Acquisition of Tonic Fitness Technology

6 Months Ended

Dec. 31, 2019

Acquisition of Tonic Fitness TechnologyIn October 2019, the Company completed its previously announced acquisition of Tonic Fitness Technology ("Tonic"), a manufacturing company located in Taiwan, for a purchase price of approximately $45.2 million, net of cash acquired, which was paid in cash. On the acquisition date, Tonic became a wholly-owned subsidiary of the Company. The Company acquired Tonic in order to have more control over its supply chain and to help the Company scale its production. The Company agreed to pay consideration if certain future production

milestones are met over the next four years. This contingent consideration was recorded as an earn-out liability on the condensed consolidated balance sheets at its fair value of $6.8 million and is included within the purchase price. The maximum payout of this contingent consideration is $7.5 million.

The operating results of Tonic have been included in the Company's condensed consolidated statements of operations since the acquisition date. Actual and pro forma revenue and results of operations for the acquisition have not been presented because they do not have a material impact to the consolidated revenue and results of operations, either individually or in the aggregate.

The Company recognized $0.1 million and $0.3 million of acquisition-related costs that were expensed as incurred during the three and six months ended December 31, 2019, respectively. These costs are included in general and administrative costs in the unaudited condensed consolidated statement of operations and comprehensive loss.

Preliminary Purchase Price Allocation

The acquisition was accounted for under the acquisition method. The following table summarizes the initial estimate of the fair values of assets acquired and liabilities assumed at the closing date:


	As of October 16, 2019
	(in millions)
Inventory	$	11.8
Other current assets	29.1
Property and equipment	20.4
Goodwill	32.5
Other assets	2.2
Total assets	$	95.9
Current liabilities	(49.9)
Other liabilities	(0.8)
Total liabilities	$	(50.7)
Net assets acquired	$	45.2

The preliminary purchase price allocation resulted in the recognition of $32.5 million of goodwill. Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including an experienced workforce and expected future synergies. The Company allocated the goodwill to its Connected Fitness reporting segment. None of the goodwill is expected to be deductible for tax purposes.

The Company expects to finalize its purchase price allocation after management has further analyzed and assessed a number of the factors used in establishing the fair values of assets acquired and liabilities assumed as of the acquisition date including, but not limited to, the working capital acquired. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation.