Company Quick10K Filing
Peloton Interactive
Price-0.00 EPS-1
Shares38 P/E0
MCap-0 P/FCF0
Net Debt-1,377 EBIT-50
TEV-1,377 TEV/EBIT28
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-12-31 Filed 2021-02-05
10-Q 2020-09-30 Filed 2020-11-06
10-K 2020-06-30 Filed 2020-09-11
10-Q 2020-03-31 Filed 2020-05-06
10-Q 2019-12-31 Filed 2020-02-06
10-Q 2019-09-30 Filed 2019-11-06
S-1 2019-08-27 Public Filing
8-K 2020-11-05
8-K 2020-09-16
8-K 2020-09-10
8-K 2020-09-08
8-K 2020-05-11
8-K 2020-05-06
8-K 2020-04-27
8-K 2020-02-05
8-K 2019-11-05

PTON 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-2.1 projectpegasus-stockasse.htm
EX-31.1 q2fy2110-qexhibit311.htm
EX-31.2 q2fy2110-qexhibit312.htm
EX-32.1 q2fy2110-qexhibit321.htm
EX-32.2 q2fy2110-qexhibit322.htm

Peloton Interactive Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
2.41.91.41.00.50.02018201820192020
Assets, Equity
0.30.20.10.1-0.0-0.12018201820192020
Rev, G Profit, Net Income
1.20.90.70.40.2-0.12018201820192020
Ops, Inv, Fin

pton-20201231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2020
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 001-39058

Peloton Interactive, Inc.
(Exact name of registrant as specified in its charter)
Delaware
47-3533761
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
125 West 25th Street, 11th Floor10001
New York, New York
(Zip Code)
(Address of principal executive offices)
(866679-9129
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.000025 par value per sharePTONThe Nasdaq Stock Market LLC

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, as amended (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes    No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes     No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes       No  

As of January 29, 2021, the number of shares of the registrant's Class A common stock outstanding was 263,637,415 and the number of shares of the registrant's Class B common stock outstanding was 30,864,250.










TABLE OF CONTENTS
Page
Part I. Financial Information
Part II. Other Information




SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan, “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, Adjusted EBITDA, operating expenses including changes in sales and marketing, general and administrative expenses (including any components of the foregoing), and research and development, and our ability to achieve and maintain future profitability;

our business plan and our ability to effectively manage our growth;

anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;

our international expansion plans and ability to continue to expand internationally;

anticipated release dates for new Connected Fitness Products and services;

market acceptance of our Connected Fitness Products and services;

beliefs and objectives for future operations;

our ability to increase sales of our Connected Fitness Products and services;

our ability to further penetrate our existing Subscription base and maintain and expand our Subscription base;

the expected timing for completion of our acquisition of Precor Incorporated, a Delaware corporation ("Precor");

the expected benefits of the proposed acquisition of Precor;

the effects of seasonal trends on our results of operations;

our expectations regarding content costs for past use;

our ability to maintain, protect, and enhance our intellectual property;

the effects of increased competition in our markets and our ability to compete effectively;

the direct and indirect impacts to our business and financial performance from the COVID-19 pandemic;

our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally; and

economic and industry trends, projected growth, or trend analysis.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. In particular, the impact of the current COVID-19 pandemic to economic conditions and the fitness industry in general and our financial position and operating results in particular have been material, are changing rapidly, and cannot be predicted.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations, except as required by law.
3



You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission, or the SEC, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

In this Quarterly Report on Form 10-Q, the words "we," "us," "our" and "Peloton" refer to Peloton Interactive, Inc. and its wholly owned subsidiaries, unless the context requires otherwise.
4


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
December 31,June 30,
20202020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$1,248.4 $1,035.5 
Marketable securities
862.1 719.5 
Accounts receivable, net
54.1 34.6 
Inventories, net
522.8 244.5 
Prepaid expenses and other current assets
172.6 124.5 
Total current assets
2,860.0 2,158.6 
Property and equipment, net
405.1 242.3 
Intangible assets, net
38.9 16.0 
Goodwill
40.8 39.1 
Restricted cash
1.5 1.5 
Operating lease right-of-use assets, net537.6 492.5 
Other assets
26.5 31.8 
Total assets
$3,910.5 $2,981.8 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
$721.4 $361.7 
Customer deposits and deferred revenue
611.0 363.6 
Operating lease liabilities, current41.7 33.1 
Other current liabilities
10.2 13.9 
Total current liabilities
1,384.4 772.2 
Operating lease liabilities, non-current577.5 508.2 
Other non-current liabilities
20.2 23.4 
Total liabilities
1,982.1 1,303.8 
Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock, $0.000025 par value; 2,500,000,000 and 2,500,000,000 Class A shares authorized, 263,239,900 and 237,518,574 shares issued and outstanding as of December 31, 2020 and June 30, 2020, respectively; 2,500,000,000 and 2,500,000,000 Class B shares authorized, 31,033,183 and 50,538,538 shares issued and outstanding as of December 31, 2020 and June 30, 2020, respectively.
  
Additional paid-in capital
2,472.7 2,361.8 
Accumulated other comprehensive income16.6 10.1 
Accumulated deficit
(561.0)(693.9)
Total stockholders’ equity
1,928.3 1,678.0 
Total liabilities and stockholders’ equity
$3,910.5 $2,981.8 
See accompanying notes to these unaudited condensed consolidated financial statements.
5

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in millions, except share and per share amounts)

Three Months Ended December 31,Six Months Ended December 31,
2020201920202019
Revenue:
Connected Fitness Products
$870.1 $389.1 $1,471.5 $550.0 
Subscription
194.7 77.1 351.2 144.3 
Total revenue
1,064.8 466.3 1,822.7 694.3 
Cost of revenue:
Connected Fitness Products
562.8 236.7 927.0 330.1 
Subscription
77.2 32.4 142.2 61.9 
Total cost of revenue
640.0 269.1 1,069.2 392.1 
Gross profit
424.8 197.1 753.5 302.2 
Operating expenses:
Sales and marketing
177.4 160.5 292.1 238.1 
General and administrative
141.1 77.5 249.7 138.5 
Research and development
47.5 20.7 84.1 38.1 
Total operating expenses
366.0 258.7 625.8 414.6 
Income (loss) from operations
58.8 (61.5)127.7 (112.4)
Other income, net:
Interest income, net
1.9 5.9 4.3 7.1 
Other expense, net
(0.1)(0.1)(0.9)(0.2)
Total other income, net
1.8 5.7 3.5 6.9 
Income (loss) before provision for income taxes
60.6 (55.8)131.2 (105.5)
Income tax benefit
(3.0)(0.4)(1.7)(0.4)
Net income (loss)
$63.6 $(55.4)$132.8 $(105.2)
Net income (loss) attributable to Class A and Class B common stockholders$63.6 $(55.4)$132.8 $(105.2)
Net income (loss) per share attributable to common stockholders, basic$0.22 $(0.20)$0.46 $(0.66)
Net income (loss) per share attributable to common stockholders, diluted$0.18 $(0.20)$0.39 $(0.66)
Weighted-average Class A and Class B common shares outstanding, basic292,462,184 279,974,823 290,591,037 159,214,343 
Weighted-average Class A and Class B common shares outstanding, diluted347,886,695 279,974,823 344,994,314 159,214,343 
Other comprehensive income (loss):
Net unrealized losses on marketable securities$(1.3)$(0.2)$(2.6)$(0.2)
Change in foreign currency translation adjustment5.3 4.7 9.1 3.4 
Total other comprehensive income4.0 4.5 6.5 3.1 
Comprehensive income (loss)$67.5 $(50.9)$139.4 $(102.0)

See accompanying notes to these unaudited condensed consolidated financial statements.

6

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)

Six Months Ended December 31,
20202019
Cash Flows from Operating Activities:
Net income (loss)$132.8 $(105.2)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense24.2 17.2 
Stock-based compensation expense67.1 35.8 
Non-cash operating lease expense28.2 21.4 
Amortization of premium from marketable securities3.5 (0.5)
Other non-cash items2.3  
Changes in operating assets and liabilities:
Accounts receivable(18.0)23.8 
Inventories(273.0)(94.2)
Prepaid expenses and other current assets(35.2)(12.5)
Other assets0.7 (8.1)
Accounts payable and accrued expenses331.9 98.0 
Customer deposits and deferred revenue245.7 68.3 
Operating lease liabilities, net4.1 (17.5)
Other liabilities(3.9)6.7 
Net cash provided by operating activities510.5 33.2 
Cash Flows from Investing Activities:
Purchases of marketable securities(449.1)(973.1)
Maturities of marketable securities300.6 141.5 
Sales of marketable securities 55.4 
Cash paid for cost method investment(0.1) 
Purchases of property and equipment(119.4)(45.3)
Capitalization of internal-use software costs(0.7)(3.4)
Business combination, net of cash acquired (45.9)
Asset acquisitions, net of cash acquired(78.1) 
Net cash used in investing activities(346.7)(870.8)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock upon initial public offering, net of offering costs 1,195.7 
Proceeds from employee stock purchase plan withholdings7.2 2.0 
Proceeds from exercise of stock options53.3 4.2 
Taxes withheld and paid on employee stock awards(16.5) 
Principal repayments of finance leases(0.5) 
Net cash provided by financing activities43.6 1,201.9 
Effect of exchange rate changes5.5 7.1 
Net change in cash, cash equivalents, and restricted cash212.9 371.4 
Cash, cash equivalents and restricted cash — Beginning of period1,037.0 163.0 
Cash, cash equivalents and restricted cash — End of period$1,249.9 $534.4 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$0.3 $ 
Cash paid for income taxes$1.3 $ 
Supplemental Disclosures of Non-Cash Investing and Financing Information:
Conversion of convertible preferred stock to common stock$ $941.1 
Property and equipment accrued but unpaid$47.2 $7.7 
Stock-based compensation capitalized for software development costs$1.8 $0.9 
7

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)

See accompanying notes to these unaudited condensed consolidated financial statements.
8

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in millions)

Class A and Class B Common StockAdditional Paid-In CapitalOther Comprehensive (Loss) IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance – September 30, 2019
280.3 $— $2,249.1 $(1.1)$(672.0)$1,576.0 
Exercise of stock options0.3 — 2.6 — — 2.6 
Stock-based compensation expense— — 17.6 — — 17.6 
Other comprehensive income— — — 4.5 — 4.5 
Net loss— — — — (55.4)(55.4)
Balance – December 31, 2019
280.6 $ $2,269.3 $3.3 $(727.4)$1,545.2 
Balance — September 30, 2020
291.8 $— $2,412.9 $12.7 $(624.6)$1,801.0 
Issuance of common stock pursuant to stock-based awards, net of withholding taxes2.4 — 21.4 — — 21.4 
Stock-based compensation expense— — 38.5 — — 38.5 
Other comprehensive income— — — 4.0 — 4.0 
Net income— — — — 63.6 63.6 
Balance — December 31, 2020
294.3 $ $2,472.7 $16.6 $(561.0)$1,928.3 


9

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions)
Redeemable Convertible
Preferred Stock
Class A and Class B Common StockAdditional Paid-In CapitalOther Comprehensive IncomeAccumulated DeficitTotal Stockholders’ (Deficit) Equity
SharesAmountSharesAmount
Balance - June 30, 2019
210.6 $941.1 25.3 $ $90.7 $0.2 $(629.5)$(538.6)
Initial public offering, net of issuance costs of $6.3 million
— 43.4 — 1,195.7 — — 1,195.7 
Conversion of redeemable convertible preferred stock to common stock(210.6)(941.1)210.6 — 941.1 — — 941.1 
Exercise of stock options— — 1.0 — 5.1 — — 5.1 
Exercise of stock warrants— — 0.2 —  — —  
Stock-based compensation expense— — — — 36.7 — — 36.7 
Other comprehensive income— — — — — 3.1 — 3.1 
Net loss— — — — — — (105.2)(105.2)
Cumulative effect adjustment in connection with adoption of ASU 2016-02— — — — — — 7.2 7.2 
Balance - December 31, 2019
 $ 280.6 $ $2,269.3 $3.3 $(727.4)$1,545.2 
Balance - June 30, 2020
 $ 288.1 $ $2,361.8 $10.1 $(693.9)$1,678.0 
Issuance of common stock pursuant to stock-based awards, net of withholding taxes— — 5.9 — 36.9 — — 36.9 
Issuance of common stock under employee stock purchase plan— — 0.2 — 5.1 — — 5.1 
Stock-based compensation expense— — — — 68.9 — — 68.9 
Other comprehensive income— — — — — 6.5 — 6.5 
Net income— — — — — — 132.8 132.8 
Balance - December 31, 2020
 $ 294.3 $ $2,472.7 $16.6 $(561.0)$1,928.3 

See accompanying notes to these unaudited condensed consolidated financial statements.
10

PELOTON INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in millions, except share and per share amounts)





1. Description of Business and Basis of Presentation
Description and Organization
Peloton Interactive, Inc. ("Peloton" or the “Company”) is the largest interactive fitness platform in the world with a loyal community of Members, which we define as any individual who has a Peloton account through a paid Connected Fitness Subscription or a paid Peloton Digital subscription. The Company pioneered connected, technology-enabled fitness with the creation of its interactive fitness equipment ("Connected Fitness Products") and the streaming of immersive, instructor-led boutique classes to its Members anytime, anywhere. The Company makes fitness entertaining, approachable, effective and convenient while fostering social connections that encourage its Members to be the best versions of themselves.
Basis of Presentation and Consolidation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. The condensed consolidated balance sheet as of June 30, 2020, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on September 10, 2020 (the "Form 10-K"). However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, cash flows and the changes in equity for the interim periods. The results for the three and six months ended December 31, 2020 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending June 30, 2021, or any other period.
Certain monetary amounts, percentages, and other figures included elsewhere in these financial statements have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
Except as described elsewhere in Note 2 of the notes to the condensed consolidated financial statements in the section titled "—Recently Issued Accounting Pronouncements" in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K.
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2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, the realizability of inventory, content costs for past use reserve, fair value measurements, the incremental borrowing rate associated with lease liabilities, useful lives of property and equipment, product warranty, goodwill and finite-lived intangible assets, accounting for income taxes, stock-based compensation expense, transaction price estimates, the fair values of assets acquired and liabilities assumed in business combinations, contingent consideration, and commitments and contingencies. Actual results may differ from these estimates.
Recently Issued Accounting Pronouncements
ASU 2016-13
In June 2016, the Financial Accounting Standards Board (“FASB") issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This standard changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which may result in earlier recognition of allowances for losses, and require expected credit losses to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. The Company adopted this standard and related amendments on July 1, 2020. The adoption of this standard did not materially impact the Company's consolidated financial statements.

ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which amends ASC Topic 740, Income Taxes. This ASU simplifies the accounting for income taxes by modifying the treatment of intraperiod tax allocation in certain circumstances, eliminating an exception to recognizing deferred tax liabilities for outside basis differences for foreign equity method investments and foreign subsidiaries when ownership or control changes, and modifying interim period tax calculations when a loss is forecast. In addition, this ASU also requires that enacted changes in tax laws or rates be included in the annual effective rate determination in the period that includes the enactment date and clarifies the tax accounting of a step up in tax basis of goodwill. The Company adopted this standard on July 1, 2020. The adoption of this standard did not materially impact the Company's condensed consolidated financial statements.

ASU 2020-01
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance clarifies the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the potential impact of adopting this new accounting guidance, but does not expect the adoption of the standard to have a material impact on its condensed consolidated financial statements.

ASU 2020-04
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Company plans to adopt this standard when LIBOR is discontinued. The Company is currently evaluating the potential impact of adopting this new accounting guidance, but does not expect the adoption of the standard to have a material impact on its condensed consolidated financial statements.
3. Revenue
The Company’s primary source of revenue is from sales of its Connected Fitness Products and associated recurring Subscription revenue.

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's revenue is reported net of sales returns, discounts, and incentives as a reduction of the transaction price. Certain contracts include consideration payable that is accounted for as a payment for distinct goods or services. The Company estimates its liability for product returns and concessions based on historical trends by product category, impact of seasonality, and an evaluation of current economic and market conditions and records the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of revenue. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.
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Some of the Company’s contracts with customers contain multiple performance obligations. For customer contracts that include multiple performance obligations, the Company accounts for individual performance obligations if they are distinct. The transaction price is then allocated to each performance obligation based on its standalone selling price. The Company generally determines standalone selling price based on prices charged to customers.

The Company applies the practical expedient as per ASC 606-10-50-14 and does not disclose information related to remaining performance obligations due to their original expected terms being one year or less.

The Company expenses sales commissions on its Connected Fitness Products when incurred because the amortization period would have been less than one year. These costs are recorded in sales and marketing expense.
Connected Fitness Products
Connected Fitness Products include the Company’s portfolio of Connected Fitness Products and related accessories, branded apparel, and extended warranty agreements. The Company recognizes Connected Fitness Product revenue net of sales returns and discounts when the product has been delivered to the customer, except for extended warranty revenue which is recognized over the warranty period. The Company allows customers to return products within thirty days of purchase, as stated in its return policy.

The Company records fees paid to third-party financing partners in connection with its consumer financing program as a reduction of revenue, as it considers such costs to be a customer sales incentive. The Company records payment processing fees for its credit card sales for Connected Fitness Products within Sales and marketing in the Company's condensed consolidated statements of operations and comprehensive income (loss).

Subscription
The Company’s subscriptions provide unlimited access to content in its library of live and on-demand fitness classes. The Company’s subscriptions are offered on a month-to-month basis.

Amounts paid for subscription fees are included within customer deposits and deferred revenue on the Company's condensed consolidated balance sheets and recognized ratably on a month-to-month basis. The Company records payment processing fees for its monthly subscription charges within cost of subscription revenue in the Company's condensed consolidated statements of operations and comprehensive income (loss).

Sales tax collected from customers and remitted to governmental authorities is not included in revenue and is reflected as a liability on the Company's condensed consolidated balance sheets.

Product Warranty
The Company offers a standard product warranty that its Connected Fitness Products will operate under normal, non-commercial use for a period of one year covering the touchscreen and most original Bike, Bike+, Tread, and Tread+ components from the date of original delivery. The Company has the obligation, at its option, to either repair or replace the defective product. At the time revenue is recognized, an estimate of future warranty costs, including costs associated with service of Connected Fitness Products outside of the warranty period, is recorded as a component of cost of revenue. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies and business practices. The Company’s products are manufactured both in-house and by contract manufacturers, and in certain cases, the Company may have recourse to such contract manufacturers.
The Company also offers the option for customers in some markets to purchase an extended warranty and service contract that extends or enhances the technical support, parts, and labor coverage offered as part of the base warranty included with the Connected Fitness Product for an additional period of 12 to 27 months.

Revenue and related fees paid to the third-party provider are recognized on a gross basis as the Company has a continuing obligation to perform over the service period. Extended warranty revenue is recognized ratably over the extended warranty coverage period and is included in Connected Fitness Product revenue in the condensed consolidated statements of operations and comprehensive income (loss).
Disaggregation of Revenue
The Company's revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 13 under the heading "Segment Information".

The Company's revenue disaggregated by geographic region, were as follows:
Three Months Ended December 31,Six Months Ended December 31,
2020201920202019
(in millions)
North America(1)
$1,007.8 $451.0 $1,729.7 $672.7 
Rest of world(2)
57.0 15.2 93.0 21.5 
Total revenue$1,064.8 $466.3 $1,822.7 $694.3 
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_________________________        
(1) Consists of United States and Canada.
(2) Consists of United Kingdom and Germany.

During the three and six months ended December 31, 2020, the Company's revenue attributable to the United States represented 91% and 92% of total revenue, respectively, and 94% and 95% of total revenue for the three and six months ended December 31, 2019, respectively.

Customer Deposits and Deferred Revenue
Deferred revenue is recorded for nonrefundable cash payments received for the Company’s performance obligation to transfer, or stand ready to transfer, goods or services in the future. Deferred revenue consists of subscription fees billed that have not been recognized. Customer deposits represent payments received in advance before the Company transfers a good or service to the customer and are refundable.
As of December 31, 2020 and June 30, 2020, customer deposits of $576.3 million and $341.5 million, respectively, and deferred revenue of $34.8 million and $22.1 million, respectively, were included in customer deposits and deferred revenue on the Company's condensed consolidated balance sheet.
In the six months ended December 31, 2020 and 2019, the Company recognized revenue of $22.1 million and $9.5 million, respectively, that was included in the deferred revenue balance as of June 30, 2020 and 2019, respectively.
4. Investments in Marketable Securities
The following table summarizes the Company's investments in marketable securities:
December 31, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
(in millions)
Corporate bonds$630.9 $0.8 $(0.1)$631.6 
U.S. treasury securities166.2 0.6  166.8 
Commercial paper62.9   62.9 
Supranational securities31.3   31.3 
Certificate of deposits7.8   7.8 
$899.1 $1.4 $(0.1)$900.4 
Less: Restricted marketable securities (1)
$38.4 
Total marketable securities$862.1 
_________________________
(1) The Company is required to pledge or otherwise restrict a portion of cash, cash equivalents, and marketable securities as collateral for standby letters of credit. The Company classifies cash, cash equivalents, and marketable securities with use restrictions of less than twelve months as "Prepaid expenses and other current assets" and of twelve months or longer as non-current "Other assets" on its condensed consolidated balance sheets.
5. Fair Value Measurements
The following table summarizes the Company's assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:

14


As of December 31, 2020
Level 1Level 2Level 3Total
(in millions)
Assets
Marketable securities$900.4 $ $ $900.4 
Cost-method investments  0.7 0.7 
Total$900.4 $ $0.7 $901.1 
Liabilities
Other current liabilities:
Contingent consideration$ $ $2.4 $2.4 
Other non-current liabilities:
Contingent consideration  2.2 2.2 
Total$ $ $4.6 $4.6 

Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are carried at fair value. All investments classified as available-for-sale are recorded at fair value within marketable securities in the condensed consolidated balance sheets. The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets.
The contingent consideration represents the estimated fair value of cash consideration payable in connection with an acquisition that is contingent upon the achievement of certain performance milestones. The Company estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled, and applied a discount rate that appropriately captures a market participant's view of risk associated with the obligation, which are considered to be Level 3 inputs. The fair value of the contingent consideration arrangement is sensitive to change in the expected achievement of the applicable milestones and changes in discount rate. The Company remeasures the fair value of the contingent consideration arrangement each reporting period, including the accretion of the discount, if applicable, and changes are recognized in general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
6. Inventory
Inventories were as follows:
December 31, 2020June 30, 2020
(in millions)
Raw materials$34.0 $17.8 
Work-in-process7.3 4.6 
Finished products495.3 232.5 
Total inventories536.6 254.9 
Less: Reserves(13.7)(10.5)
Total inventories, net$522.8 $244.5 

7. Acquisitions
Asset Acquisitions
During the three months ended December 31, 2020, the Company completed three separate transactions to acquire certain software, developed technology, and an assembled workforce for use in the development of the Company's connected fitness products and services, for total net cash consideration paid of approximately $78.1 million, inclusive of $2.4 million of direct transaction costs. The Company accounted for each transaction as an asset acquisition in accordance with ASC 805.
Total aggregate consideration allocated for the three transactions was $84.0 million, inclusive of the deferred tax liability of $5.9 million. The Company allocated the consideration based on the relative fair values of the assets acquired in each transaction, resulting in $57.4 million being allocated to developed software, $22.7 million being allocated to developed technology, and $3.9 million being allocated to the assembled workforce.
15


The developed software acquired was assigned a useful life of 5 years, and is recorded in Property and equipment, net. The developed technology assets acquired were assigned a useful life of 3 years and the assembled workforce was assigned a useful life of 4 years. Both of these acquired assets are recorded in Intangible assets, net.
Pending Transaction
On December 21, 2020, the Company entered into a Stock and Purchase Agreement ("Purchase Agreement") with Amer Sports Corporation ("Parent"), a Finnish corporation, pursuant to which the Company will acquire Precor Incorporated, a Delaware corporation (“Precor”), and certain related entities and assets from Parent and certain of its subsidiaries. Precor manufactures, sells, and distributes cardiovascular and strength-building exercise machines, fitness equipment, and associated technical and digital services.
Under the terms of the Purchase Agreement, the Company has agreed to acquire Precor for $420.0 million in cash, subject to customary adjustments for working capital, transaction expenses, cash, and indebtedness.
The closing of the transactions contemplated by the Purchase Agreement is anticipated to occur during early calendar 2021 and is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Purchase Agreement also provides customary termination rights to each of the parties.

8. Debt and Financing Arrangements
Amended and Restated Credit Agreement
In 2019, the Company entered into an amended and restated loan and security agreement (“Amended Credit Agreement”). The Amended Credit Agreement provides for a $250.0 million secured revolving credit facility, including up to the lesser of $150.0 million and the aggregate unused amount of the facility for the issuance of letters of credit. Interest on the Amended Credit Agreement is paid based on LIBOR plus 2.75% or an Alternative Base Rate plus 1.75%. The Company is required to pay an annual commitment fee of 0.375% on a quarterly basis based on the unused portion of the revolving credit facility.

During the three and six months ended December 31, 2020, the Company incurred total commitment fees of $0.2 million and $0.5 million, respectively, and $0.2 million and $0.4 million during the three and six months ended December 31, 2019, respectively, which are included in interest expense in the condensed consolidated statements of operations and comprehensive income (loss).

The outstanding balance, if any, is payable in full in June 2024. As of December 31, 2020, the Company has not drawn on the credit facility and did not have outstanding borrowings under the Amended Credit Agreement.
In connection with the execution of the Amended Credit Agreement, the Company incurred debt issuance costs of $0.9 million, which are capitalized and presented as other assets on the Company's condensed consolidated balance sheets. These costs are being amortized to interest expense using the effective interest method over the term of the Amended Credit Agreement.
The Company has the option to repay its borrowings under the Amended Credit Agreement without premium or penalty prior to maturity. The Amended Credit Agreement contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that include limitations on the Company's ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare cash dividends in the entirety or make certain other distributions, and undergo a merger or consolidation or certain other transactions. The Amended Credit Agreement also contains certain financial condition covenants, including maintaining a total level of liquidity of not less than $125.0 million and maintaining certain minimum total revenue ranging from $725.0 million to $1,985.0 million depending on the applicable date of determination. As of December 31, 2020, the Company was in compliance with the covenants under the Amended Credit Agreement. At December 31, 2020, the Company was contingently liable for approximately $4.8 million in standby letters of credit as security for an operating lease obligation.
9. Commitments and Contingencies
Content Costs for Past Use Reserve
To secure the rights to stream music on the Peloton platform, the Company must obtain licenses from, and pay royalties to, copyright owners of both sound recordings and musical compositions. The Company has entered into negotiations with various music rights holders, to pay for any and all uses of musical compositions and sound recordings to date and, at the same time, enter into go-forward license agreements for the use of music in the future.

Prior to the execution of go-forward music license agreements, the Company estimates and records expenses inclusive of estimated content costs for past use as well as normal and recurring music royalty expenses. During the three and six months ended December 31, 2020, the Company recorded content costs for past use and estimates for normal and recurring royalty expense of $3.3 million and $5.6 million, respectively, and $0.9 million and $3.5 million during the three and six months ended December 31, 2019, respectively. The Company includes both of these components in its reserve. As of December 31, 2020 and 2019, the Company recorded reserves of $17.6 million and $21.7 million, respectively, included in Accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
16



Legal Proceedings
The Company is, or may become, a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business. Some of these proceedings may be based on complex claims involving substantial uncertainties and unascertainable damages, such as litigation that centers around intellectual property claims. Accordingly, it is not possible to determine the probability of loss or estimate damages, and therefore, the Company has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, the Company records a liability, and, if the liability is material, discloses the amount of the liability reserved. The Company does not believe that the outcome of any existing legal or regulatory proceeding to which it is a party, either individually or in the aggregate, will have a material adverse effect on its results of operations, financial condition or cash flows.
10. Equity-Based Compensation
2019 Equity Incentive Plan
In August 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (the "2019 Plan"), which was subsequently approved by the Company’s stockholders in September 2019. The 2019 Plan serves as the successor to the 2015 Stock Plan (the "2015 Plan"). The 2015 Plan continues to govern the terms and conditions of the outstanding awards previously granted thereunder. Any reserved shares not issued or subject to outstanding grants under the 2015 Plan on the effective date of the 2019 Plan became available for grant under the 2019 Plan and will be issued as Class A common stock. The number of shares reserved for issuance under the 2019 Plan will increase automatically on July 1 of each of 2020 through 2029 by the number of shares of the Company’s Class A common stock equal to 5% of the total outstanding shares of all of the Company’s classes of common stock as of each June 30 immediately preceding the date of increase, or a lesser amount as determined by the Board of Directors. On July 1, 2020, the number of shares of Class A common stock available for issuance under the 2019 Plan was automatically increased according to its terms by 14,401,954 shares. As of December 31, 2020, the number of shares of Class A common stock available for future award under the 2019 Plan is 50,054,907.

Stock Options
The following summary sets forth the stock option activity under the 2019 Plan:
Options Outstanding
Number of Stock Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (years)
Aggregate
Intrinsic
Value (in millions)
Outstanding — June 30, 2020
66,818,860 $10.57 8.0$3,153.6 
Granted2,653,078 $86.81 
Exercised(6,031,747)$7.31 
Forfeited(1,141,370)$17.24 
Outstanding — December 31, 2020
62,298,821 $14.01 7.6$8,578.9 
Vested and Exercisable— December 31, 2020
28,599,374 $6.28 6.7$4,159.6 

Unvested option activity is as follows:

OptionsWeighted-Average Grant Date Fair Value
Unvested - June 30, 2020
39,674,590 $7.41 
Granted2,653,078 $36.05 
Early exercised unvested(39,117)$3.31 
Vested(7,454,067)$6.62 
Forfeited(1,135,037)$7.88 
Unvested - December 31, 2020
33,699,447 $9.83 

During the six months ended December 31, 2020, 633,896 shares of common stock were issued upon cashless exercise of 898,390 options.

The aggregate intrinsic value of options outstanding, vested and exercisable, were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2020. The fair value of the common stock is the closing stock price of the Company's Class A common stock as reported on the Nasdaq Global Select Market.

As part of the 2015 Plan and 2019 Plan (collectively, the "Plans"), the Company issued options to certain key management that vest upon the achievement of certain performance milestones. During the three and six months ended December 31, 2020, the Company recorded stock-based
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compensation expense related to the performance-based options of $0.2 million and $0.4 million, respectively, and $0.1 million and $3.9 million for the three and six months ended December 31, 2019, respectively.

For the six months ended December 31, 2020 the weighted-average grant date fair value per option was $36.05. The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:

Six Months Ended December 31, 2020
Weighted average risk-free interest rate (1)
0.4%
Weighted average expected term (in years)
6.2
Weighted average expected volatility (2)
42.8%
Expected dividend yield
____________________________
(1) Based on U.S. Treasury seven-year constant maturity interest rate whose term is consistent with the expected term of the option.
(2) Expected volatility is based on an analysis of comparable public company volatilities and adjusted for the Company’s stage of development.

Restricted Stock and Restricted Stock Units
The following table summarizes the activity related to the Company's restricted stock and restricted stock units:


Restricted Stock Units Outstanding
Number of Awards
Weighted-Average Grant Date Fair Value
Outstanding — June 30, 2020
616,113 $32.02 
Granted804,740 $89.09 
Vested and converted to shares(159,381)$39.88 
Cancelled(8,172)$86.67 
Outstanding — December 31, 2020
1,253,300 $67.31 

Employee Stock Purchase Plan
In August 2019, the Board of Directors adopted, and in September 2019, the Company's stockholders approved, the 2019 Employee Stock Purchase Plan ("ESPP"), through which eligible employees may purchase shares of the Company's Class A common stock at a discount through accumulated payroll deductions. The ESPP became effective on the date the registration statement, in connection with the Company’s IPO, was declared effective by the SEC (the "Effective Date"). The number of shares of the Company's Class A common stock that will be available for issuance and sale to eligible employees under the ESPP will increase automatically on the first day of each fiscal year of the Company beginning on July 1, 2020 through 2029, equal to 1% of the total number of outstanding shares of all classes of the Company's common stock on the immediately preceding June 30, or such lesser number as may be determined by the Board of Directors or applicable committee in its sole discretion. On July 1, 2020, the number of shares of Class A common stock available for issuance under the ESPP was automatically increased according to its terms by 2,880,390 shares. As of December 31, 2020, a total of 8,101,657 shares of Class A common stock are available for sale to employees under the ESPP.

Unless otherwise determined by the Board of Directors, each offering period will consist of four six-month purchase periods, provided that the initial offering period commenced on the Effective Date and will end on August 31, 2021, and the initial purchase period ended February 28, 2020. Thereafter, each offering period and each purchase period will commence on September 1 and March 1 and end on August 31 and February 28 of each two-year period or each six-month period, respectively, subject to a reset provision. If the closing stock price on the first day of an offering period is higher than the closing stock price on the last day of any applicable purchase period, participants will be withdrawn from the ongoing offering period immediately following the purchase of ESPP shares on the purchase date and would automatically be enrolled in the subsequent offering period ("ESPP reset"), resulting in a modification under ASC 718.

Unless otherwise determined by the Board of Directors, the purchase price for each share of Class A common stock purchased under the ESPP will be 85% of the lower of the fair market value per share on the first trading day of the applicable offering period or the fair market value per share on the last trading day of the applicable purchase period.

The Black-Scholes option pricing model assumptions used to calculate the fair value of shares estimated to be purchased at the commencement of the ESPP offering periods were as follows:

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Six Months Ended December 31, 2020
Weighted average risk-free interest rate
1.1%
Weighted average expected term (in years)
1.2
Weighted average expected volatility
60.0%
Expected dividend yield

The expected term assumptions were based on each offering period's respective purchase date. Since the Company does not have a historical trading history of its stock, the expected volatility was derived from the average historical stock volatilities of several unrelated public companies that the Company considers to be comparable to its business over a period equivalent to the expected terms. The risk-free rate assumptions were based on the U.S. treasury yield curve in effect at the time of the grants. The dividend yield assumption was zero as the Company has not historically paid any dividends and does not expect to declare or pay dividends in the foreseeable future.

During the three and six months ended December 31, 2020, the Company recorded stock-based compensation expense associated with the ESPP of $2.2 million and $3.8 million, respectively and $0.9 million for each of the three and six months ended December 31, 2019.

In connection with the offering period which ended on August 31, 2020, employees purchased approximately 216,094 shares of Class A common stock at a weighted-average price of $23.73 under the ESPP. As of December 31, 2020, total unrecognized compensation cost related to the ESPP was $12.1 million, which will be amortized over a weighted-average remaining period of 1.4 years.

Stock-Based Compensation Expense
The Company's total stock-based compensation expense was as follows:

Three Months Ended December 31,Six Months Ended December 31,
2020201920202019
(in millions)
Cost of revenue
   Connected Fitness Products$2.0 $0.5 $3.5 $0.7 
Subscription5.1 1.2 9.5 2.2 
Total cost of revenue7.1 1.6 13.0 2.9 
Sales and marketing4.6 2.0 8.0 3.6 
General and administrative21.2 11.2 37.8 24.6 
Research and development4.6 2.4 8.2 4.7 
  Total stock-based compensation expense$37.5 $17.1 $67.1 $35.8 

As of December 31, 2020, the Company had $385.3 million of unrecognized stock-based compensation expense related to unvested stock-based awards that is expected to be recognized over a weighted-average period of 3.2 years.
11. Income Taxes
The Company recorded a benefit from income taxes of $3.0 million and $1.7 million for the three and six months ended December 31, 2020, respectively, and $0.4 million for each of the three and six months ended December 31, 2019. Furthermore, the Company's effective tax rates were (4.60)% and (1.24)% for the three and six months ended December 31, 2020, respectively, and 0.79% and 0.32% for the three and six months ended December 31, 2019, respectively. The income tax benefit is driven by adjustments to the valuation allowance resulting from the acquisitions disclosed in Note 7, partially offset by state and international taxes.

The Company maintains a valuation allowance on the majority of its deferred tax assets as it has concluded that it is more likely than not that the deferred assets will not be utilized.
12. Net Income (Loss) Per Share
The computation of basic and diluted net income (loss) per share is as follows:
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Three Months Ended December 31,Six Months Ended December 31,
2020201920202019
(in millions, except share and per share amounts)
Basic net income (loss) per share:
Net income (loss) attributable to common stockholders$63.6 $