) (170)Net income$26,602 $18,795 $47,954 Basic income per share from continuing operations$0.86 $0.65 $1.55Basic loss per share from discontinued operations(0.01) (0.05) (0.01)Basic net income per share$0.85 $0.60 $1.54 Diluted income per share from continuing operations$0.85 $0.64 $1.53Diluted loss per share from discontinued operations(0.01) (0.05) (0.01)Diluted net income per share$0.84 $0.59 $1.52Shares used in per share calculations: Basic31,288 31,253 31,072Diluted31,589 31,688 31,457See accompanying Notes to Consolidated Financial Statements.32NAUTILUS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Year Ended December 31, 2015 2014 2013Net income$26,602 $18,795 $47,954Other comprehensive income (loss): Unrealized gain (loss) on marketable securities, net of income tax expense (benefit) of $1, $(11) and$02 (18) —Foreign currency translation adjustment, net of income tax expense of $17, $15 and $20(1,021) (534) (381)Other comprehensive loss(1,019) (552) (381)Comprehensive income$25,583 $18,243 $47,573See accompanying Notes to Consolidated Financial Statements.33NAUTILUS, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(In thousands) Common Stock RetainedEarnings AccumulatedOtherComprehensiveIncome (Loss) TotalShareholders'Equity Shares Amount Balances at January 1, 201330,924 $6,103 $36,598 $625 $43,326Net income— — 47,954 — 47,954Foreign currency translation adjustment, net of income tax expense of $20— — — (381) (381)Stock-based compensation expense— 454 — — 454Common stock issued under equity compensation plan238 357 — — 357Tax deficiency related to stock-based awards— (145) — — (145)Balances at December 31, 201331,162 6,769 84,552 244 91,565Net income— — 18,795 — 18,795Unrealized loss on marketable securities, net ofincome tax benefit of $(11)— — — (18) (18)Foreign currency translation adjustment, net ofincome tax expense of $15— — — (534) (534)Stock-based compensation expense— 1,066 — — 1,066Common stock issued under equity compensation plan171 378 — — 378Tax deficiency related to stock-based awards— (180) — — (180)Balances at December 31, 201431,3338,033103,347(308)111,072Net income— — 26,602 — 26,602Unrealized gain on marketable securities, net ofincome tax expense of $1— — — 2 2Foreign currency translation adjustment, net of income tax expense of $17— — — (1,021) (1,021)Stock-based compensation expense— 1,484 — — 1,484Common stock issued under equity compensation plan, net of shares withheld for tax payments377 275 — — 275Common stock issued under employee stockpurchase plan7 116 — — 116Tax benefit related to stock-based awards— 28 — — 28Repurchased shares(712) (9,140) (2,427) — (11,567)Balances at December 31, 201531,005 $796 $127,522 $(1,327) $126,991See accompanying Notes to Consolidated Financial Statements.34NAUTILUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2015 2014 2013Cash flows from operating activities: Income from continuing operations$26,803 $20,383 $48,124Loss from discontinued operations(201) (1,588) (170)Net income26,602 18,795 47,954Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization3,412 4,024 3,344Bad debt expense786 104 588Inventory lower-of-cost-or-market adjustments1,583 457 557Stock-based compensation expense1,484 1,066 454Loss on asset disposals313 145 2Deferred income taxes, net of valuation allowances11,669 8,007 (32,814)Excess tax (benefit) deficiency related to stock-based awards(28) 180 145Changes in operating assets and liabilities, net of effects of acquisition: Trade receivables(6,812) (1,331) (4,417)Inventories(7,147) (9,560) 2,388Prepaids and other current assets1,365 (314) (1,174)Income taxes receivable(389) 30 (91)Trade payables4,506 10,456 4,487Accrued liabilities, including warranty obligations3,776 2,313 (337)Net cash provided by operating activities41,120 34,372 21,086Cash flows from investing activities: Proceeds from sale of discontinued operations— — 116Proceeds from other asset sales— — 5Acquisition of business, net of cash acquired(114,062) — —Purchases of property, plant and equipment and intangible assets(5,734) (3,181) (3,590)Purchases of available-for-sale-securities(61,933) (37,434) —Proceeds from maturities of available-for-sale securities55,292 10,450 —Proceeds from sales of available-for-sale securities3,602 — —Net cash used in investing activities(122,835) (30,165) (3,469)Cash flows from financing activities: Proceeds from long-term debt80,000 — —Proceeds from employee stock purchases116 — —Proceeds from exercise of stock options1,050 378 357Tax payments related to stock award issuances(775) — —Excess tax benefit (deficiency) related to stock-based awards28 (180) (145)Payments for stock repurchases(11,567) — —Net cash provided by financing activities68,852 198 212Effect of exchange rate changes on cash and cash equivalents(1,565) (178) (57)Increase (decrease) in cash and cash equivalents(14,428) 4,227 17,772Cash and cash equivalents: Beginning of year45,206 40,979 23,207End of year$30,778 $45,206 $40,979Supplemental disclosure of cash flow information: Cash paid for income taxes, net$(1,308) $(923) $(450)Cash paid for interest$(22) $(25) $(36)Supplemental disclosure of non-cash investing activities: Acquisition consideration owed but not yet paid$2,813 $— $—Capital expenditures incurred but not yet paid$1,000 $86 $—Supplemental disclosure of non-cash financing activities: Loan fees incurred but not yet paid$36 $— $—See accompanying Notes to Consolidated Financial Statements.35NAUTILUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) SIGNIFICANT ACCOUNTING POLICIESOrganization and BusinessNautilus, Inc. and subsidiaries (collectively, "Nautilus" or the "Company") was founded in 1986 and incorporated in the State of Washington in 1993. Ourheadquarters 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 businessactivities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use,primarily in the United States and Canada, but also in international markets outside North America. Our products are sold under some of the most-recognizedbrand names in the fitness industry: Nautilus ® , Bowflex ® , Octane Fitness ® , Schwinn ® and Universal ® .We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct businessoffers products directly to consumers through television advertising, catalogs and the Internet. Our Retail business offers our products through a network ofindependent retail companies with stores and websites located in the United States and internationally. We also derive a portion of our revenue from the licensingof our brands and intellectual property.Basis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”) and relate to Nautilus, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany transactions andbalances have been eliminated in consolidation.Discontinued OperationsResults from discontinued operations relate to the disposal of our former Commercial business, which began in 2009 and was completed in April 2011. We reachedsubstantial completion of asset liquidation at December 31, 2012. However, we continue to have legal and accounting expenses as we work with authorities onfinal deregistration of each entity and 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 periodspresented.Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in the financial statements. Our most significant estimates relateto the following:•Revenue recognition, net of returns and allowances;•Sales discounts and allowances;•Allowance for uncollectible trade receivables;•Valuation of excess and obsolete inventory;•Goodwill and other long-term assets valuation;•Product warranty obligations;•Litigation and loss contingencies;•Deferred tax assets and the related valuation allowance;•Unrecognized tax benefits; and•Valuation of assets and liabilities related to acquisition.Actual results could differ from our estimates.ConcentrationsFinancial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents held in bank accounts in excess offederally-insured limits and trade receivables. Trade receivables are generally unsecured and therefore collection is affected by the economic conditions in each ofour 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 couldbe disrupted by natural disasters, difficulties in transporting products from non-U.S. suppliers,36as well as political, social or economic instability in the countries where contract manufacturers or their vendors or customers conduct business. While any suchcontract manufacturing arrangement could be replaced over time, the temporary loss of the services of any primary contract manufacturer could delay productshipments 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 notreplaced with new business, would negatively affect our operating results and cash flows. In each of 2015 , 2014 and 2013 , one customer accounted for more than10% , but less than 15% , of our net sales.Cash and Cash EquivalentsAll highly liquid investments with maturities of three months or less at purchase are considered to be cash equivalents. As of December 31, 2015 , cash equivalentsconsisted of money market funds and corporate bonds and totaled $0.7 million . Our cash equivalents as of December 31, 2014 consisted of money market funds,certificates of deposit, commercial paper, and variable-rate demand notes and totaled $24.1 million .Available-For-Sale SecuritiesWe classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Marketable securities with original maturities of greater thanthree months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may beclassified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for currentoperations. Unrealized holding gains and losses, which are immaterial, are excluded from earnings and are reported net of tax in other comprehensive income untilrealized. Dividend and interest income is recognized when earned. Realized gains and losses, which were not material in 2015 or 2014 , are included in earningsand 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 andquantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recoveryoccurs.For additional information, refer to Note 4, Fair Value Measurements .InventoriesInventories are stated at the lower of cost or market, 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 market value based onhistorical demand, competitive factors, changes in technology and product lifecycles.Inventories acquired from Octane as of December 31, 2015 have been recorded at provisional fair values. For additional information, see Note 2, BusinessAcquisition .Property, Plant and EquipmentProperty, plant and equipment is stated at cost, net of accumulated depreciation. Improvements or betterments which add new functionality or significantly extendthe life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired, or otherwise disposed of, and therelated accumulated depreciation, are removed from the accounts at the time of disposal. Gains and losses resulting from asset sales and dispositions are recognizedin 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, inthe case of leasehold improvements, the lease term, including renewal periods if we expect to exercise our renewal options. Depreciation on computer equipment,machinery and equipment and furniture and fixtures is determined based on estimated useful lives, which generally range from three -to- seven years.Property, plant and equipment acquired from Octane as of December 31, 2015 have been recorded at provisional fair values. For additional information, see Note2, Business Acquisition .GoodwillGoodwill consists of the excess of acquisition costs over the fair values of net assets acquired in business combinations. We review goodwill for impairment in thefourth quarter of each year and when events or changes in circumstances indicate that the carrying amount may be impaired. For this purpose, goodwill isevaluated at the reporting unit level. Our goodwill asset related to our Canadian subsidiary is attributable to our Direct reporting unit, and our goodwill related tothe Octane acquisition is attributable to our Retail reporting unit. We performed an assessment of goodwill in the fourth quarters of 2015 , 2014 and 2013 andconcluded37that circumstances did not more likely than not indicate an impairment had occurred. For further information regarding goodwill, see Note 8, Goodwill .Other Intangible AssetsDefinite-lived intangible assets, primarily acquired trade names, customer relationships, patents and patent rights, are stated at cost, net of accumulatedamortization. We recognize amortization expense for our definite-lived intangible assets on a straight-line basis over the estimated useful lives.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 acquired trademarks for impairment in the fourth quarter of each year and when events orchanges in circumstances indicate that the assets may be impaired. The fair value of trademarks is estimated using the relief from royalty method to estimate thevalue 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 fairvalue of the trademark. If the carrying amount of trademarks exceeds the estimated fair value, we calculate impairment as the excess of carrying amount over theestimate of fair value. We tested our acquired trademarks for impairment in the fourth quarters of 2015 , 2014 and 2013 and determined that no impairment wasindicated. For further information regarding other intangible assets, see Note 9, Other Intangible Assets .Other intangible assets acquired from Octane as of December 31, 2015 have been recorded at provisional fair values. For additional information, see Note 2,Business Acquisition .Impairment of Long-Lived AssetsLong-lived assets, including property, plant and equipment and definite-lived intangible assets, are evaluated for impairment when events or circumstances indicatethe 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 andeventual disposition of the asset to determine whether a potential impairment exists. If the carrying value exceeds estimated future undiscounted cash flows, werecord impairment expense to reduce the carrying value of the asset to its estimated fair value. No impairment charges were recorded in 2015 , 2014 or 2013 .Revenue RecognitionDirect and Retail product sales and shipping revenues are recorded when products are shipped and title passes to customers. In most instances, Retail sales tocustomers are made pursuant to a sales contract that provides for transfer of both title and risk of loss to the customer upon our delivery to the carrier. For Directsales, revenue is generally recognized when products are shipped. Revenue is recognized net of applicable sales incentives, such as promotional discounts, rebatesand return allowances. We estimate the revenue impact of incentive programs based on the planned duration of the program and historical experience.Many Direct business customers finance their purchases through a third-party credit provider, for which we pay a commission or financing fee to the creditprovider. Revenue for such transactions is recognized based on the sales price charged to the customer and the related commission or financing fee is included inselling and marketing expense.Sales Discounts and Returns AllowanceProduct sales and shipping revenues are reported net of promotional discounts and return allowances. We estimate the revenue impact of retail sales incentiveprograms based on the planned duration of the program and historical experience. If the amount of sales incentives is reasonably estimable, the impact of suchincentives 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 returnsbased on historical experience and record the expected obligation as a reduction of revenue. If actual return costs differ from previous estimates, the amount of theliability and corresponding revenue are adjusted in the period in which such costs occur. Activity in our sales discounts and returns allowance was as follows (inthousands): 2015 2014 2013Balance, January 1$4,296 $4,106 $4,990Charges to reserve16,700 15,285 13,345Reductions for sales discounts and returns(15,569) (15,095) (14,229)Business acquisition (Note 2)250 — —Balance, December 31$5,677 $4,296 $4,106Taxes Collected from Customers and Remitted to Governmental AuthoritiesTaxes collected from customers and remitted to governmental authorities are recorded on a net basis and excluded from net sales.38Shipping and Handling FeesShipping and handling fees billed to customers are recorded net of discounts and included in both net sales and cost of sales.Cost of SalesCost 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; andallocated expenses for shared administrative functions.Product Warranty ObligationsOur products carry defined warranties for defects in materials or workmanship which, according to their terms, generally obligate us to pay the costs of supplyingand shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods rangefrom 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 fulfillingfuture warranty claims. If necessary, we adjust the liability for specific warranty-related matters when they become known and are reasonably estimable. Estimatedwarranty expense is included in cost of sales, based on historical warranty claim experience and available product quality data. Warranty expense is affected by theperformance 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 inherentin previous estimates are no longer valid, the amount of product warranty obligations is adjusted accordingly.Litigation and Loss ContingenciesFrom time to time, we may be involved in various claims, lawsuits and other proceedings. These legal and tax proceedings involve uncertainty as to the eventualoutcomes 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 acomponent 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 theaccrual) 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 disclosethat an estimate cannot be made.Advertising and PromotionWe expense our advertising and promotion costs as incurred. Production costs of television advertising commercials are recorded as prepaid expenses until theinitial broadcast, at which time such costs are expensed. Advertising and promotion costs are included in selling and marketing expenses and totaled $54.8 million ,$42.6 million and $35.8 million for the years ended December 31, 2015 , 2014 and 2013 , respectively. Prepaid advertising and promotion costs were $1.5 millionand $1.4 million as of December 31, 2015 and 2014 , respectively.Research and DevelopmentInternal research and development costs, which primarily consist of salaries and wages, employee benefits, expenditures for materials, and fees to use licensedtechnologies, are expensed as incurred. Third party research and development costs for products under development or being researched, if any, are expensed asthe contracted work is performed.Income TaxesWe account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets andliabilities 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, inthe 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 allowancesare provided against deferred income tax assets if we determine it is more likely than not that such assets will not be realized.Unrecognized Tax BenefitsWe 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 theposition upon examination, including resolutions of any related appeals or litigation. We recognize tax-related interest and penalties as a component of income taxexpense.Foreign Currency TranslationWe translate the accounts of our non-U.S. subsidiaries into U.S. dollars as follows: revenues, expenses, gains and losses are translated at weighted-averageexchange 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 inour consolidated balance sheets as a component of accumulated other comprehensive income.39Gains and losses arising from foreign currency transactions, including transactions between us and our non-U.S. subsidiaries, are recorded as a component of otherincome (expense) in our consolidated statements of operations.Fair Value of Financial InstrumentsThe carrying values of cash and cash equivalents, trade receivables, prepaids and other current assets, trade payables and accrued liabilities approximate fair valuedue to their short maturities.For additional information on financial instruments recorded at fair value on a recurring basis as of December 31, 2015 and 2014 , refer to Note 4, Fair ValueMeasurements .Stock-Based CompensationWe 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 theextent 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 probabilityof achieving the performance targets.Fair value of stock options is estimated using the Black-Scholes-Merton option valuation model; fair value of performance share unit ("PSU") awards, restrictedstock unit ("RSU") awards and restricted stock awards ("RSA") is based on the closing market price on the day preceding the grant.We estimate future forfeitures, at the time of grant and in subsequent periods, based on historical turnover rates, previous forfeiture experience and changes in thebusiness or key personnel that would suggest future forfeitures may differ from historical data. We recognize compensation expense for only those stock optionsand other stock-based awards that are expected to vest. We reevaluate estimated forfeitures monthly and, if applicable, recognize a cumulative effect adjustment inthe period of the change if the revised estimate of the impact of forfeitures differs significantly from the previous estimate.Income Per Share AmountsBasic income per share amounts were computed using the weighted average number of common shares outstanding. Diluted income per share amounts werecalculated using the number of basic weighted average shares outstanding increased by dilutive potential common shares related to stock-based awards, asdetermined by the treasury stock method.New Accounting PronouncementsASU 2016-02In 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 standards would require companies and other organizationsto include lease obligations on their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leasesor operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases the lessee would recognize a straight-line total lease expense. ASU 2016-02 is effective for public companies' annual periods, and interim periods within those fiscal years, beginning after December15, 2018. We are currently evaluating any potential impact that adoption of ASU 2016-02 may have on our financial position, results of operations and cash flows.ASU 2015-17In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies thepresentation of deferred income taxes, and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.The amendments apply to all entities that present a classified statement of financial position, and aligns the presentation of deferred income tax assets and liabilitieswith International Financial Reporting Standards ("IFRS") IAS 1. ASU 2015-17 is effective for public companies' financial statements issued for annual periodsbeginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted and may be applied either prospectively to alldeferred tax liabilities and assets or retrospectively to all periods presented. We do not expect the adoption of ASU 2015-17 to have a material effect on ourfinancial position, results of operations or cash flows.ASU 2015-11In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuationof all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospectivebasis. Early adoption is40permitted. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.ASU 2015-05In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” ASU 2015-05 provides guidanceregarding the accounting for a customer's fees paid in a cloud computing arrangement, specifically about whether a cloud computing arrangement includes asoftware license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies' annual periods, including interim periods,beginning after December 15, 2015. Early adoption is permitted. We do not expect the adoption of ASU 2015-05 to have a material effect on our financial position,results of operations or cash flows.ASU 2014-12In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)." ASU No. 2014-12 addresses accounting for share-basedpayments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 indicates that, in suchsituations, the performance target should be treated as a performance condition and, accordingly, the performance target should not be reflected in estimating thegrant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will beachieved. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We do not expect theadoption of ASU 2014-12 to have a material effect on our financial position, results of operations or cash flows.ASU 2014-09In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 clarifies the principles for recognizing revenue anddevelops a common revenue standard for U.S. GAAP and the International Accounting Standards Board that:• removes inconsistencies and weaknesses in revenue requirements;• provides a more robust framework for addressing revenue issues;• improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;• provides more useful information to users of financial statements through improved disclosure requirements; and• simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017. While we do not expect the adoption of ASU2014-09 to have a material effect on our business, we are still evaluating any potential impact that adoption of ASU 2014-09 may have on our financial position,results of operations or cash flows.ASU 2014-08In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) andReporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". ASU 2014-08 amends the definition for what types of assetdisposals are to be considered discontinued operations, and amends the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 alsoenhances the convergence of the FASB’s and the International Accounting Standard Board’s reporting requirements for discontinued operations. ASU 2014-08was effective for annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015.Our adoption of ASU 2014-08 in January 2015 did not have a material effect on our financial position, results of operations or cash flows.(2) BUSINESS ACQUISITIONOn December 31, 2015, we acquired all of the outstanding capital stock of OF Holdings, Inc., sole parent of Octane Fitness, LLC ("Octane" or "Octane Fitness")for an aggregate base purchase price of $115.0 million , plus net adjustments for working capital and cash acquired on the closing date. We funded the acquisitionthrough an $80.0 million term loan and cash on hand. Based in Brooklyn Park, Minnesota, Octane is a leader in zero-impact training with a line of fitnessequipment focused on Retail specialty and commercial channels. The acquisition of Octane is expected to strengthen and diversify our brand portfolio, broaden ourdistribution and deepen our talent pool. Octane's business is anticipated to be highly complementary to our existing business from both product and channelperspectives and create numerous revenue synergies for us.Since the acquisition occurred on December 31, no amount of net sales or net income related to the Octane business were included in our reported 2015 amounts.We expect to categorize Octane's results of operations in our Retail segment.41Total acquisition costs incurred through December 31, 2015 were $0.6 million and were expensed in general and administrative costs.Purchase Price AllocationAcquired assets and liabilities were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value ofidentifiable net assets resulted in the recognition of goodwill of $58.4 million , all of which was assigned to the Retail segment, and is attributed primarily toOctane's intellectual property base, benefits of access to different markets and customers, and employee workforce. The goodwill is not expected to be deductiblefor income tax purposes.The goodwill was determined on the basis of the provisional fair values of the assets and liabilities identified as of the acquisition date. It may be adjusted, within aperiod of no more than 12 months from the acquisition date, if the provisional fair values change as a result of circumstances existing at the acquisition date. Suchfair value adjustments may arise in respect to intangible assets, inventories, and property, plant and equipment, upon completion of the necessary valuations andphysical verifications of such assets. The amount of deferred taxes may also be adjusted during the measurement period.As of December 31, 2015, the fair values of the assets acquired and liabilities assumed for the acquisition of Octane are provisional because final appraisals and/orvaluations have not yet been completed. The following table summarizes the preliminary fair values of the net assets acquired and liabilities assumed, net of anyworking capital and other adjustments, as of December 31, 2015 (in thousands): Preliminary Valuation atDecember 31, 2015Cash$7,759Accounts receivable12,507Inventories12,168Prepaid expenses1,028Deferred tax assets1,287Property, plant and equipment3,240Intangible assets63,100 Total assets acquired$101,089 Accounts payable6,215Accrued liabilities1,614Warranty obligations5,550Deferred tax liabilities, non-current20,914Other non-current liabilities519 Total liabilities assumed$34,812 Net identifiable assets acquired$66,277Goodwill58,357Net assets acquired$124,63442The following table sets forth the components of identifiable intangible assets and their estimated fair values and useful lives as of December 31, 2015 (dollars inthousands): Estimated fairvalue Estimated useful life(years) Weighted-averageamortization period(years)Trade name - Octane Fitness$23,000 Indefinite N/ATrade name - others2,600 10 - 15 12.5Patents12,800 11 - 24 18Customer relationships24,700 10 - 15 13 $63,100 Summary of Unaudited Pro Forma InformationThe following table reflects the unaudited pro forma consolidated results of operations for the period presented, as though the acquisition of Octane had occurredon January 1, 2014 (in thousands): (unaudited) Year Ended December 31, 2015 2014Net sales$400,078 $338,990Net income29,352 20,233Net income per share: Basic$0.94 $0.65 Diluted0.93 0.64The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have beenrealized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The pro forma results do not include, forexample, the effects of anticipated synergies from combining the two companies.(3) DISCONTINUED OPERATIONSFollowing is a summary of certain financial information regarding our discontinued operations (in thousands): Year Ended December 31, 2015 2014 2013Loss from discontinued operations before income taxes$(601) $(1,134) $(559)Income tax expense (benefit)(400) 454 (389)Total loss from discontinued operations$(201) $(1,588) $(170)The following table summarizes liabilities for exit costs related to discontinued operations, included in accrued liabilities and other long-term liabilities in ourconsolidated balance sheets (in thousands): FacilitiesLeasesBalance as of January 1, 2013$1,118Payments(287)Balance as of December 31, 2013831Payments(258)Balance as of December 31, 2014573Payments(273)Balance as of December 31, 2015$30043We expect the lease obligations to be paid out through 2016 .(4) FAIR VALUE MEASUREMENTSFactors 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 andcredit 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 indetermining fair value. Assets measured at fair value on a recurring basis as of December 31, 2015 and 2014 were as follows (in thousands): December 31, 2015 Level 1 Level 2 Level 3 TotalCash Equivalents Money market funds $1 $— $— $1Corporate bonds — 733 — 733 Total Cash Equivalents 1 733 — 734 Available-for-Sale Securities Certificates of deposit (1) — 25,234 — 25,234Corporate bonds — 4,764 — 4,764 Total Available-for-Sale Securities — 29,998 — 29,998 Total assets measured at fair value $1 $30,731 $— $30,732 December 31, 2014 Level 1 Level 2 Level 3 TotalCash Equivalents Money market funds $2,591 $— $— $2,591Certificates of deposit (1) — 980 — 980Commercial paper — 12,497 — 12,497Variable-rate demand notes — 8,000 — 8,000 Total Cash Equivalents 2,591 21,477 — 24,068 Available-for-Sale Securities Certificates of deposit (1) — 14,202 — 14,202Corporate bonds — 12,782 — 12,782 Total Available-for-Sale Securities — 26,984 — 26,984 Total assets measured at fair value $2,591 $48,461 $— $51,052(1) All certificates of deposit are within current FDIC insurance limits.44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 levelsduring the year ended December 31, 2015 . We did not have any changes to our valuation techniques during the year ended December 31, 2015 .We classify our marketable securities as available-for-sale and, accordingly, record them at fair value. Level 1 investment valuations are obtained from real-timequotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from inputs, other than quoted marketprices in active markets, 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 holdinggains and losses are excluded from earnings and are reported net of tax in other comprehensive income until realized. During the years ended December 31, 2015and 2014 , we did not record any other-than-temporary impairments on our financial assets required to be measured at fair value on a nonrecurring basis. We recognize or disclose the fair value of certain assets, such as non-financial assets, primarily property, plant and equipment, goodwill, other intangible assets andcertain other long-lived assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fallunder Level 3 of the fair value hierarchy. Other than our annual goodwill and indefinite-lived trade names impairment valuations effective as of October 1, 2015and 2014 , we did not perform any valuations on assets or liabilities that are valued at fair value on a nonrecurring basis.The carrying value of our term loan approximates its fair value and falls under Level 2 of the fair value hierarchy, as the interest rate is variable and based oncurrent market rates.(5) TRADE RECEIVABLESTrade receivables, net, consisted of the following (in thousands): December 31, 2015 2014Trade receivables$46,073 $26,368Allowance for doubtful accounts(918) (108) $45,155 $26,260Changes in our allowance for doubtful trade receivables were as follows (in thousands): 2015 2014 2013Balance, January 1$108 $53 $93Charges to bad debt expense786 104 588Recoveries (write-offs), net24 (49) (628)Balance, December 31$918 $108 $53(6) INVENTORIESInventories consisted of the following (in thousands): December 31, 2015 2014Finished goods$39,115 $23,765Parts and components3,614 1,131 $42,729 $24,89645(7) PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment consisted of the following (in thousands): EstimatedUseful Life(in years) December 31, 2015 2014Automobiles5to6 $139 $23Leasehold improvements5to20 3,397 2,144Computer equipment3to7 23,991 25,397Machinery and equipment3to5 10,867 6,709Furniture and fixtures5 1,605 1,108Work in progress (1)N/A 1,655 421Total cost 41,654 35,802Accumulated depreciation (24,890) (26,168) $16,764 $9,634(1) Work in progress includes computer hardware and software and production tooling construction in progress.Depreciation expense was as follows (in thousands): Year Ended December 31, 2015 2014 2013Depreciation expense$2,558 $1,983 $1,254(8) GOODWILLThe rollforward of goodwill was as follows (in thousands): Direct Retail TotalBalance, January 1, 2013$2,940 $— $2,940Currency exchange rate adjustment(200) — (200)Balance, December 31, 20132,740 — 2,740Currency exchange rate adjustment(220) — (220)Balance, December 31, 20142,520 — 2,520Currency exchange rate adjustment(407) — (407)Business acquisition (Note 2)— 58,357 58,357Balance, December 31, 2015$2,113 $58,357 $60,470(9) OTHER INTANGIBLE ASSETSOther intangible assets consisted of the following (in thousands): EstimatedUseful Life(in years) December 31, 2015 2014Indefinite-lived trademarksN/A $32,052 $9,052Definite-lived trademarks10to15 2,600 —Patents8to24 31,487 18,154Customer relationships10to15 24,700 — 90,839 27,206Accumulated amortization - definite-lived intangible assets (17,485) (16,631) $73,354 $10,57546Amortization expense was as follows (in thousands): Year Ended December 31, 2015 2014 2013Amortization expense$854 $2,040 $2,050Future amortization of definite-lived intangible assets is as follows (in thousands):2016$3,55320173,25520183,16220193,13220203,106Thereafter25,094 $41,302(10) ACCRUED LIABILITIESAccrued liabilities consisted of the following (in thousands): December 31, 2015 2014Payroll and related liabilities$6,556 $5,058Other6,471 4,793 $13,027 $9,851(11) PRODUCT WARRANTIESChanges in our product warranty obligations were as follows (in thousands): 2015 2014 2013Balance, January 1$2,246 $1,638 $2,492Accruals2,302 2,264 1,097Adjustments— — (186)Payments(1,553) (1,656) (1,765)Business acquisition (Note 2)5,550 — —Balance, December 31$8,545 $2,246 $1,638 (12) BORROWINGSTerm Loan and Line of CreditOn December 31, 2015 we entered into an amendment (the “Amendment”) to our existing Credit Agreement, dated December 5, 2014, with JPMorgan ChaseBank, N.A. (“Chase Bank”) that provided for an $80 million term loan to finance the acquisition described in Note 2, Business Acquisition , above (the “TermLoan”). The Term Loan and our existing $20 million revolving line of credit with Chase Bank are secured by substantially all of the assets of Nautilus. The TermLoan matures on December 31, 2020. The Amendment also extended the maturity date of our existing revolving line of credit to December 31, 2020.The Credit Agreement, as amended, contains customary covenants, including minimum fixed charge coverage ratio and funded debt to EBITDA ratio, andlimitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Credit Agreement also containscustomary events of default. Upon an event of default, the lender may terminate its credit line commitment, accelerate all outstanding obligations and exercise itsremedies under the continuing security agreement.47Borrowing availability under the Credit Agreement is subject to our compliance with certain financial and operating covenants at the time borrowings arerequested. Letters of credit under the Credit Agreement are treated as a reduction of the available borrowing amount and are subject to covenant testing.The interest rate applicable to the Term Loan and to each advance under the revolving line of credit is based on either Chase Bank's floating prime rate or adjustedLIBOR, plus an applicable margin. As of December 31, 2015 , our borrowing rate for the Term Loan and line of credit advances was 1.68% .As of December 31, 2015 , we had outstanding borrowings of $80.0 million on our term loan and $0.5 million in letters of credit issued under the CreditAgreement with expiration dates through April 2016 . As of December 31, 2015 , we were in compliance with the financial covenants of the Credit Agreement andapproximately $19.5 million was available for borrowing under the line of credit.Maturities of our Term Loan over the next five years are as follows (in thousands):2016$16,000201716,000201816,000201916,000202016,000 $80,000(13) INCOME TAXESIncome Tax ExpenseIncome from continuing operations before income taxes was as follows (in thousands): Year Ended December 31, 2015 2014 2013United States$39,242 $29,115 $15,386Non-U.S.780 1,109 653 $40,022 $30,224 $16,039Income tax expense (benefit) from continuing operations was as follows (in thousands): Year Ended December 31, 2015 2014 2013Current: U.S. federal$858 $1,086 $541U.S. state171 100 56Non-U.S.355 222 (12)Total current1,384 1,408 585Deferred: U.S. federal11,324 8,913 (29,552)U.S. state573 (558) (3,370)Non-U.S.(62) 78 252Total deferred11,835 8,433 (32,670) $13,219 $9,841 $(32,085)48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, 2015 2014 2013U.S. statutory income tax rate35.0 % 35.0 % 35.0 %State tax, net of U.S. federal tax benefit2.6 2.5 2.9Non-U.S. income taxes(0.1) (0.3) 1.2Nondeductible operating expenses0.8 0.2 (0.4)Research and development credit(0.6) (2.4) (0.7)Change in deferred tax measurement rate— 0.1 0.2Change in uncertain tax positions1.1 1.5 2.2Expiration of capital loss carryforward— — 26.9Change in valuation allowance(5.8) (4.1) (267.6)Other— 0.1 0.2Effective income tax rate33.0 % 32.6 % (200.1)%Deferred Income TaxesIndividually significant components of deferred income tax assets and liabilities were as follows (in thousands): December 31, 2015 2014Deferred income tax assets: Accrued liabilities$6,392 $3,510Allowance for doubtful accounts467 33Inventory valuation818 377Capitalized indirect inventory costs671 295Stock-based compensation expense693 558Deferred rent869 —Net operating loss carryforward3,361 19,742Basis difference on long-lived assets1,810 3,289Credit carryforward3,736 4,565Other171 339Gross deferred income tax assets18,988 32,708Valuation allowance(888) (6,156)Deferred income tax assets, net of valuation allowance18,100 26,552Deferred income tax liabilities: Prepaid advertising(523) (467)Other prepaids(579) (696)Basis difference on long-lived assets(26,285) (3,355)Undistributed earnings of foreign subsidiaries(188) (179)Other(1) (1)Deferred income tax liabilities(27,576) (4,698)Net deferred income tax assets (liabilities)$(9,476) $21,85449Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands): December 31, 2015 2014Deferred income tax assets$8,904 $12,368Long-term deferred income tax assets— 9,546Long-term deferred income tax liabilities(18,380) —Other long-term liabilities— (60)Net deferred income tax assets (liabilities)$(9,476) $21,854The table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2015 and 2014, that arose directly fromtax deductions related to equity compensation greater than compensation recognized for financial reporting. Instead, equity will be increased by $1.4 million if andwhen such deferred tax assets are ultimately realized. We use FASB ASC 740 ordering for purposes of determining when excess tax benefits have been realized.We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We have recorded a valuationallowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Evaluating the need for, and amount of, avaluation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdictionbasis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we considerboth positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which thestrength of the evidence can be objectively verified.Each quarter, we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxableincome and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, in 2014, wedetermined that a portion of the existing valuation allowance against the state net operating loss deferred tax assets was no longer necessary. Accordingly, anincome tax benefit of $1.2 million was recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance. Further, in the fourthquarter of 2015, after re-evaluating the potential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2015, theexisting valuation allowance against the foreign tax credit deferred tax assets as well as the substantially all of the remaining valuation allowance against the statenet operating loss deferred tax assets were no longer necessary. As such, an income tax benefit of $2.4 million was recorded in the fourth quarter of 2015 related tothe reduction of our existing valuation allowance. As of December 31, 2015, we have a valuation allowance against net deferred income tax assets of $0.9 million . Of the remaining valuation allowance, $0.6million primarily relates to domestic tax credit carryforwards as we currently do not anticipate generating the income of appropriate character to utilize thosecredits. The remainder of $0.3 million relates to foreign net operating loss carryforwards. Should it be determined in the future that it is more likely than not thatour domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the period in which such an assessment ismade. There have been no material changes to our foreign operations since December 31, 2014 and, accordingly, we maintain our existing valuation allowance onforeign deferred income tax assets in such jurisdictions at December 31, 2015.Income Tax CarryforwardsAs of December 31, 2015 , we had the following income tax carryforwards (in millions): Amount Expires inNet operating loss carryforwards U.S. State $71.1 2016 - 2035China $0.3 2020Italy $0.8 2016 - 2017Income tax credit carryforwards U.S. Federal $3.2 2018 - 2035U.S. State $0.5 2018 - 202250As previously mentioned, the table of tax attributes shown above does not include deferred tax assets created by, and associated with, excess tax benefits arosedirectly from tax deductions related to equity compensation greater than compensation recognized for financial reporting.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, Limitationon Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change .Unrecognized Tax BenefitsFollowing is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands): Year Ended December 31, 2015 2014 2013Balance, January 1$2,768 $1,964 $2,530Additions for tax positions taken in prior years1 72 166Reductions for tax positions taken in prior years(426) — (472)Additions for tax positions related to the current year43 821 54Settlements— — —Lapses of statutes of limitations— (89) (314)Other133 — —Balance, December 31$2,519 $2,768 $1,964Of the $2.5 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2015 , $2.4 million would affect our effectivetax rate if recognized.We recorded tax-related interest and penalties of $0.5 million , $0.4 million and $0.0 million in 2015 , 2014 and 2013 , respectively. We had a cumulative liabilityfor interest and penalties related to uncertain tax positions as of December 31, 2015 and 2014 of $2.5 million and $2.0 million , respectively.Our U.S. federal income tax returns for 2009 through 2015 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2006 through2015 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. jurisdictionswith varying statutes of limitation.As of December 31, 2015 , we believe it is reasonably likely that, within the next 12 months, $0.6 million of the previously unrecognized tax benefits related tocertain non-U.S. filing positions will be recognized as we anticipate the deregistration of certain entities.(14) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)Accumulated other comprehensive income (loss), net of applicable taxes, reported on our consolidated balance sheets consists of unrealized holding gains andlosses on available-for-sale securities and foreign currency translation adjustments. The following table sets forth the changes in accumulated other comprehensiveincome (loss), net of tax (in thousands): Unrealized Gain (Loss) onAvailable-for-Sale Securities Foreign CurrencyTranslation Adjustments TotalBalance, January 1, 2013 $— $625 $625Current period other comprehensive loss — (381) (381)Balance, December 31, 2013 — 244 244Current period other comprehensive loss (18) (534) (552)Balance, December 31, 2014 (18) (290) (308)Current period other comprehensive income (loss) 2 (1,021) (1,019)Balance, December 31, 2015 $(16) $(1,311) $(1,327)51(15) STOCK-BASED COMPENSATION2015 Long-Term Incentive PlanOn April 28, 2015, our shareholders approved our 2015 Long-Term Incentive Plan (the “2015 Plan”), which replaced our 2005 Long-Term Incentive Plan thatexpired 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-basedawards including: stock options, stock appreciation rights, RSAs, RSUs and PSUs. Stock options granted under the 2015 Plan shall not have an exercise price lessthan 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 withoutshareholder approval. Stock options generally vest over periods of three or four years of continuous service, commencing on the date of grant. Stock optionsgranted 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 adoptionof the 2015 Plan included new shares approved plus any shares of common stock which were previously reserved for issuance under our preceding plan, and werenot 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 availablefor issuance is reduced by (i) two shares for each share delivered in settlement of any stock appreciation rights, for each share of RSA, RSU or PSU award, 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 tostock 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, 2015 ,we had 4.5 million shares available for future grant under our 2015 Plan, and a total of 5.4 million shares of our common stock are reserved for future issuancepursuant to the 2015 Plan and our previous plan combined.Stock Option ActivityStock option activity was as follows (shares in thousands): OptionsOutstanding Weighted-AverageExercisePriceOutstanding at December 31, 2014798 $4.41Granted18 16.21Forfeited, canceled or expired(12) 15.40Exercised(284) 3.70Outstanding at December 31, 2015520 $5.01Certain information regarding options outstanding at December 31, 2015 was as follows: OptionsOutstanding OptionsExercisable Options Vestedand Expectedto VestNumber (in thousands)520 373 520Weighted-average exercise price$5.01 $3.47 $5.01Aggregate intrinsic value (in thousands)$6,099 $4,940 $6,099Weighted average remaining contractual term (in years)3.9 3.4 3.952RSU ActivityCompensation expense for RSUs is recognized over the estimated vesting period. Following is a summary of RSU activity (shares in thousands): RSUs Outstanding Weighted-AverageGrant Date Fair Valueper ShareOutstanding at December 31, 201487 $5.93Granted69 17.58Vested(46) 4.54Outstanding at December 31, 2015110 $13.73PSU ActivityCompensation expense for PSUs is recognized over the estimated requisite service period based on the number of PSUs ultimately expected to vest.In February and August 2012, we granted PSU awards to certain executive officers covering a total of 82,000 shares of our common stock. The PSUs vested basedon achievement of certain operating income and return on asset goals established for a three-year performance period. The number of PSUs that vest can rangefrom 60% of the PSUs if minimum thresholds are achieved to a maximum of 150% . These awards vested in full at the 150% maximum achievement, net offorfeitures, for a total of 95,250 shares.In May 2013, we granted PSU awards to certain of our executive officers covering a total of 24,500 shares of our common stock. The PSUs vest based onachievement of certain operating income and return on asset goals established for a three-year performance period. The number of shares vesting under the PSUawards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of sharesvesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150% . These awards are expected to vest in full at the 150%maximum achievement, with the exception of any forfeitures.In February 2014, we granted PSU awards to certain of our executive officers covering a total of 82,494 shares of our common stock. The PSUs vest based onachievement of goals established for operating income and revenue growth for a three-year performance period. The number of shares vesting under the PSUawards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved. The number of sharesvesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150% .In April and September 2015, we granted PSU awards to certain of our executive officers and management team covering a total of 56,820 shares of our commonstock. The PSUs vest based on achievement of goals established for certain operating income and return on asset criteria for a three-year performance period. Thenumber of shares vesting under the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goalsare achieved. The number of shares vesting can range from 60% of the PSU awards if minimum thresholds are achieved to a maximum of 150% .In December 2015, we granted PSU awards to a certain executive officer and management team personnel covering a total of 117,230 shares of our common stock.The PSUs vest based on achievement of certain operating income and operating margin goals for a three-year performance period. The number of shares vestingunder the PSU awards following conclusion of the performance period will be determined based on the level at which the financial goals are achieved.Following is a summary of PSU activity (shares in thousands): PSUs Outstanding Weighted-AverageGrant Date Fair Valueper ShareOutstanding at December 31, 2014166 $5.97Granted and additional goal shares awarded206 14.87Vested(95) 2.85Outstanding at December 31, 2015277 $13.6753Stock-Based CompensationWe receive income tax deductions as a result of the exercise of certain stock options and vesting of RSUs and PSUs. Stock-based compensation expense, primarilyincluded in general and administrative expense, was as follows (in thousands): Year Ended December 31, 2015 2014 2013Stock options$327 $592 $337RSUs544 121 54PSUs575 353 63ESPP38 — — $1,484 $1,066 $454Certain other information regarding our stock-based compensation was as follows (in thousands, except per share amounts): Year Ended December 31, 2015 2014 2013Weighted average grant-date per share fair value of stock options granted$8.94 $5.36 $4.37Total intrinsic value of stock options exercised4,142 736 451Fair value of RSUs vested673 872 545Fair value of PSUs vested1,454 — 386As of December 31, 2015 , unrecognized compensation expense for outstanding, but unvested stock option awards was $0.4 million , which is expected to berecognized over a weighted average period of 1.2 years.Employee Stock Purchase PlanOn April 28, 2015, our shareholders approved our Employee Stock Purchase Plan (the “ESPP”). The ESPP is administered by the Compensation Committee of theBoard of Directors and provides a means by which eligible employees may be given an opportunity to purchase shares of our common stock at a discount usingpayroll 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 stocksplits, 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 aseries 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 commonstock 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 yearand 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 madeexclusively 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 andwho, immediately upon purchasing shares under the ESPP, would own directly or indirectly, an aggregate of less than 5% of the total combined voting power orvalue of all outstanding shares of our common stock.ESPP activity was as follows (shares in thousands): Shares Availablefor Issuance Weighted- Average Purchase Price Weighted-AverageDiscount perShareBalance at December 31, 2014— Shares upon ESPP adoption500 Employee shares purchased(7) $16.69 $1.85Balance at December 31, 2015493 54Assumptions used in calculating the fair value of stock option grants and employee stock purchases were as follows: Year Ended December 31, 2015 2014 2013 ESPP Options Options OptionsDividend yield—% —% —% —%Risk-free interest rate0.1% 1.6% 1.7% 0.9%Expected life (years)N/A 4.28 4.75 4.75Expected volatility43% 71% 80% 89%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 stockoption.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 thevesting 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 stockoptions. Expected price volatility is calculated using historical daily closing prices over a period matching the weighted-average expected life, as managementbelieves such changes are the best indicator of future volatility.(16) STOCK REPURCHASE PROGRAMOn November 3, 2014 , our Board of Directors approved a stock repurchase program that authorizes us to repurchase up to $15.0 million of our outstandingcommon stock from time to time over a period of 24 months. The repurchase program expires November 3, 2016 . Share repurchases will be funded with existingcash balances and repurchased shares will be retired and returned to unissued authorized shares. Repurchases pursuant to the program were as follows:Quarter Ended Number of Shares Repurchased Amount Average Price per ShareMarch 31, 2015 133,877 $1,995,982 $14.91September 30, 2015 577,831 9,571,545 16.56Totals to Date 711,708 $11,567,527 $16.25As of December 31, 2015 , $3.4 million remains available for future repurchases. (17) INCOME PER SHAREThe weighted average numbers of shares outstanding used to compute income per share amounts were as follows (in thousands): Year Ended December 31, 2015 2014 2013Shares used for basic per share calculations31,288 31,253 31,072Dilutive effect of outstanding options, PSUs and RSUs301 435 385Shares used for diluted per share calculations31,589 31,688 31,457The weighted average numbers of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted income per share,primarily 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, 2015 2014 2013Stock options12 225 304PSUs— — 1255(18) 401(k) SAVINGS PLANThe Company sponsors a 401(k) savings plan that allows eligible employees to contribute a certain percentage of their salary. Employees are automaticallyenrolled 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 matchingcontributions. 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 amaximum 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 ofemployment. Our matching contributions for the savings plan were as follows (in thousands): Year ended December 31, 2015 2014 2013401(k) matching contributions$746 $631 $544(19) SEGMENT AND ENTERPRISE-WIDE INFORMATIONIn accordance with FASB ASC 280, Segment Reporting , Nautilus determined that it has three operating segments as of December 31, 2015 - Direct, Retail andOctane. Based on the aggregation criteria of ASC 280-10, we determined that two of the operating segments (Retail and Octane) can be aggregated due to thesesegments having similar economic characteristics and meeting the aggregation criteria. As a result, we have two reportable segments - Direct and Retail. Thisfinancial reporting structure was effective as of December 31, 2015, the acquisition date of Octane. Since the acquisition occurred on December 31, no amount ofnet sales, contribution or expenses related to the Octane business were included in our reported Retail segment results for 2015. Retail segment assets, however, doinclude the identifiable assets acquired from Octane, as further discussed in Note 2, Business Acquisition .We evaluate performance using several factors, of which the primary financial measures are net sales and reportable segment contribution. Contribution is themeasure of profit or loss, defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketingexpenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets are thosedirectly assigned to an operating segment's operations, primarily accounts receivable, inventories, goodwill and other intangible assets. Unallocated assetsprimarily include cash and cash equivalents, available-for-sale 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 notsignificant in any period.The accounting policies of the reportable segments are the same as the policies described in Note 1, Significant Accounting Policies .56Following is summary information by reportable segment (in thousands): Year Ended December 31, 2015 2014 2013Net Sales: Direct$225,595 $175,593 $136,663Retail106,195 93,223 76,775Unallocated royalty income3,974 5,631 5,365Consolidated net sales$335,764 $274,447 $218,803Contribution: Direct$39,940 $29,345 $14,126Retail12,850 13,279 11,431Unallocated royalty income3,974 5,631 5,365Consolidated contribution$56,764 $48,255 $30,922 Reconciliation of consolidated contribution to income from continuing operations: Consolidated contribution$56,764 $48,255 $30,922Amounts not directly related to segments: Operating expenses(16,493) (18,101) (15,198)Other income, net(249) 70 315Income tax expense (benefit)13,219 9,841 (32,085)Income from continuing operations$26,803 $20,383 $48,124 Depreciation and amortization expense: Direct$868 $1,913 $1,956Retail757 643 642Unallocated corporate1,787 1,468 746Total depreciation and amortization expense$3,412 $4,024 $3,344 December 31, Assets:2015 2014 Direct$35,356 $25,263 Retail202,696 37,203 Unallocated corporate77,860 113,188 Total assets$315,912 $175,654 Net sales by geographic area were as follows: Year Ended December 31, 2015 2014 2013U.S.$295,366 $231,230 $181,381Canada33,230 35,367 34,166All other7,168 7,850 3,256 $335,764 $274,447 $218,803There are no material long-lived assets held outside of the U.S.In 2015 , 2014 and 2013 , Amazon.com accounted for 11.1% , 11.3% and 11.2% , respectively, of our net sales.57(20) COMMITMENTS AND CONTINGENCIESOperating LeasesWe lease property and equipment under non-cancellable operating leases which, in the aggregate, extend through 2025. Many of these leases contain renewaloptions and provide for rent escalations and payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Rentexpense under all operating leases was as follows (in thousands): Year Ended December 31, 2015 2014 2013Rent expense$5,033 $3,625 $3,473As of December 31, 2015 , future minimum lease payments under non-cancellable leases, reduced for sublease income, were as follows (in thousands):2016$5,32720174,43920183,89220193,98920203,894Thereafter8,731 $30,272Guarantees, Commitments and Off-Balance Sheet ArrangementsAs of December 31, 2015 , we had approximately $0.5 million in letters of credit with certain vendors with expiration dates through April 2016 .We have long lead times for inventory purchases and, therefore, must secure factory capacity from our vendors in advance. As of December 31, 2015 , we hadapproximately $32.0 million in non-cancellable market-based purchase obligations, primarily for inventory purchases expected to be received within the nexttwelve 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 amount ofproducts that are shipped directly to Retail customer warehouses versus through Nautilus warehouses.In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may include: agreementswith vendors and suppliers, under which we may indemnify them against claims arising from use of their products or services; agreements with customers, underwhich we may indemnify them against claims arising from their use or sale of our products; real estate and equipment leases, under which we may indemnifylessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which we may indemnify the licensee orlicensor 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 tobe significant to our financial position, results of operations or cash flows and, therefore, no related liabilities were recorded as of December 31, 2015 .58Legal MattersIn 2004, we were sued in the Southern District of New York by BioSig Instruments, Inc. for alleged patent infringement in connection with our incorporation ofheart rate monitors into certain cardio products. No significant activity in the litigation occurred until 2008. In 2012, the United States District Court grantedsummary judgment to us on grounds that BioSig’s patents were invalid as a matter of law. BioSig appealed the grant of summary judgment and, in April 2013, theUnited States Court of Appeals for the Federal Circuit reversed the District Court’s decision on summary judgment and remanded the case to the District Court forfurther proceedings. On January 10, 2014, the U. S. Supreme Court granted our petition for a writ of certiorari to address the legal standard applied by the FederalCircuit in determining whether the patents may be valid under applicable law. The case was argued before the Supreme Court on April 28, 2014. By decision datedJune 2, 2014, the Supreme Court unanimously reversed the Federal Circuit, holding that its standard of when a patent may be “indefinite” was incorrect andremanding to the Federal Circuit for reconsideration under the correct standard. The remand hearing in the Federal Circuit was held on October 29, 2014. Bydecision dated April 27, 2015, the same panel of the Federal Circuit affirmed its earlier reversal of the District Court’s decision on summary judgment. On May 27,2015, we filed a petition for a rehearing en banc in the Federal Circuit, which was denied on August 4, 2015 and a Petition for Review by the U. S. Supreme Courtwhich was also denied. The case will be returned to the District Court for further proceedings. We do not believe that our use of heart rate monitors utilized orpurchased from third parties, and otherwise, infringes the BioSig patents.In August 2014, we initiated an arbitration proceeding to resolve a dispute with the licensor under a 1999 license agreement pursuant to which we had licensedcertain rights relating to our TreadClimber ® products. We asserted that our obligation to pay royalties under the license agreement ceased in the fourth quarter of2013 and sought a declaratory ruling in the arbitration that there is no continuing royalty obligation and that we had performed all of our obligations under thelicense agreement. The licensor disputed this and asserted various intellectual property and contract claims. The matter proceeded to mediation by agreement of theparties and was settled in December 2015. Under the settlement agreement, we agreed to pay certain cash amounts and sales-based royalties over a period ofmultiple years. In connection with this settlement, in the fourth quarter of 2015, we recorded a charge of $2.5 million as a component of cost of sales. Futureroyalty payments under the settlement agreement are not expected to have a material impact on our financial position, results of operations or cash flows.In addition to the matters described above, from time to time, we may be involved in various claims, lawsuits and other proceedings. These legal and taxproceedings 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 anycurrent legal proceeding, it is reasonably possible that a loss may be incurred in connection with proceedings to which we are a party. Assessment of whetherincurrence 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, involvescomplex judgments and numerous uncertainties. Management is unable to estimate a range of reasonably possible losses related to litigation in its early stages,especially when the damages sought are indeterminate, or the legal and factual basis for the relevant claims have not been developed with specificity. As such, zeroliability is recorded as of December 31, 2015 .We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates accordingly. Weevaluate, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developmentsthat would make a loss probable or reasonably possible, and whether the amount of a probable or reasonably possible loss is estimable. Among other factors, weevaluate the advice of internal and external counsel, the outcomes from similar litigation, current status of the lawsuits (including settlement initiatives), legislativedevelopments and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resultingestimates of the related loss contingencies are subject to substantial uncertainties.59(21) SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS (unaudited)The following table summarizes our unaudited quarterly financial data for 2015 and 2014 (in thousands, except per share amounts): Quarter Ended March 31 June 30 September 30 December 31 Total2015 Net sales$96,239 $59,695 $70,690 $109,140 $335,764Gross profit53,889 30,656 36,209 52,480 173,234Operating income17,605 3,932 6,389 12,345 40,271Income from continuing operations10,859 2,219 3,873 9,852 26,803Income (loss) from discontinued operations(127) 205 (145) (134) (201)Net income (1),(2)10,732 2,424 3,728 9,718 26,602Net income per share: Basic$0.34 $0.08 $0.12 $0.31 $0.85Diluted0.34 0.08 0.12 0.31 0.84 2014 Net sales$71,903 $48,546 $59,067 $94,931 $274,447Gross profit38,481 24,780 28,795 48,519 140,575Operating income9,001 2,379 4,281 14,493 30,154Income from continuing operations5,748 1,498 2,664 10,473 20,383Loss from discontinued operations(374) (941) (177) (96) (1,588)Net income (1)5,374 557 2,487 10,377 18,795Net income per share: Basic$0.17 $0.02 $0.08 $0.33 $0.60Diluted0.17 0.02 0.08 0.33 0.59(1) Net income for the quarters ended December 31, 2015 and 2014 included a $2.4 million and $1.2 million credit, respectively, related to the reversal of a portion of ourdeferred tax asset valuation allowance.(2) Net income for the quarter ended December 31, 2015 also include d $4.5 million of unusual items including the following: settlement expense related to a licensing arbitration;write-off of nutrition inventory; unrecorded current period royalty revenue and reversal of prior period royalty revenue related to a dispute with the licensee; an accountsreceivable reserve related to potentially uncollectible balances from a large sporting goods retailer; and transaction expenses related to the acquisition of Octane.60Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDisclosure Controls and ProceduresAs of December 31, 2015 , we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and otherprocedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the ExchangeAct is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits underthe Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or personsperforming similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer andChief Financial Officer concluded as of December 31, 2015 that our disclosure controls and procedures were effective.Management's Report On Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under theExchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of, our Principal Executive Officer andPrincipal Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, andthat receipts and expenditures are being made only in accordance with authorizations of our management and directors; and•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.Management's AssessmentOur management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reportingbased on the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on our assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2015 .We acquired Octane on December 31, 2015 . As such, and as permitted by the Securities and Exchange Commission, we have excluded Octane from the scope ofour assessment for the quarter and year then ended. The total assets and total revenues of Octane represented 50.5% and 0% , respectively, of the relatedconsolidated financial statement amounts as of and for the year ended December 31, 2015 . See Note 2 of Notes to Consolidated Financial Statements foradditional information on the acquisition.Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting as ofDecember 31, 2015 , which is included herein.Changes In Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the three-month period ended December 31, 2015 that have materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting.61REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders ofNautilus, Inc.Vancouver, Washington We have audited the internal control over financial reporting of Nautilus, Inc. and subsidiaries (the “Company”) as of December 31, 2015 , based on criteriaestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As describedin Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting atOctane Fitness, which was acquired on December 31, 2015 and whose financial statements constitute 50.5% and 0% of total assets and of revenues, respectively,of the consolidated financial statement amounts as of and for the year ended December 31, 2015 . Accordingly, our audit did not include the internal control overfinancial reporting at Octane Fitness . The Company's management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control OverFinancial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principalfinancial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receiptsand expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on thefinancial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of theinternal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 , based on the criteriaestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statementsas of and for the year ended December 31, 2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financialstatements. /s/ Deloitte & Touche LLPPortland, OregonFebruary 25, 201662Item 9B. Other InformationNone.PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item will be set forth under the captions Election of Directors , Section 16(a) Beneficial Ownership Reporting Compliance,Executive Officers, Information Concerning the Board of Directors and Code of Ethics in our Proxy Statement for our 2016 Annual Meeting of Shareholders to befiled with the SEC by April 29, 2016 (the "2016 Proxy Statement"). If the 2016 Proxy Statement is not filed with the SEC by April 29, 2016, such information willbe included in an amendment to this Annual Report on Form 10-K filed by April 29, 2016.Item 11. Executive CompensationThe information required by this item will be set forth under the captions Executive Compensation and Director Compensation in our 2016 Proxy Statement. If the2016 Proxy Statement is not filed with the SEC by April 29, 2016, such information will be included in an amendment to this Annual Report on Form 10-K filedby April 29, 2016.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersEquity Compensation Plan InformationThe following table provides information about our equity compensation plan as of December 31, 2015 (shares in thousands):Plan CategoryNumber of securitiesto be issued upon exerciseof outstanding options,warrants and rights (1),(2),(3)(a) Weighted averageexercise price ofoutstanding options,warrants and rights (4)(b) Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))(c)Equity compensation plans approved by security holders797 $5.01 4,516Equity compensation plans not approved by security holders— — —Total797 $5.01 4,516(1) Includes 160 PSU awards granted to certain executive officers and management team. The awards vest based on service requirements along with achievement ofcertain financial goals established for a three-year performance period, and can range from 60% of the PSU awards if minimum thresholds are achieved to amaximum of 150%. The 160 PSU shares are calculated at 100% of the target award.(2) Includes 117 PSU awards granted to a certain executive officer and other management personnel pursuant to the acquisition of Octane (see Note 2 of Notes toConsolidated Financial Statements). The awards vest based on service requirements along with achievement of certain financial goals established for a three-year performance period. The 117 PSU shares are calculated at 100% of the target award.(3) Excludes 110 RSU awards outstanding at December 31, 2015.(4) Weighted average exercise price shown in column (b) does not take into account the PSU awards included in column (a) of the table.For further information regarding our equity compensation plan, refer to Note 15, Stock-Based Compensation , to our consolidated financial statements in Part II,Item 8 of this report.Beneficial OwnershipThe information required by this item is included under the caption Security Ownership of Certain Beneficial Owners and Management in our 2016 ProxyStatement. If the 2016 Proxy Statement is not filed with the SEC by April 29, 2016, such information will be included in an amendment to this Annual Report onForm 10-K filed by April 29, 2016.63Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item is included under the caption Information Concerning the Board of Directors in our 2016 Proxy Statement. If the 2016 ProxyStatement is not filed with the SEC by April 29, 2016, such information will be included in an amendment to this Annual Report on Form 10-K filed by April 29,2016.Item 14. Principal Accounting Fees and ServicesThe information required by this item is included under the caption Ratification of Appointment of Independent Registered Public Accounting Firm for 2016 in our2016 Proxy Statement. If the 2016 Proxy Statement is not filed with the SEC by April 29, 2016, such information will be included in an amendment to this AnnualReport on Form 10-K filed by April 29, 2016.PART IVItem 15. Exhibits and Financial Statement SchedulesFinancial Statements and SchedulesThe Consolidated Financial Statements, together with the report thereon of Deloitte & Touche LLP, are included on the pages indicated below: PageReport of Independent Registered Public Accounting Firm 30Consolidated Balance Sheets as of December 31, 2015 and 2014 31Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 32Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 33Consolidated Statements of Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013 34Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 35Notes to Consolidated Financial Statements 36Financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.ExhibitsThe following exhibits are filed herewith and this list is intended to constitute the exhibit index.Exhibit No. Description 2.1 Stock Purchase Agreement dated December 31, 2015 by and among Nautilus, Inc. and OF Holdings, Inc., the Holders of Stock in OF Holdings,Inc., and NCP-OFI Representative, LLC - Incorporated by reference to Exhibit 2.1 of our Form 8-K dated December 31, 2015, as filed with theCommission on January 4, 2016. 3.1 Amended and Restated Articles of Incorporation - Incorporated by reference to Exhibit A to Schedule 14A, as filed with the Commission onApril 22, 2008. 3.2 Amended and Restated Bylaws - Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, as filed with the Commission onApril 5, 2005. 3.3 Amendment to Amended and Restated Bylaws of the Company - Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K,as filed with the Commission on January 31, 2007. 10.1* Company 2005 Long-Term Incentive Plan - Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, as filed with theCommission on June 10, 2005. 10.2* First Amendment to Company 2005 Long-Term Incentive Plan - Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the three months ended September 30, 2006, as filed with the Commission on November 9, 2006. 10.3* Form of Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10 of our Current Report on Form 8-K, as filed with theCommission on July 29, 2005. 10.4* Form of Non-Employee Director Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10 of our Current Report onForm 8-K, as filed with the Commission on August 19, 2005. 64Exhibit No. Description10.5* Form of Performance Unit Agreement - Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the three monthsended June 30, 2006, as filed with the Commission on August 9, 2006. 10.6 Trademark License Agreement, dated September 20, 2001, by and between Pacific Direct, LLC and Nautilus, Inc. - Incorporated by referenceto Exhibit 2.1 of our Quarterly Report on Form 10-Q for the three months ended September 30, 2001, as filed with the Commission onNovember 14, 2001. 10.7 License Agreement dated as of December 29, 2009 between Nautilus, Inc. and Fit Dragon International, Inc. - Incorporated by reference toExhibit 10.24 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010. 10.8 Technology Transfer and License Agreement dated as of December 29, 2009 between Nautilus, Inc. and Fit Dragon International, Inc. -Incorporated by reference to Exhibit 10.26 of our Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission onMarch 8, 2010. 10.9 Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between Nautilus, Inc. and GE Money Bank -Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2010 as filed with the Commission on August16, 2010. [Confidential treatment has been granted with respect to a portion of this Exhibit] 10.10 HELPcard Merchant Agreement, dated June 14, 2010, effective as of June 11, 2010, by and between Nautilus, Inc. and Dent-A-Med, Inc. -Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended June 30, 2010 as filed with the Commission on August16, 2010. [Confidential treatment has been granted with respect to a portion of this Exhibit] 10.11 First Amendment dated November 6, 2010 to Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and betweenthe Company and GE Money Bank - Incorporated by reference to Exhibit 10.27 of our Form 10-K for the fiscal year ended December 31, 2012as filed with the Commission on March 7, 2013. 10.12 Merchant Agreement dated December 15, 2010, between the Company and Hy Cite Corporation - Incorporated by reference to Exhibit 10.28 ofour Form 10-K for the fiscal year ended December 31, 2012 as filed with the Commission on March 7, 2013. [Confidential treatment has beengranted with respect to a portion of this Exhibit] 10.13* Executive Employment Agreement, dated September 21, 2007, between the Company and Wayne M. Bolio - Incorporated by reference toExhibit 10.33 of our Form 10-K for the fiscal year ended December 31, 2010 as filed with the Commission on March 8, 2011. 10.14* Severance and Employment Agreement, dated April 23, 2012, between the Company and Robert O. Murdock - Incorporated by reference toExhibit 10.1 of our Current Report on Form 8-K as filed with the Commission on March 20, 2013. 10.15* Severance and Employment Agreement, dated March 30, 2011, between the Company and William B. McMahon - Incorporated by reference toExhibit 10.1 of our Current Report on Form 8-K as filed with the Commission on March 31, 2011. 10.16 Office Lease Agreement dated as of July 25, 2011, by and between Nautilus, Inc. and Columbia Tech Center, L.L.C. - Incorporated byreference to Exhibit 10.2 to our Current Report on Form 8-K as filed with the Commission on July 29, 2011. 10.17* Executive Employment Agreement dated as of May 30, 2011, between Nautilus, Inc. and Bruce M. Cazenave - Incorporated by reference toExhibit 10.1 of our Form 10-Q for the three months ended June 30, 2011 as filed with the Commission on August 11, 2011. 10.18* Form of Restricted Stock Unit Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the three months ended June 30,2011 as filed with the Commission on August 11, 2011. 10.19* Form of Restricted Stock Unit Agreement - Incorporated by reference to Exhibit 10.3 of our Form 10-Q for the three months ended June 30,2011 as filed with the Commission on August 11, 2011. 10.20* Form of Non-Employee Director Nonstatutory Stock Option Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for thethree months ended March 31, 2012 as filed with the Commission on May 9, 2012. 10.21 Program Agreement between Nautilus, Inc. and Genesis Bankcard Services, Inc. - Incorporated by reference to Exhibit 10.1 of our Form 10-Qfor the three months ended June 30, 2013 as filed with the Commission on August 8, 2013. [Confidential Treatment has been granted withrespect to portions of this exhibit] 10.22* Form of Non-Employee Director Restricted Stock Unit Award Agreement - Incorporated by reference to Exhibit 10.2 of our Form 10-Q for thethree months ended June 30, 2013 as filed with the Commission on August 8, 2013. 65Exhibit No. Description10.23* Executive Employment Agreement dated as of February 10, 2014, by and between Nautilus, Inc. and Sidharth Nayar - Incorporated by referenceto Exhibit 10.1 of our Form 10-Q for the three months ended March 31, 2014 as filed with the Commission on May 8, 2014. 10.24* Stock Unit Award Agreement dated as of February 28, 2014, by and between Nautilus, Inc. and Sidharth Nayar - Incorporated by reference toExhibit 10.2 of our Form 10-Q for the three months ended March 31, 2014 as filed with the Commission on May 8, 2014. 10.25* Offer Letter, dated July 26, 2013, between the Company and Jeffery Collins - Incorporated by reference to Exhibit 10.3 of our Form 10-Q forthe three months ended March 31, 2014 as filed with the Commission on May 8, 2014. 10.26 First Lease Modification Agreement, dated as of June 19, 2014, to the Office Lease by and between Nautilus, Inc. and Columbia Tech Ceter,L.L.C. dated July 25, 2011 - Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the three months ended June 30, 2014 as filed withthe Commission on August 7, 2014. 10.27 Credit Agreement dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit 10.1of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.28 Continuing Security Agreement dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference toExhibit 10.2 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.29 Line of Credit Note dated December 5, 2014 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. - Incorporated by reference to Exhibit10.3 of our Form 8-K dated December 5, 2014 as filed with the Commission on December 8, 2014. 10.30 Consent and Amendment to Loan Documents dated December 31, 2015 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. 10.31 Term Note dated December 31, 2015 between Nautilus, Inc. and JPMorgan Chase Bank, N.A. 10.32* Nautilus, Inc. 2015 Long-Term Incentive Plan - Incorporated by reference to Exhibit 10.1 of our Form 8-K dated April 28, 2015 as filed with theCommission on May 4, 2015. 10.33 Nautilus, Inc. Employee Stock Purchase Plan - Incorporated by reference to Exhibit 10.2 of our Form 8-K dated April 28, 2015 as filed with theCommission on May 4, 2015. 21 Subsidiaries of the Company. 23 Consent of Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, asamended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 The following financial statements from Nautilus, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2015, formatted inXBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii)Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of CashFlows, and (vi) Notes to Consolidated Financial Statements.*Indicates management contract, compensatory agreement or arrangement, in which our directors or executive officers may participate.66SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized. NAUTILUS, INC. (Registrant) February 25, 2016 By:/s/ Bruce M. Cazenave Date Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer) NAUTILUS, INC. (Registrant) February 25, 2016 By:/s/ Sidharth Nayar Date Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer)POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Bruce M. Cazenave, Sidharth Nayar and Wayne M. Bolio, and each ofthem, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name,place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to thisreport, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-factand agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact andagents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and inthe capacities indicated on February 25, 2016 .(Remainder of page is blank.) 67Signature Title/s/ Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer)Bruce M. Cazenave /s/ Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer)Sidharth Nayar * ChairmanM. Carl Johnson, III * DirectorRonald P. Badie * DirectorRichard A. Horn * DirectorAnne G. Saunders * DirectorMarvin G. Siegert *By: /s/ Wayne M. Bolio February 25, 2016 Wayne M. Bolio Attorney-In-Fact 68[Consent and Amendment to Credit Agreement] DWT 28490370v9 0089131-000028 1 Consent and Amendment to Loan Documents This amendment ("Amendment"). (dated as of December 31, 2015 is between JPMorgan Chase Bank, N.A. (together with its successors and assigns, the "Bank"), and Nautilus, Inc. (the "Borrower"). 1. Preliminary Statements. 1.1 Credit Agreement. The Borrower and the Bank are each a party to that certain Credit Agreement dated as of December 5, 2014 (as amended, restated, extended, supplemented or otherwise modified from time to time, the "Credit Agreement"), pursuant to which and subject to the terms and conditions therein contained, the Bank has approved a credit facility to the Borrower in the principal sum not to exceed Twenty Million and 00/100 Dollars ($20,000,000.00) in the aggregate at any one time outstanding ("Facility A"). 1.2 Line of Credit Note. The loans made by the Bank to the Borrower pursuant to Facility A are evidenced by that certain Line of Credit Note made by the Borrower in favor of the Bank dated as of December 5, 2014 (as amended, restated, extended, supplemented or otherwise modified from time to time, the "Line of Credit Note"). 1.3 Acquisition of OF Holdings. The Borrower and NCP-OFI GP, LLC, and the other sellers party thereto (collectively, the "Sellers") have entered into that certain Stock Purchase Agreement dated as of December 31, 2015 (the "Acquisition Agreement"), pursuant to which and subject to the terms and conditions therein contained, the Borrower has agreed to purchase, and the Sellers have agreed to sell, all of the outstanding equity interests in OF Holdings, Inc., a Delaware corporation ("OF Holdings"). 1.4 Requested Amendment. In connection with the acquisition of OF Holdings, the Borrower has requested that the Bank (1) make a term loan to the Borrower in the initial principal sum of Eighty Million and 00/100 Dollars ($80,000,000.00) ("Facility B"), which loan shall be evidenced by that certainTerm Note made by the Borrower in favor of the Bank dated December 31, 2015 (the "Term Note"), (2) extend the term of the availability of Facility A and (3) make certain other modifications to the Credit Agreement, which the Bank has agreed to do, subject to the terms and conditions of this Amendment and the Term Note. 2. Definitions and Interpretations. 2.1 Definitions. All capitalized terms used in this Amendment and not otherwise defined herein have the meanings specified in the Credit Agreement. 2.2 Interpretations. The rules of construction and interpretation specified in Section 2.1 of the Credit Agreement also apply to this Amendment and are incorporated herein by this reference. 3. Consent. 3.1 Acquisition Agreement. Subject to the terms and conditions of this Amendment, the Bank hereby (A) consents to the transactions contemplated under the Acquisition Agreement and (B) agrees that the consideration (including assumed liabilities, earnout payments and any other deferred payment) paid by the Borrower for the purchase of the outstanding equity interests in OF Holdings pursuant to the Acquisition Agreement shall not be included in calculating the Borrower's compliance with Clause (12) of Section 5.2(J) of the Credit Agreement. 3.2 Letter of Credit. Subject to the terms and conditions of this Amendment, the Bank hereby consents to the Borrower permitting to exist, a security interest granted by Octane Fitness, LLC, a Minnesota limited liability company ("Octane Fitness"), in favor of Associated Bank, N.A., a national banking association ("Associated Bank"), on a deposit account maintained by Octane Fitness with Associated Bank to secure the obligations of Octane Fitness to Associated Bank arising in connection with the issuance by Associated Bank of a standby letter of credit for the account of Octane Fitness in the amount of $23,420 in favor of Altus Northland, LLC, a Delaware limited liability company; provided that (A) the amount of funds on deposit in such deposit account shallnot exceed $75,000 at any time and (B) the security interest granted to Associated Bank in such deposit account is released not later than February 29, 2016. 4. Amendments to Loan Documents. Subject to the terms and conditions of this Amendment, the Bank and the Borrower agree as follows: [Consent and Amendment to Credit Agreement] DWT 28490370v9 0089131-000028 2 4.1 Amendment to Line of Credit Note. The Line of Credit Note is hereby amended as follows: A. Promise to Pay. In the paragraph titled "Promise to Pay," the reference to the date December 5, 2017 is deleted and a reference to the date December 31, 2020 is substituted in its stead. B. Purpose of Loan. In the paragraph titled "Purpose of Loan," the following sentence is added at the end of such paragraph: Borrower agrees not to request any loan or use, or permit any proceeds of any loan to be used, directly or indirectly, by Borrower or any of its Subsidiaries or its or their respective directors, officers, employees and agents: (a) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws; (b) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, to the extent such activities, businesses or transaction would be prohibited by Sanctions if conducted by a corporation incorporated in the United States; or (c) in any manner that would result in the violation of any Sanctions applicable to any party hereto. C. General Definitions. In the paragraph titled "General Definitions," the following definitions are added and the remaining definitions renumbered accordingly: 2. "Anti-Corruption Laws" means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery or corruption. 7. "Legal Requirements" means any law, ordinance, decree, requirement, order, judgment, rule, Sanction, regulation (or interpretation of any of the foregoing) of any foreign governmental authority, the United States of America, any state thereof, any political subdivision of any of the foregoing or any agency, department, commission, board, bureau, courtor other tribunal having jurisdiction over the Bank, any Pledgor or any Obligor or any of its Subsidiaries or their respective Properties or any agreement by which any of them is bound. 16. "Sanctions" means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State. 17. "Sanctioned Country" means, at any time, a country or territory which is the subject or target of any Sanctions. 18. "Sanctioned Person" means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person controlled by any such Person. D. Representations by Borrower. In the paragraph titled "Representations by Borrower," Clauses (d) through (f) set forth below are inserted between the end of Clause (c) and the phrase "and, if the Borrower is not a natural Person:" (d) the Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and the Borrower, its Subsidiaries and their respective officers and employees and to the knowledge of the Borrower its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects; (e) none of (i) the Borrower, any Subsidiary or to the knowledge of the Borrower or such Subsidiary any of their respective directors, officers or employees, or (ii) to the knowledge of the Borrower, any agent of the Borrower or any Subsidiary that will act in any capacity in connection with or benefit from any Advance made under this Note, is aSanctioned Person; (f) no advance, letter of credit, use of proceeds or other transaction contemplated by the Related Documents will violate Anti-Corruption Laws or applicable Sanctions; [Consent and Amendment to Credit Agreement] DWT 28490370v9 0089131-000028 3 E. Government Regulations. In the paragraph titled "Government Regulations," Clause (b) is renumbered Clause (d) and Clauses (b) and (c) set forth below are inserted between the end of Clause (a) and the beginning of renumbered Clause (d): (b) fail to maintain in effect and enforce policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti- Corruption Laws and applicable Sanctions, (c) fail to promptly inform the Bank in writing of all existing and all threatened litigation, claims, investigations, administrative proceedings and similar actions or changes in Legal Requirements affecting it which could materially affect its business, assets, affairs, prospects or financial condition, or 4.2 Amendments to Credit Agreement. The Credit Agreement is hereby amended as follows: A. Section 1.3. Section 1.3 is added as follows: 1.3 Facility B (Term Loan). The Bank has approved a term loan to the Borrower in the principal sum of $80,000,000.00 ("Facility B"). Credit under Facility B shall be repayable as set forth in a Term Note dated December 31, 2015, and any renewals, modifications, extensions, rearrangements, restatements thereof and replacements or substitutions therefor. B. Section 2.1. In Section 2.1, the following definition is added and the succeeding definitions re-lettered accordingly: AA. "Restricted Payments" means (i) all cash Distributions made or paid with respect to any Equity Interests in Borrower and (ii) all payments, including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interests in Borrower. C. Section 5.2(C). In Clause (5) of Section 5.2(C), the reference to the amount of $3,000,000.00 is deleted and a reference to the amount of $4,000,000.00 is substituted in its stead. D. Section 5.2(J). Clause (12) ofSection 5.2(J) is deleted and the following substituted in its stead: (12) Permitted Acquisitions in an amount not to exceed (a) $20,000,000 in the aggregate in any Test Period or (b) $60,000,000 in the aggregate during the period commencing on the date of this Agreement and ending on December 31, 2020. E. Section 5.2(L). In Section 5.2(L), the reference to the amount of $10,000,000.00 is deleted and a reference to the amount of $12,000,000.00 is substituted in its stead. F. Section 5.2(M). Section 5.2(M) is deleted and the following substituted in its stead: M. Fixed Charge Coverage Ratio. Permit its "Fixed Charge Coverage Ratio" (hereinafter defined in this subsection) for any "Test Period" (hereinafter defined in this subsection) to be less than 1.25 to 1.00. As used in this subsection, the term "Fixed Charge Coverage Ratio" means its ratio of (i) net income, plus amortization expense, plus depreciation expense, plus interest expense, plus income tax expense, plus rent and operating lease payments made, plus non-cash stock based compensation, plus a one-time addition of expenses paid in cash by Borrower in connection with the acquisition of the Equity Interests of OF Holdings and the related financing, in an aggregate amount not to exceed $1,000,000, plus other non-cash, non-recurring expenses agreed to by Bank, minus other non-cash or non-recurring income as agreed to by Bank, minus Capital Expenditures made which were not financed with long term debt, minus income tax expense, minus Restricted Payments made, minus, to the extent not included in the calculation of net income, cash earnout payments made to the sellers of Equity Interests of OF Holdings, Inc., all computed for the Test Period, to (ii) scheduled principal payments made on long term debt, plus capitalized lease payments made, plus interest expense, plus rent and operating lease payments made, all computed for the Test Period. As used in this subsection, the term "Test Period" means each period of four consecutive fiscal quarters.Notwithstanding anything else contained in the Credit Agreement, the [Consent and Amendment to Credit Agreement] DWT 28490370v9 0089131-000028 4 Fixed Charge Coverage Ratio shall be determined for Borrower and its Subsidiaries on a consolidated basis. G. Section 5.2(N). Section 5.2(N) is deleted and the following substituted in its stead: N. Funded Debt to EBITDA Ratio. Permit its "Funded Debt to EBITDA Ratio" (hereinafter defined in this subsection) for any "Test Period" (hereinafter defined in this subsection) to be less than (1) for each Test Period ending from December 31, 2015 through September 29, 2016, 3.00 to 1.00, (2) for each Test Period ending from September 30, 2016 through September 29, 2017, 2.50 to 1.00 and (3) for each Test Period ending from and after September 30, 2017, 2.00 to 1.00. As used in this subsection, the term "Funded Debt to EBITDA Ratio" means its ratio of (a) total liabilities excluding (i) accounts arising from the purchase of goods and services in the ordinary course of business, (ii) accrued expenses or losses, and (iii) deferred revenues or gains, all computed as of the end of the Test Period, to (b) net income, plus amortization expense, plus depreciation expense, plus interest expense, plus income tax expense, plus non-cash stock based compensation, plus other non-cash, non-recurring expenses agreed to by Bank, minus other non- cash, non-recurring income as agreed to by Bank, all computed for the Test Period. As used in this subsection, the term "Test Period" means each period of four consecutive fiscal quarters. Notwithstanding anything else contained in the Credit Agreement, the Fixed Charge Coverage Ratio shall be determined for Borrower and its Subsidiaries on a consolidated basis. 5. Conditions Precedent to Effectiveness of Amendment. Notwithstanding anything contained herein to the contrary, this Amendment shall become effective as of December 31, 2015; provided that each of the following conditions is fully and simultaneously satisfied on or before December 31, 2015: 5.1 Delivery of Amendment. TheBorrower and the Bank shall have executed and delivered counterparts of this Amendment to each other, sufficient in number for distribution to the Borrower and the Bank; 5.2 Delivery of Term Note. The Borrower shall have executed and delivered to the Bank the Term Note; 5.3 Delivery of Guarantor Documents. A. OF Holdings. OF Holdings shall have executed and delivered to the Bank (1) that certain Continuing Guaranty made by OF Holdings in favor of the Bank dated as of December 31, 2015 (the "OF Holdings Guaranty") and (2) that certain Continuing Security Agreement made by OF Holdings in favor of the Bank dated as of December 31, 2015 (the "OF Holdings Security Agreement" and together with the OF Holdings Guaranty, together the "OF Holdings Documents"); B. Octane Fitness. Octane Fitness shall have executed and delivered to the Bank (1) that certain Continuing Guaranty made by Octane Fitness in favor of the Bank dated as of December 31, 2015 (the "Octane Fitness Guaranty") and (2) that certain Continuing Security Agreement made by Octane Fitness in favor of the Bank dated as of December 31, 2015 (the "Octane Fitness Security Agreement" and together with the Octane Fitness Guaranty, together the "Octane Fitness Documents"); 5.4 Acquisition. The Bank shall have received such evidence as the Bank shall request that all of the transactions contemplated under the Acquisition Agreement have been consummated in accordance in all material respects with the terms of the Acquisition Agreement. 5.5 Authorization. The Bank shall have received such evidence of corporate authority and action as the Bank shall request demonstrating that (A) the execution, delivery and performance of this Amendment and the Term Note has been duly authorized by the Borrower, (B) the execution, delivery and performance of the OF Holdings Documents has been duly authorized by OF Holdings, and (C) the execution, delivery and performance of the Octane Fitness Documents has been dulyauthorized by Octane Fitness; 5.6 Representations. The representations of the Borrower and any other parties, other than the Bank, in the Related Documents are true on and as of the effective date of this Amendment; [Consent and Amendment to Credit Agreement] DWT 28490370v9 0089131-000028 5 5.7 No Event of Default. No default, event of default or event that would constitute a default or event of default but for the giving of notice, the lapse of time or both, has occurred in any provision of the Credit Agreement, the Note or any other Related Documents and is continuing; and 5.8 Additional Approvals, Opinions, and Documents. The Bank shall have received any other approvals, opinions and documents as it may reasonably request. 6. No Further Amendment. Except as expressly modified by this Amendment, the Credit Agreement and the other Related Documents shall remain unmodified and in full force and effect and the parties hereby ratify their respective obligations thereunder. 7. Reservation of Rights. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to forbear or execute similar amendments under the same or similar circumstances in the future. 8. Miscellaneous. 8.1 Governing Law. This amendment shall be governed by and construed in accordance with the laws of the State of Washington (without giving effect to its laws of conflicts). 8.2 Counterparts. This amendment may be executed in multiple counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts, taken together, shall constitute one and the same amendment. Delivery of an executed counterpart of a signature page of this Amendment by telecopy or other electronic imaging means shall be effective as delivery of a manually executed counterpart of this Amendment. 8.3 Integration. This Amendment, the Credit Agreement, the other Related Documents, and that certain covenant calculation letter between the Bank and the Borrower dated as of the date hereof embody the entire agreement and understanding between the Borrower and the Bank and supersede all prior agreementsand understandings relating to their subject matter. If any one or more of the obligations of the Borrower under this amendment is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this amendment in any other jurisdiction. [Remainder of page intentionally left blank]            EXHIBIT 21SUBSIDIARIES OF NAUTILUS, INC. Nautilus, Inc., a Washington corporationNautilus Fitness Canada, Inc., a Canadian corporationNautilus (Shanghai) Fitness Co., Ltd., a Chinese corporationNautilus (Shanghai) Fitness Equipments Co., Ltd., a Chinese corporationOF Holdings, Inc., a Delaware corporationOctane Fitness, LLC, a Minnesota limited liability companyUS Octane Fitness Limited, a Hong Kong corporationOctane Fitness International, B.V., a Netherlands corporationOctane Fitness UK Ltd, a United Kingdom corporationEXHIBIT 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statements No. 333-204455, 333-126054, 333-46936 and 333-79643 on Form S-8 of our reports datedFebruary 25, 2016 , relating to the consolidated financial statements of Nautilus, Inc., and the effectiveness of Nautilus, Inc.'s internal control over financialreporting, appearing in this Annual Report on Form 10-K of Nautilus, Inc. for the year ended December 31, 2015 . /s/ Deloitte & Touche LLP Portland, OregonFebruary 25, 2016EXHIBIT 31.1CERTIFICATIONI, Bruce M. Cazenave, certify that:1.I have reviewed this annual report on Form 10-K of Nautilus, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. February 25, 2016By:/s/ Bruce M. CazenaveDate Bruce M. Cazenave Chief Executive Officer (Principal Executive Officer)EXHIBIT 31.2CERTIFICATIONI, Sidharth Nayar, certify that:1.I have reviewed this annual report on Form 10-K of Nautilus, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. February 25, 2016By:/s/ Sidharth NayarDate Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer)EXHIBIT 32.1CertificationPursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersignedofficers of Nautilus, Inc., a Washington corporation (the “Company”), do hereby certify that:To our knowledge, the Annual Report on Form 10-K for the year ended December 31, 2015 (the “Form 10-K”) of the Company fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects,the financial condition and results of operations of the Company. February 25, 2016By:/s/ Bruce M. CazenaveDateBruce M. Cazenave Chief Executive Officer (Principal Executive Officer)February 25, 2016By:/s/ Sidharth NayarDate Sidharth Nayar Chief Financial Officer (Principal Financial and Accounting Officer)

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