Toggle SGML Header (+)


Section 1: 10-Q (FOXF 03-30-2018 10-Q)

Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-36040
 
Fox Factory Holding Corp.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
26-1647258
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
915 Disc Drive
Scotts Valley, CA
95066
(Address of Principal Executive Offices)
(Zip Code)
(831) 274-6500
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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 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
ý
Accelerated filer
¨

Non-accelerated filer
¨  (Do not check if a smaller reporting company)
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.    ¨


Table of Contents


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 26, 2018, there were 37,672,737 shares of the registrant’s common stock outstanding.
 



Fox Factory Holding Corp.
FORM 10-Q
Table of Contents
 
 
 
Page 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of March 30, 2018 and December 29, 2017
 
Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 30, 2018 and March 31, 2017
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 30, 2018 and March 31, 2017
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 30, 2018 and March 31, 2017
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOX FACTORY HOLDING CORP.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(Unaudited)
 
As of
 
As of
 
March 30,
 
December 29,
 
2018

2017
 

 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
22,233

 
$
35,947

Accounts receivable (net of allowances of $770 and $676 at March 30, 2018 and December 29, 2017, respectively)
56,816

 
61,060

Inventory
91,256

 
84,841

Prepaids and other current assets
24,114

 
21,100

Total current assets
194,419

 
202,948

Property, plant and equipment, net
45,746

 
43,636

Deferred tax assets
6,243

 
2,669

Goodwill
88,442

 
88,438

Intangibles, net
88,480

 
90,044

Other assets
484

 
551

Total assets
$
423,814

 
$
428,286

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
46,962

 
$
40,813

Accrued expenses
25,546

 
32,608

Reserve for uncertain tax positions
1,427

 
7,787

Current portion of long-term debt
5,509

 
5,038

Total current liabilities
79,444

 
86,246

Line of credit
17,020

 
35,585

Long-term debt, less current portion
56,642

 
58,020

Deferred rent
603

 
645

Total liabilities
153,709

 
180,496

Commitments and contingencies (Refer to Note 7 - Commitments and Contingencies)

 

Redeemable non-controlling interest
14,192

 
12,955

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value — 10,000 authorized and no shares issued or outstanding as of March 30, 2018 and December 29, 2017

 

Common stock, $0.001 par value — 90,000 authorized; 38,546 shares issued and 37,656 outstanding as of March 30, 2018; 38,497 shares issued and 37,607 outstanding as of December 29, 2017
38

 
38

Additional paid-in capital
112,453

 
112,793

Treasury stock, at cost; 890 common shares as of March 30, 2018 and December 29, 2017
(13,754
)
 
(13,754
)
Accumulated other comprehensive income (loss)
307

 
(168
)
Retained earnings
156,869

 
135,926

Total stockholders’ equity
255,913

 
234,835

Total liabilities, redeemable non-controlling interest and stockholders’ equity
$
423,814

 
$
428,286

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(Unaudited)
 
 
For the three months ended
 
March 30,

March 31,
 
2018

2017
Sales
$
129,792

 
$
106,330

Cost of sales
88,148

 
72,616

Gross profit
41,644

 
33,714

Operating expenses:
 
 
 
Sales and marketing
8,734

 
6,592

Research and development
6,197

 
4,482

General and administrative
9,193

 
8,081

Amortization of purchased intangibles
1,568

 
695

Fair value adjustment of contingent consideration and acquisition related compensation

 
1,447

Total operating expenses
25,692

 
21,297

Income from operations
15,952

 
12,417

Other expense, net:
 
 
 
Interest expense
798

 
588

Other expense
283

 
545

Other expense, net
1,081

 
1,133

Income before income taxes
14,871

 
11,284

(Benefit of) provision for income taxes
(6,579
)
 
756

Net income
21,450

 
10,528

Less: net income attributable to non-controlling interest
(226
)
 

Net income attributable to FOX stockholders
$
21,224

 
$
10,528

Earnings per share:
 
 
 
Basic
$
0.56

 
$
0.28

Diluted
$
0.55

 
$
0.27

Weighted average shares used to compute earnings per share:
 
 
 
Basic
37,625

 
37,135

Diluted
38,835

 
38,562

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited) 
 
For the three months ended
 
March 30,
 
March 31,
 
2018
 
2017
Net income
$
21,450

 
$
10,528

Other comprehensive income
 
 
 
Foreign currency translation adjustments, net of tax effects
471

 
1,252

Other comprehensive income
471

 
1,252

Comprehensive income
21,921

 
11,780

Comprehensive income attributable to non-controlling interest
226

 

Comprehensive income attributable to FOX stockholders
$
21,695

 
$
11,780

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
For the three months ended
 
March 30, 2018
 
March 31, 2017
OPERATING ACTIVITIES:
 
 
 
Net income
$
21,450

 
$
10,528

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3,506

 
2,405

Stock-based compensation
2,046

 
1,909

Deferred taxes and uncertain tax positions
(9,912
)
 
(2,399
)
Change in fair value of contingent consideration

 
(150
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,713

 
12,480

Inventory
(6,030
)
 
(7,499
)
Income taxes payable
(3,407
)
 
(1,793
)
Prepaids and other assets
(3,027
)
 
(411
)
Accounts payable
5,737

 
3,535

Accrued expenses
(4,111
)
 
(9,396
)
Net cash provided by operating activities
10,965

 
9,209

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(3,975
)
 
(2,726
)
Purchase of intangible assets

 
(54
)
Net cash used in investing activities
(3,975
)
 
(2,780
)
FINANCING ACTIVITIES:
 
 
 
Payments on line of credit
(18,565
)
 

Repayment of debt
(938
)
 
(937
)
(Repurchases from) proceeds from stock compensation program, net
(1,375
)
 
1,878

Net cash (used in) provided by financing activities
(20,878
)
 
941

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
174

 
341

 
 
 
 
CHANGE IN CASH AND CASH EQUIVALENTS
(13,714
)
 
7,711

CASH AND CASH EQUIVALENTS—Beginning of period
35,947

 
35,280

CASH AND CASH EQUIVALENTS—End of period
$
22,233

 
$
42,991

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
6,730

 
$
4,937

Interest
$
853

 
$
512

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents


FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)

1. Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies
Fox Factory Holding Corp. (the "Company") designs and manufactures performance-defining ride dynamics products primarily for bicycles ("bikes"), side-by-side vehicles ("Side-by-Sides"), on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. The Company is a direct supplier to leading power vehicle original equipment manufacturers ("OEMs"). Additionally, the Company supplies top bicycle OEMs and their current contract manufacturers, and provides aftermarket products to retailers and distributors.
Throughout this Form 10-Q, unless stated otherwise or as the context otherwise requires, the "Company," "FOX," "Fox Factory," "we," "us," "our," and "ours" refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis.
Basis of Presentation - The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America ("U.S.") and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 29, 2017 included in the Company’s Annual Report on Form 10-K as filed with the SEC. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.
The Company operates on a 52-53 week fiscal calendar. For 2018 and 2017, the Company's fiscal year will end or has ended on December 28, 2018 and December 29, 2017, respectively. The three month periods ended March 30, 2018 and March 31, 2017 each included 13 weeks.
Principles of Consolidation - These condensed consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Summary of Significant Accounting Policies - Beginning the first quarter of fiscal year 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), as updated by ASU 2016-20. There have been no other changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 29, 2017, as filed with the SEC on February 27, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition - Revenues are generated from the sale of ride dynamics products to customers worldwide. The Company’s ride dynamics products are solutions that improve performance and control of power vehicles and bikes. Power vehicles include Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles.
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master service agreements.

5

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded based on management’s assessment of historical trends and projection of future results. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix. At March 30, 2018, the balance of deferred revenue related to pricing provisions was $306. These amounts are expected to be recognized over the next 12 months.
Segments - The Company has determined that it has a single operating and reportable segment. The Company considers operating segments to be components of the Company for which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Use of Estimates - The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates.
Certain Significant Risks and Uncertainties - The Company is subject to those risks common in manufacturing-driven markets, including, but not limited to, competitive forces, dependence on key personnel, customer demand for its products, the successful protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional financing when needed.
Fair Value Measurements - The Company uses the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires the valuation of assets and liabilities subject to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed by the Company in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
The carrying amount of the Company's financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature.
Recent Accounting Pronouncements - In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, updated December 2016 with the release of ASU 2016-20. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.


6

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2018, using the modified retrospective implementation method. The Company applied the guidance to all open contracts at the date of initial application. The primary impact of adopting the standard resulted from certain pricing provisions within contracts that provide the customer with a material right. Under the new standard, revenue attributed to such pricing provisions is deferred and recognized when the right is exercised by the customer. The Company recorded a cumulative effect adjustment of $368 gross and $279 net of taxes, to the opening balance of retained earnings to reflect the cumulative effect of the adoption of the standard.
In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the existing guidance for lease accounting. This ASU will require lessees to recognize leases with durations greater than 12 months on the balance sheet. This guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation of certain transactions, including but not limited to contingent consideration payments made after a business combination and debt prepayment and extinguishment costs in the cash flow statement. This standard will be effective for fiscal years, and interim periods within those years, beginning the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfer of Assets Other Than Inventory, which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted ASU 2016-16 effective in the first quarter of fiscal year 2018. The adoption of ASU 2016-16 did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which provides more guidance to an entity when they are assessing if transactions should be accounted for as acquisitions of assets or businesses. The clarification of the definition of a business impacts various areas of accounting such as acquisitions, disposals, goodwill, and consolidations. The Company adopted ASU 2017-01 effective in the first quarter of fiscal year 2018. The adoption of ASU 2017-01 did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the goodwill impairment test that would currently require the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Under ASU 2017-04, goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value. The Company adopted ASU 2017-04 effective for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on the Company's consolidated financial statements.


2. Revenues
The following table summarizes total sales by product category:
 
For the three months ended
 
March 30, 2018
 
March 31, 2017
Bike products
$
57,659

 
$
52,275

Power Vehicle products
72,133

 
54,055

Total sales
$
129,792

 
$
106,330


7

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The following table summarizes total sales by sales channel:
 
For the three months ended
 
March 30, 2018
 
March 31, 2017
OEM
$
72,764

 
$
60,648

Aftermarket
57,028

 
45,682

Total sales
$
129,792

 
$
106,330


The following table summarizes total sales generated by geographic location of the customer:
 
For the three months ended
 
March 30, 2018
 
March 31, 2017
North America
$
83,168

 
$
63,805

Asia
21,203

 
20,352

Europe
23,916

 
20,453

Rest of the world
1,505

 
1,720

Total sales
$
129,792

 
$
106,330




3. Inventory
Inventory consisted of the following:
 
March 30,

December 29,
 
2018
 
2017
Raw materials
$
57,639

 
$
51,371

Work-in-process
5,353

 
1,233

Finished goods
28,264

 
32,237

Total inventory
$
91,256

 
$
84,841


8

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


4. Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following:
 
March 30,

December 29,
 
2018
 
2017
Machinery and manufacturing equipment
$
33,227

 
$
33,664

Information systems, office equipment and furniture
8,150

 
7,715

Internal use software
9,456

 
7,819

Transportation equipment
3,726

 
3,325

Building and land
8,811

 
8,811

Leasehold improvements
11,245

 
9,919

Total
74,615

 
71,253

Less: accumulated depreciation and amortization
(28,869
)
 
(27,617
)
Property, plant and equipment, net
$
45,746

 
$
43,636


The Company’s long-lived assets by geographic location are as follows:
 
As of March 30,
 
As of  
 December 29,
 
2018
 
2017
United States
$
40,684

 
$
38,450

International
5,062

 
5,186

Total long-lived assets
$
45,746

 
$
43,636



9

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


5. Accrued Expenses
Accrued expenses consisted of the following:
 
March 30,

December 29,
 
2018

2017
Payroll and related expenses
$
8,324

 
$
13,211

Warranty
6,596

 
6,481

Income tax payable
2,970

 
6,562

Other accrued expenses
7,656

 
6,354

Total
$
25,546

 
$
32,608

Activity related to warranties is as follows:
 
For the three months ended
 
March 30, 2018
 
March 31, 2017
Beginning warranty liability
$
6,481

 
$
4,593

Charge to cost of sales
1,289

 
1,279

Costs incurred
(1,174
)
 
(865
)
Ending warranty liability
$
6,596

 
$
5,007



6. Debt
Second Amended and Restated Credit Facility
In August 2013, the Company entered into a credit facility with Sun Trust Bank and other named lenders which has been periodically amended and restated; the last restatement occurred on May 11, 2016 and was further amended on August 11, 2016, June 12, 2017 and November 30, 2017 (as most recently amended and restated and as further amended, the “Second Amended and Restated Credit Facility”). The Second Amended and Restated Credit Facility, which matures on May 11, 2021, provides a revolving line of credit and a maturing secured term loan with a refinanced principal balance of $75,000. The term loan is subject to quarterly amortization payments.
The Second Amended and Restated Credit Facility provides for interest at either a rate based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.50% to 2.50%, or based on the prime rate offered by SunTrust Bank plus a margin ranging from 0.50% to 1.50%. At March 30, 2018, the one-month LIBOR and prime rates were 1.88% and 4.75%, respectively. At March 30, 2018, our weighted average interest rate on outstanding borrowing was 3.96%. The Second Amended and Restated Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and also requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of March 30, 2018.
Additionally, the existing credit facility permits up to $15,000 of the aggregate revolving commitment to be used by the Company for issuance of letters of credit. As of March 30, 2018, the Company utilized $5,000 in the form of a standby letter of credit in support of subsidiary operations. The letter of credit expires in November 2018.

10

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The following table summarizes the line of credit under the Second Amended and Restated Credit Facility:
 
March 30,
 
December 29,
 
2018
 
2017
Amount outstanding
$
16,500

 
$
35,000

Standby letter of credit
$
5,000

 
$
5,000

Available borrowing capacity
$
78,500

 
$
60,000

Maximum borrowing capacity
$
100,000

 
$
100,000

Maturity date
May 11, 2021

As of March 30, 2018, future principal payments for long-term debt, including the current portion, are summarized as follows:
For fiscal year:
 
2018 (remaining nine months)
$
4,219

2019
5,625

2020
7,031

2021
45,625

Total term debt
62,500

Debt issuance cost
(349
)
Long-term debt, net of issuance cost
62,151

Less: current portion
(5,509
)
Long-term debt less current portion
$
56,642


Other Indebtedness
The Company had $520 and $585 outstanding under a vendor associated line of credit as of March 30, 2018 and December 29, 2017, respectively.

7. Commitments and Contingencies
Operating Leases - The Company has operating lease agreements for administrative, research and development, manufacturing and sales and marketing facilities and equipment that expire at various dates. The Company recognizes rent expense on a straight-line basis over the lease term and records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. See Note 12 - Related Party Agreements for additional information on related party operating leases.
Indemnification Agreements - In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on the Company’s results of operations, financial position or liquidity.

11

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Legal Proceedings - A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("'027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016. That lawsuit alleges patent infringement of U.S Patent number 9,291,250 ("'250 Patent").  The Company believes the lawsuits are without merit and intends to vigorously defend itself.  As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. The PTAB has instituted all of the Company's IPR Petitions and has stayed a third party ex-parte re-exam of SRAM's '027 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. The Company is currently evaluating strategic next steps.
In a separate action the Company filed a lawsuit on January 29, 2016 in the U.S. District Court, Northern District of California against SRAM. That lawsuit alleges SRAM’s infringement of two separate Company owned patents, specifically U.S. Patent numbers 6,135,434 and 6,557,674.  A second lawsuit was filed by the Company on July 1, 2016 in the U.S. District Court, Northern District of California against SRAM alleging infringement of the Company’s U.S. Patent numbers 8,226,172 and 8,974,009. These lawsuits have been moved to U.S. District Court, District of Colorado but are otherwise proceeding.
The SRAM lawsuits against the Company have been stayed by the U.S. District Court, Northern District of Illinois pending a PTAB determination in the Company filed SRAM patent reviews (IPRs).  Recently, the PTAB opined that certain claims of the SRAM ‘027 Patent were not shown to be invalid. However, because additional IPRs of the ‘027 and ‘250 Patents remain pending with the PTAB, SRAM’s lawsuits against the Company in Illinois remain stayed. Meanwhile the Company filed lawsuits have moved forward as scheduled by the courts. Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the consolidated financial statements for the settlement of these matters.  Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, the Company's business, financial condition or results of operations could be materially and adversely affected.
The Company is involved in other legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Other Commitments - On November 30, 2017, the Company through FF US Holding Corp. acquired an 80% interest in the business of Flagship, Inc. ("Tuscany"). The stockholders' agreement provides the Company with a call option (the "Call Option") to acquire the remaining 20% of Tuscany any time from November 30, 2019 through November 30, 2024 at a value which approximates fair market value. In addition, if the Call Option has not been exercised as of November 30, 2024, the non-controlling owners shall be entitled to exercise a put option on November 30, 2024 and for a 180 day period thereafter, which would require the Company to purchase all of the remaining shares held by the non-controlling owners at a price that approximates fair market value.


8. Fair Value Measurements
The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods:
 
March 30, 2018
 
December 29, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Credit facility
$

 
$
62,151

 
$

 
$
62,151

 
$

 
$
63,058

 
$

 
$
63,058

Non-controlling interest subject to put provisions

 

 
14,192

 
14,192

 

 

 
12,955

 
12,955

Total liabilities measured at fair value
$

 
$
62,151

 
$
14,192

 
$
76,343

 
$

 
$
63,058

 
$
12,955

 
$
76,013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

12

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 categories of the fair value hierarchy during the three month period ended March 30, 2018.
The Company used Level 2 inputs to determine the fair value of its Second Amended and Restated Credit Facility. As of March 30, 2018 and December 29, 2017, the carrying amount of the principal under the Company’s Second Amended and Restated Credit Facility approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company’s net leverage ratio.
The Company has potential obligations to purchase non-controlling interests held by third parties in the Tuscany subsidiary. These obligations are in the form of put provisions and are exercisable at the third-party owners' discretion within the specified periods outlined in the put provision within the Tuscany stockholders' agreement. If these put provisions were exercised, the Company would be required to purchase the third-party owners' non-controlling interests at the appraised fair value. The Company measured the fair value of the non-controlling interests using Level 3 unobservable inputs, including the expected growth rate, income tax rate, and discount factor applied to forecasted results. The estimated fair values of the non-controlling interests can fluctuate and the amount at which these obligations may ultimately be settled could vary significantly from our future estimates depending upon market conditions. Valuation adjustments arising from the fair value measurement of the non-controlling interests are recognized as additional paid in capital on the consolidated balance sheet.

The following table provides a reconciliation of the beginning and ending balances for the Company's liability measured at fair value using Level 3 inputs:
 
Redeemable Non-Controlling Interest (level 3 measurement)
Balance at December 29, 2017
$
12,955

Net income attributable to non-controlling interest
226

Change in fair value
1,011

Balance at March 30, 2018
$
14,192


9. Stockholders' Equity
Share Repurchase Program and Secondary Stock Offerings
In February 2016, the Company's Board of Directors authorized the Company's 2016 share repurchase program (the "2016 Repurchase Program"), permitting repurchases of up to an aggregate of $40,000 in shares of common stock. The plan expired on December 31, 2017. The Company repurchased 890 shares for a total of $13,754 under both the 2016 Repurchase Program and the prior repurchase program of the Company, which expired on December 31, 2015. Shares of common stock repurchased under such programs are accounted for as treasury stock under the cost method.
In March 2017, the Company closed a secondary offering, whereby the selling stockholders sold an additional 5,574 shares of the Company's common stock at a price of $26.65 per share, less underwriting discounts and commissions. The total shares sold included 466 shares, which were also sold by certain selling stockholders, in connection with the underwriters' option to purchase additional shares. The Company did not sell shares or receive any proceeds from the sales of shares by the selling stockholders. As a result of the March 2017 secondary offering, Compass Group Diversified Holdings LLC ("Compass") no longer holds any equity interest in the Company.
The Company incurred approximately $113 of expenses in connection with the secondary offering during the three months ended March 31, 2017.

13

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Equity Incentive Plans
The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of income:
 
For the three months ended
 
March 30, 2018

March 31, 2017
Cost of sales
$
101

 
$
33

Sales and marketing
161

 
148

Research and development
142

 
112

General and administrative
1,642

 
1,616

Total
$
2,046

 
$
1,909


The following table summarizes the activity for the Company's unvested restricted stock units ("RSU") for the three months ended March 30, 2018.
 
Unvested RSUs
 
Number of shares outstanding
 
Weighted-average grant date fair value
Unvested at December 29, 2017
800

 
$
23.91

Canceled
(5
)
 
$
14.41

Vested
(85
)
 
$
27.09

Unvested at March 30, 2018
710

 
$
23.60


As of March 30, 2018, the Company had approximately $11,151 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.46 years.
No options to purchase common stock were expired, forfeited or issued during the three months ended March 30, 2018. As of March 30, 2018, stock-based compensation expense related to stock options has been fully recognized.


14

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

10. Income Taxes
 
For the three months ended
 
March 30, 2018
 
March 31, 2017
Provision for income taxes
$
(6,579
)
 
$
756

Effective tax rates
(44.2
)%
 
6.7
%
The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on unremitted earnings of certain foreign subsidiaries, creates a new minimum tax on certain foreign earnings, and provides incentives for U.S. companies to sell and license goods and services abroad, among other changes.
Effective January 1, 2016, the Company sold the net assets of its Taiwan branch operations and its shares of Fox Factory IP Holding Corp. to Fox Factory Switzerland GmbH. The Company’s Taiwan operations were as a result, organized as a branch of the Swiss entity (together, "Fox Switzerland"). Fox Switzerland owns or licenses the Company’s non-U.S. intangible property and generates earnings that, prior to the enactment of the TCJA, were not subject to payment of U.S. income taxes or accrual of deferred tax expense because the Company asserted that such earnings were permanently invested outside the U.S. The unremitted earnings of Fox Switzerland through 2017 became subject to U.S. tax as a result of the one-time transition tax provided for by the TCJA. As a result of the change in U.S. taxation, the Company no longer considers the unremitted earnings of Fox Switzerland to be permanently reinvested, and, as such, has accrued foreign withholding tax due upon remittance of dividends from Fox Switzerland, including a cumulative adjustment of $2,026 in the fourth quarter of the fiscal year 2017.
As permitted by the SEC's Staff Accounting Bulletin 118, the Company has not completed its accounting for the tax effects of the enactment of the TCJA; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects of the new law. In other cases, primarily the impact of grandfathering on limitations of deductibility of executive compensation, the Company has not been able to make a reasonable estimate because clarifying regulations have not been issued, and, as such, continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to the enactment. The Company has recognized provisional amounts for all items for which it was able to determine a reasonable estimate. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company's estimates may be affected as interpretations of the law through regulations and common practice emerge.
Provisional amounts
Deferred Tax Assets and Liabilities: In the fourth quarter of fiscal year 2017, the Company remeasured its U.S. deferred tax assets and liabilities that give rise to future tax deductions based on the enacted tax rates in effect for the periods in which the deductions are expected to be taken. However, certain aspects of the TCJA could potentially affect the measurement of these balances or give rise to new deferred tax amounts. For example, differences between the provisional and actual calculations of the one-time transition tax could result in the need for changes to the amount of the valuation allowance on the balance that is not utilized to pay such tax. The provisional amount recorded in the fourth quarter of fiscal year 2017 related to the remeasurement of our deferred tax balance was a net benefit of $2,448. There have been no material changes in the estimated remeasurement of our deferred tax balance in fiscal year 2018.
One-Time Transition Tax: The one-time transition tax is based on the total post-1986 earnings and profits on which U.S. tax were previously deferred. In the fourth quarter of fiscal year 2017, the Company recorded a provisional amount as an increase in income tax expense related to the one-time transition tax of $3,706. Because of the complexities of the TCJA, the Company has estimated the amount of earnings and profits subject to the tax. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The Company's estimates may change when it finalizes the calculations required to determine the ultimate amount of the transition tax.

15

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

For the three months ended March 30, 2018, the difference between the Company's effective tax benefit of 44.2% and the 21% federal statutory rate resulted primarily from a $9,838 one-time impact of the favorable conclusion of the 2015 U.S. Internal Revenue Service ("IRS") audit and the recognition of related tax positions with respect to the deductibility of amortization and depreciation expense resulting from the acquisition of the Company in 2008. The benefit of the deductions was not recognized in accounting for the acquisition due to uncertainty about whether the tax position would withstand audit. The results of the audit provided basis for the Company to conclude that the amortization and depreciation will likely be deductible for all open tax years. In addition, the effective tax rate benefited from lower foreign tax rates, lower effective federal rates on licensing and export activities, research and development credits, and $238 from excess benefits related to the vesting of RSUs. These benefits were partially offset by state taxes, foreign withholding taxes and the impact of non-deductible expenses.
For the three months ended March 31, 2017, the difference between the Company's 6.7% effective tax rate and the 35% federal statutory rate resulted primarily from lower foreign tax rates on permanently reinvested earnings of the Company's foreign subsidiaries and $2,427 from excess benefits related to the exercise of stock options. These benefits were partially offset by state taxes and the impact of non-deductible expenses.
The Company's federal tax returns for 2013, 2014, 2016 and forward, state tax returns for 2012 forward, and foreign tax returns from 2014 forward are subject to examination by tax authorities.
The Company has obtained tax incentives in Switzerland that are effective through March 2019 that result in a rate reduction provided that the Company meets specified criteria. Upon expiration, the Company may renew the arrangement on demand, as long as the applicable law and operating criteria remain in place. The effect of the tax incentives were not material to the Company's income tax provision for the three months ended March 30, 2018 and March 31, 2017.

11. Earnings Per Share
Basic earnings per share ("EPS") amounts are computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted EPS amounts are computed by dividing net income attributable to Fox Factory Holding Corp. Stockholders for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include shares issuable upon the exercise of outstanding stock options and vesting of RSUs, which are reflected in diluted EPS by application of the treasury stock method.
The following table presents the calculation of basic and diluted EPS:
 
For the three months ended
 
March 30, 2018

March 31, 2017
Net income attributable to FOX stockholders
$
21,224

 
$
10,528

Weighted average shares used to compute basic EPS
37,625

 
37,135

Dilutive effect of employee stock plans
1,210

 
1,427

Weighted average shares used to compute diluted EPS
38,835

 
38,562

EPS:
 
 
 
Basic
$
0.56

 
$
0.28

Diluted
$
0.55

 
$
0.27

The Company did not exclude any potentially dilutive shares from the calculation of diluted EPS for the three months ended March 30, 2018 and March 31, 2017, as none of these shares would have been antidilutive.


16

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

12. Related Party Agreements

Fox Factory, Inc. has a triple-net building lease for its manufacturing and office facilities in Watsonville, California. The building is owned by a member of our Board of Directors. Rent expense under this lease was $179 for the three months ended March 30, 2018 and March 31, 2017, respectively. The lease was amended effective April 2016 to extend the term through June 30, 2020, with monthly rental payments of $60, which are adjusted annually for a cost-of-living increase based upon the consumer price index.
On November 30, 2017, the Company acquired an 80% interest in Tuscany, which has building leases for its manufacturing and office facilities in Elkhart, Indiana. The buildings are owned by the non-controlling interest stockholders, who are now employees of the Company. Rent expense under these leases was $86 and $0 for the three months ended March 30, 2018 and March 31, 2017, respectively. The leases are effective November 30, 2017 through April 1, 2022, with monthly rental payments of $29, which are subject to annual escalation of 7.5%.

13. Business Combinations

On November 30, 2017, the Company acquired an 80% interest in Tuscany, a designer, manufacturer and distributor of premium aftermarket powered vehicle performance packages in an asset purchase accounted for as a business combination. The purchase price of Tuscany was allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of November 30, 2017, with the excess purchase price allocated to goodwill. The allocation of the purchase price is preliminary, subject to the completion of the Company's validation of working capital and completion of its intangible valuation procedures, with the assistance of specialists.
The financial results of this subsidiary have been included in our consolidated financial statements since the date of acquisition.
The Company incurred $248 in transaction costs in conjunction with this acquisition during the three months ended March 30, 2018, which is included in general and administrative expense in the accompanying consolidated statement of income.


17

Table of Contents

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2017, as filed with the U.S. Securities and Exchange Commission ("SEC") on February 27, 2018, and our other reports and registration statements that we file with the SEC from time to time. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section included in Part II, Item 1A.
Unless the context otherwise requires, the terms “FOX,” the “Company,” “we,” “us,” and “our” in this Quarterly Report on Form 10-Q refer to Fox Factory Holding Corp. and its operating subsidiaries, on a consolidated basis.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements, which are subject to the “safe harbor” created by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We may make forward-looking statements in our SEC filings, press releases, news articles, earnings presentations and when we are speaking on behalf of the Company. Forward-looking statements generally relate to future events or our future financial or operating performance which involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “likely,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K are subject to numerous risks and uncertainties, including but not limited to risks related to:
 
our ability to develop new and innovative products in our current end-markets;
our ability to leverage our technologies and brand to expand into new categories and end-markets;
our ability to increase our aftermarket penetration;
our ability to accelerate international growth;
our exposure to exchange rate fluctuations;
the loss of key customers;
our ability to improve operating and supply chain efficiencies;
our ability to enforce our intellectual property rights;
our future financial performance, including our sales, cost of sales, gross profit or gross margins, operating expenses, ability to generate positive cash flow and ability to maintain our profitability;
our ability to maintain our premium brand image and high-performance products;
our ability to maintain relationships with the professional athletes and race teams we sponsor;
our ability to selectively add additional dealers and distributors in certain geographic markets;
the growth of the markets in which we compete, our expectations regarding consumer preferences and our ability to respond to changes in consumer preferences;
changes in demand for high-end suspension and ride dynamics products;
the loss of key personnel, management and skilled engineers;
our ability to successfully identify, evaluate and manage potential acquisitions and to benefit from such acquisitions;
the outcome of pending litigation;
future disruptions in the operations of our manufacturing facilities;
our ability to adapt our business model to mitigate the impact of certain changes in tax laws including those enacted in the U.S. in December 2017;

18

Table of Contents

changes in the relative proportion of profit earned in the numerous jurisdictions in which we do business and in tax legislation, case law and other authoritative guidance in those jurisdictions;
product recalls and product liability claims; and
future economic or market conditions.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects and the outcomes of any of the events described in any forward-looking statements are subject to risks, uncertainties, and other factors. In addition to the risks, uncertainties and other factors discussed above and elsewhere in this Quarterly Report on Form 10-Q, the risks, uncertainties and other factors expressed or implied in Part I, Item 1A, "Risk Factors" of our 2017 Annual Report on Form 10-K filed with the SEC on February 27, 2018, could cause or contribute to actual results differing materially from those set forth in any forward-looking statement. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur. Actual results, events, or circumstances could differ materially from those contemplated by, set forth in, or underlying any forward-looking statements. For all of these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act, and Section 21E of the Exchange Act.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
Critical Accounting Policies and Estimates

Beginning in the first quarter of fiscal year 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. There have been no other changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 29, 2017, as filed with the SEC on February 27, 2018, that have had a material impact on our condensed consolidated financial statements and related notes. See Note 1 - Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details of this update.

Recent Accounting Pronouncements

See Note 1 - Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Seasonality
Certain portions of our business are seasonal; we believe this seasonality is due to the delivery of new products. In each of the last three fiscal years, our quarterly sales have been the lowest in the first quarter and higher in the third or fourth quarter of the year. For example, our sales in our first and third quarters of 2017 represented 22% and 27% of our total sales for the year, respectively. In addition, acquisitions such as Tuscany will affect the seasonality of our business and product mix by quarter; therefore, our 2017 sales are not necessarily reflective of the future.


19

Table of Contents

Results of Operations
The table below summarizes our results of operations:
 
For the three months ended
(in thousands)
March 30, 2018

March 31, 2017
Sales
$
129,792

 
$
106,330

Cost of sales
88,148

 
72,616

Gross profit
41,644

 
33,714

Operating expenses:
 
 
 
Sales and marketing
8,734

 
6,592

Research and development
6,197

 
4,482

General and administrative
9,193

 
8,081

Amortization of purchased intangibles
1,568

 
695

Fair value adjustment of contingent consideration and acquisition related compensation

 
1,447

Total operating expenses
25,692

 
21,297

Income from operations
15,952

 
12,417

Other expense, net:
 
 
 
Interest expense
798

 
588

Other expense
283

 
545

Other expense, net
1,081

 
1,133

Income before income taxes
14,871

 
11,284

(Benefit of) provision for income taxes
(6,579
)
 
756

Net income
21,450

 
10,528

Less: net income attributable to non-controlling interest
(226
)
 

Net income attributable to FOX stockholders
$
21,224

 
$
10,528



20

Table of Contents

The following table sets forth selected statement of income data as a percentage of sales for the periods indicated:
 
For the three months ended
 
March 30, 2018

March 31, 2017
Sales
100.0
 %
 
100.0
%
Cost of sales
67.9

 
68.3

Gross profit
32.1

 
31.7

Operating expenses:
 
 
 
Sales and marketing
6.7

 
6.2

Research and development
4.8

 
4.2

General and administrative
7.1

 
7.6

Amortization of purchased intangibles
1.2

 
0.7

Fair value adjustment of contingent consideration and acquisition related compensation

 
1.4

Total operating expenses
19.8

 
20.1

Income from operations
12.3

 
11.6

Other expense, net:
 
 
 
Interest expense
0.6

 
0.6

Other expense
0.2

 
0.5

Other expense, net
0.8

 
1.1

Income before income taxes
11.5

 
10.5

(Benefit of) provision for income taxes
(5.1
)
 
0.7

Net income
16.6
 %
 
9.8
%
Less: net income attributable to non-controlling interest
(0.2
)%
 
%
Net income attributable to FOX Stockholders
16.4
 %
 
9.8
%
Three months ended March 30, 2018 compared to three months ended March 31, 2017
Sales
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018
 
March 31, 2017
 
Change ($)
 
Change (%)
Bike products
$
57.7

 
$
52.3

 
$
5.4

 
10.3
%
Power vehicle products
72.1

 
54.0

 
18.1

 
33.5
%
Total sales
$
129.8

 
$
106.3

 
$
23.5

 
22.1
%
Sales for the three months ended March 30, 2018 increased approximately $23.5 million, or 22.1%, compared to the three months ended March 31, 2017. Bike sales increased by $5.4 million or 10.3% primarily driven by higher OEM sales. Powered vehicle sales increased by $18.1 million or 33.5% due to continued higher demand for our on and off road suspension products and growth in aftermarket sales due to the acquisition of Tuscany.
Cost of sales
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018

March 31, 2017
 
Change ($)
 
Change (%)
Cost of sales
$
88.1

 
$
72.6

 
$
15.5

 
21.3
%
Cost of sales for the three months ended March 30, 2018 increased approximately $15.5 million, or 21.3%, compared to the three months ended March 31, 2017. The increase in cost of sales was driven primarily by an increase in sales.

21

Table of Contents

For the three months ended March 30, 2018, our gross margin increased 40 basis points to 32.1% compared to 31.7% for the three months ended March 31, 2017. The improvement in gross margin was primarily due to improved manufacturing efficiencies and increased volume.

Operating expenses
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018

March 31, 2017
 
Change ($)
 
Change (%)
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
$
8.7

 
$
6.6

 
$
2.1

 
31.8
 %
Research and development
6.2

 
4.5

 
1.7

 
37.8

General and administrative
9.2

 
8.1

 
1.1

 
13.6

Amortization of purchased intangibles
1.6

 
0.7

 
0.9

 
128.6

Fair value adjustment of contingent consideration and acquisition related compensation

 
1.4

 
(1.4
)
 
(100.0
)
Total operating expenses
$
25.7

 
$
21.3

 
$
4.4

 
20.7
 %
Total operating expenses for the three months ended March 30, 2018 increased approximately $4.4 million, or 20.7%, over the same period in 2017. When expressed as a percentage of sales, operating expenses decreased to 19.8% of sales for the three months ended March 30, 2018 compared to 20.1% of sales in the same period in 2017.
Within operating expenses, our sales and marketing expenses increased approximately $2.1 million primarily due to costs incurred at our recently acquired Tuscany subsidiary of $1.4 million, as well as increased spending in our existing business lines to continue to promote our products and grow our brand. Research and development costs increased approximately $1.7 million primarily due to prototype, supplies, and equipment expenses of $0.6 million, headcount costs of $0.6 million, and professional fees of $0.3 million. General and administrative expenses increased by approximately $1.1 million due to higher professional fees of $0.8 million primarily associated with legal costs related to ongoing litigation, tax reform costs, costs related to integration of acquisitions, as well as due to expenses of $0.5 million incurred at Tuscany, offset by various other items.
Amortization of purchased intangible assets for the three months ended March 30, 2018 increased by approximately $0.9 million as compared to the three months ended March 31, 2017. The increase is primarily due to the amortization of customer relationship assets acquired in the Tuscany acquisition.
We incurred $1.4 million in acquisition related compensation in connection with management earn-out arrangements during the three months ended March 31, 2017. Earn-out arrangements were completed during the fiscal year 2017.
Income from operations
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018

March 31, 2017
 
Change ($)
 
Change (%)
Income from operations
$
16.0

 
$
12.4

 
$
3.6

 
29.0
%
As a result of the factors discussed above, income from operations for the three months ended March 30, 2018 increased approximately $3.6 million, or 29.0%, compared to income from operations for the three months ended March 31, 2017.

22

Table of Contents

Other expense, net
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018

March 31, 2017
 
Change ($)
 
Change (%)
Other expense, net:
 
 
 
 
 
 
 
Interest expense
$
0.8

 
$
0.6

 
$
0.2

 
33.3
 %
Other expense
0.3

 
0.5

 
(0.2
)
 
(40.0
)
Other expense, net
$
1.1

 
$
1.1

 
$

 
 %
Other expense, net for the three months ended March 30, 2018 remained relatively unchanged for the three months ended March 30, 2018, compared for the three months ended March 31, 2017.
Income taxes
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018

March 31, 2017
 
Change ($)
 
Change (%)
(Benefit of) provision for income taxes
$
(6.6
)
 
$
0.8

 
$
(7.4
)
 
(925.0
)%
We had an effective tax benefit rate of 44.2% for the three months ended March 30, 2018, compared to an effective tax rate of 6.7% for the three months ended March 31, 2017.
For the three months ended March 30, 2018, the difference between our effective tax benefit rate and the 21% federal statutory rate resulted primarily from a $9.8 million one-time impact of the favorable conclusion of our 2015 U.S. Internal Revenue Service ("IRS") audit and the recognition of related tax positions with respect to the deductibility of amortization and depreciation expense resulting from the acquisition of the Company in 2008. The benefit of the deductions was not recognized in accounting for the acquisition of the Company by our former majority shareholder due to uncertainty about whether the tax position would withstand audit. The results of the audit provided basis for management to conclude that the amortization and depreciation will likely be deductible for all open tax years. In addition, the effective tax rate benefited from lower foreign tax rates, lower effective federal rates on licensing and export activities, research and development credits, and $0.3 million from excess benefits related to stock-based compensation. These benefits were partially offset by state taxes, foreign withholding taxes and the impact of non-deductible expenses.
For the three months ended March 31, 2017, the difference between the our effective tax rate and the 35% federal statutory rate resulted primarily from lower foreign tax rates on permanently reinvested earnings of our foreign subsidiaries and $2.4 million in excess benefits related to stock-based compensation. These benefits were partially offset by state taxes and the impact of non-deductible expenses.
The change in income tax benefit for the three months ended March 30, 2018, as compared to the tax provision to the three months ended March 31, 2017, was primarily a result of the $9.8 million one-time impact of the favorable conclusion of the 2015 IRS audit. Offsetting the audit benefit, excess benefits related to stock-based compensation were $2.1 million lower for the three months ended March 30, 2018 compared to the three months ended March 31, 2017. Additionally, we recorded $0.5 million of incremental tax expense resulting from the 31.8% increase in pre-tax income, which was taxed at a 355 basis point lower blended annual rate for all jurisdictions.

23

Table of Contents

Net income
 
For the three months ended
 
 
 
 
(in millions)
March 30, 2018
 
March 31, 2017
 
Change ($)
 
Change (%)
Net income
$
21.5

 
$
10.5

 
$
11.0

 
104.8
%
As a result of the factors described above, our net income increased $11.0 million, or 104.8%, to $21.5 million in the three months ended March 30, 2018 from $10.5 million for the three months ended March 31, 2017.

Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. Historically, we have generally financed our liquidity needs with operating cash flows and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology. A summary of our operating, investing and financing activities are shown in the following table:
 
For the three months ended
(in thousands)
March 30, 2018
 
March 31, 2017
Net cash provided by operating activities
$
10,965

 
$
9,209

Net cash used in investing activities
(3,975
)
 
(2,780
)
Net cash (used in) provided by financing activities
(20,878
)
 
941

Effect of exchange rate changes on cash
174

 
341

(Decrease) increase in cash and cash equivalents
$
(13,714
)
 
$
7,711

Operating activities
Cash provided by operating activities consists of net income, adjusted for certain non-cash items, primarily depreciation and amortization, stock-based compensation, changes in deferred income taxes, fair value adjustments of our contingent consideration, and net cash invested in working capital.
In the three months ended March 30, 2018, net cash provided by operating activities was $11.0 million and consisted of net income of $21.5 million, less non-cash items totaling $4.4 million and changes in operating assets and liabilities totaling $6.1 million. Non-cash items and other adjustments consisted of depreciation and amortization of $3.5 million, stock-based compensation of $2.0 million, offset by a $9.9 million change in deferred taxes that included $6.4 million related to the recognition of uncertain tax positions upon favorable settlement of our 2015 IRS audit.
Our investment in operating assets and liabilities is a result of an increase in inventory of $6.0 million, decrease in accrued expenses of $4.1 million, decrease in income taxes payable of $3.4 million, and increase in prepaids and other assets of $3.0 million, partially offset by an increase in accounts payable of $5.7 million and a decrease in accounts receivable of $4.7 million. The changes in inventory, accounts payable, accounts receivable and prepaid and other assets are primarily due seasonal impacts on working capital. The decrease in income taxes payable is primarily due to a reduction in accrued withholding taxes and the decrease in accrued expenses was primarily due to a decrease in wage related liabilities.

24

Table of Contents

In the three months ended March 31, 2017, net cash provided by operating activities was $9.2 million and consisted of net income of $10.5 million, less non-cash items totaling $1.8 million, plus changes in operating assets and liabilities totaling $3.1 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $2.4 million and stock-based compensation of $1.9 million, partially offset by deferred taxes of $2.4 million. Our cash generated from operating assets and liabilities is a result of a decrease in accounts receivable of $12.5 million, an increase in accounts payable of $3.5 million and an increase in income taxes payable of $1.8 million, partially offset by a decrease in accrued expenses of $9.4 million and an increase in inventory of $7.5 million. The decrease in accounts receivable reflects slightly lower sales in the first quarter of 2017 relative to the fourth quarter of 2016 as a result of business seasonality, changes in customer mix and improved collections. The increase in inventory and corresponding increase in accounts payable are due to seasonality as we prepare for the peak selling seasons. The decrease in accrued expenses was primarily due to payment of $6.5 million of acquisition related compensation. Additionally, our income tax payable increased primarily due to timing of payments.
Investing activities
Cash used in investing activities relates to investments in our manufacturing and general infrastructure through the procurement of property and equipment and strategic acquisitions.
In the three months ended March 30, 2018 and March 31, 2017, net cash used in investing activities was $4.0 million and $2.8 million, respectively, consisting primarily of purchases of property and equipment.
Financing activities
Cash provided by financing activities primarily relates to changes in our capital structure, including the various forms of debt and equity instruments used to finance our business.
In the three months ended March 30, 2018, net cash used in financing activities was $20.9 million, which consisted of $18.6 million paid on our line of credit and $0.9 million paid on our term debt. In addition, we paid $1.4 million to repurchase shares of our common stock as part of our stock compensation program.
In the three months ended March 31, 2017, net cash provided by financing activities was $0.9 million, which consisted of $1.9 million in proceeds from the exercise of stock options, partially offset by $0.9 million repaid under our Second Amended and Restated Credit Facility.

Second Amended and Restated Credit Facility
In August 2013, we entered into the 2013 Credit Facility with Sun Trust Bank and other named lenders. The 2013 Credit Facility provided a revolving line of credit. On March 31, 2014, in connection with our asset purchase of Sport Truck, we amended and restated the 2013 Credit Facility. The Amended and Restated 2013 Credit Facility provided a maturing secured term loan in the principal amount of $50.0 million, subject to quarterly amortization payments, and extended the term of the 2013 Credit Facility through March 31, 2019. The proceeds of the term loan were used, in part, to fund the acquisition of Sport Truck and to pay down the revolving line of credit provided under the 2013 Credit Facility. On December 12, 2014, we amended the existing Amended and Restated 2013 Credit Facility. The First Amendment increased the term loan by the principal amount of $30.0 million to a total of $56.8 million, subject to quarterly amortization payments, and extended the maturity of the Amended and Restated 2013 Credit Facility through December 12, 2019. The additional proceeds of the term loan made available through the First Amendment were used to partially fund the acquisition of Race Face/Easton. Additional amendments entered into on May 29, 2015 and March 31, 2016, respectively, made minor technical changes to the Amended and Restated 2013 Credit Facility. On May 11, 2016, we amended and restated the existing Amended and Restated 2013 Credit Facility. Further technical amendments were made on August 11, 2016, June 12, 2017 and November 30, 2017 (as most recently amended and restated and as further amended, the "Second Amended and Restated Credit Facility"). The Second Amended and Restated Credit Facility provides a maturing secured term loan in the principal amount of $75.0 million, subject to quarterly amortization payments, increased the availability on the line of credit to $100.0 million, and extended the maturity of the Second Amended and Restated Credit Facility through May 11, 2021.
The Second Amended and Restated Credit Facility is secured by substantially all of our assets, restricts our ability to make certain payments and engage in certain transactions, and also requires that we satisfy customary financial ratios, including a fixed charge coverage ratio of not less than 1.5:1.0 and a leverage ratio of not greater than 3.0:1.0, both ratios calculated as defined in the Second Amended and Restated Credit Facility. Additionally, certain disposal events can trigger prepayments. We were in compliance with the covenants as of March 30, 2018.


25

Table of Contents

Other Commitments

No material contractual obligation has changed since the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2017, as filed with the SEC on February 27, 2018.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Inflation
Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials could have an adverse impact on our business, financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
There have been no material changes to the disclosures discussed in the section “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2017, as filed with the SEC on February 27, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act 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 under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, under the direction and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 30, 2018. Based on the evaluation of our disclosure controls and procedures as of March 30, 2018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

26

Table of Contents

Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("'027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016. That lawsuit alleges patent infringement of U.S Patent number 9,291,250 ("'250 Patent").  The Company believes the lawsuits are without merit and intends to vigorously defend itself.  As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. The PTAB has instituted all of the Company's IPR Petitions and has stayed a third party ex-parte re-exam of SRAM's '027 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. The Company is currently evaluating strategic next steps.
In a separate action the Company filed a lawsuit on January 29, 2016 in the U.S. District Court, Northern District of California against SRAM. That lawsuit alleges SRAM’s infringement of two separate Company owned patents, specifically U.S. Patent numbers 6,135,434 and 6,557,674.  A second lawsuit was filed by the Company on July 1, 2016 in the U.S. District Court, Northern District of California against SRAM alleging infringement of the Company’s U.S. Patent numbers 8,226,172 and 8,974,009. These lawsuits have been moved to U.S. District Court, District of Colorado but are otherwise proceeding.
The SRAM lawsuits against the Company have been stayed by the U.S. District Court, Northern District of Illinois pending a PTAB determination in the Company filed SRAM patent reviews (IPRs).  Recently, the PTAB opined that certain claims of the SRAM ‘027 Patent were not shown to be invalid. However, because additional IPRs of the ‘027 and ‘250 Patents remain pending with the PTAB, SRAM’s lawsuits against the Company in Illinois remain stayed. Meanwhile the Company filed lawsuits have moved forward as scheduled by the courts. Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the consolidated financial statements for the settlement of these matters.  Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, the Company's business, financial condition or results of operations could be materially and adversely affected.
The Company is involved in other legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows.


27

Table of Contents

ITEM 1A. RISK FACTORS

Our business, financial condition, operating results and prospects could be materially and adversely affected by various risks and uncertainties that are described herein. In addition to the risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties described below. If any of these risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline.
Risks related to our business
If we are unable to continue to enhance existing products and develop, manufacture and market new products that respond to consumer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products, and our business and financial results could suffer.
Our growth strategy involves the continuous development of innovative performance products. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers and the end users of our products, unless we can continue to enhance existing products and develop new, innovative products in the global markets in which we compete. In addition, we must continuously compete not only for end users who purchase our products through the dealers and distributors who are our customers, but also for the OEMs, which incorporate our products into their bikes and powered vehicles. These OEMs regularly evaluate our products against those of our competitors to determine if they are allowing the OEMs to achieve higher sales and market share on a cost-effective basis. Should one or more of our OEM customers determine that they could achieve overall better financial results by incorporating a competitor’s new or existing product, they would likely do so, which could harm our business, financial condition or results of operations.
Product development requires significant financial, technological and other resources. While we expended approximately $20.2 million, $18.5 million and $17.0 million for our research and development efforts in 2017, 2016 and 2015, respectively, there can be no assurance that this level of investment in research and development will be sufficient in the future to maintain our competitive advantage in product innovation, which could cause our business, financial condition or results of operations to suffer.
Product improvements and new product introductions require significant planning, design, development and testing at the technological, product and manufacturing process levels, and we may experience unanticipated delays in our introduction of product improvements or new products. Our competitors’ new products may beat our products to market, be more effective and/or less expensive than our products, obtain better market acceptance or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations. In addition, one of our competitors could develop an unforeseen and entirely new product or technology that renders our products less desirable or obsolete, which could negatively affect our business, financial condition or results of operations.
We face intense competition in all product lines, including from some competitors that may have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.
The ride dynamics industry is highly competitive. We compete with a number of other manufacturers that produce and sell ride dynamics products to OEMs and aftermarket dealers and distributors, including OEMs that produce their own lines of products for their own use. Our continued success depends on our ability to continue to compete effectively against our competitors, some of which have significantly greater financial, marketing and other resources than we have. Also, several of our competitors offer broader product lines to OEMs, which they may sell in connection with suspension products as part of a package offering. In the future, our competitors may be able to maintain and grow brand strength and market share more effectively or quickly than we do by anticipating the course of market developments more accurately than we do, developing products that are superior to our products, creating manufacturing or distribution capabilities that are superior to ours, producing similar products at a lower cost than we can or adapting more quickly than we do to new technologies or evolving regulatory, industry or customer requirements, among other possibilities. In addition, we may encounter increased competition if our current competitors broaden their product offerings by beginning to produce additional types of ride dynamics products or through competitor consolidations. We could also face competition from well-capitalized entrants into the performance suspension and ride dynamics product market, as well as aggressive pricing tactics by other manufacturers trying to gain market share. As a result, our products may not be able to compete successfully with our competitors’ products, which could negatively affect our business, financial condition or results of operations.

28

Table of Contents

Our business is sensitive to economic conditions that impact consumer spending. Our suspension and ride dynamics products, and the bike and powered vehicles into which they are incorporated, are discretionary purchases and may be adversely impacted by changes in the economy.
Our business depends substantially on global economic and market conditions. In particular, we believe that currently a significant majority of the end users of our products live in the United States and countries in Europe. These areas are either in the process of recovering from recession or, in some cases, are still struggling with recession, disruption in banking and/or financial systems, economic weakness and uncertainty. In addition, our products are recreational in nature and are generally discretionary purchases by consumers. Consumers are usually more willing to make discretionary purchases during periods of favorable general economic conditions and high consumer confidence. Discretionary spending may also be affected by many other factors, including interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. During periods of unfavorable economic conditions, or periods when other negative market factors exist, consumer discretionary spending is typically reduced, which in turn could reduce our product sales and have a negative effect on our business, financial condition or results of operations.
There could also be a number of secondary effects resulting from an economic downturn, such as insolvency of our suppliers resulting in product delays, an inability of our OEM and distributor and dealer customers to obtain credit to finance purchases of our products, customers delaying payment to us for the purchase of our products due to financial hardship or an increase in bad debt expense. Any of these effects could negatively affect our business, financial condition or results of operations.
If we are unable to maintain our premium brand image, our business may suffer.
Our products are selected by both OEMs and dealers and distributors in part because of the premium brand reputation we hold with them and our end users. Therefore, our success depends on our ability to maintain and build the image of our brands. We have focused on building our brands through producing products or acquiring businesses that produce products that we believe are innovative, high in performance and highly reliable. In addition, our brands benefit from our strong relationships with our OEM customers and dealers and distributors and through marketing programs aimed at bike and powered vehicle enthusiasts in various media and other channels. For example, we sponsor a number of professional athletes and professional race teams. In order to continue to enhance our brand image, we will need to maintain our position in the suspension and ride dynamics products industry and continue to provide high quality products and services. Also, we will need to continue to invest in sponsorships, marketing and public relations.
There can be no assurance, however, that we will be able to maintain or enhance the strength of our brands in the future. Our brands could be adversely impacted by, among other things:
failure to develop new products that are innovative, performance and reliable;
internal product quality control issues;
product quality issues on the bikes and powered vehicles on which our products are installed;
product recalls;
high profile component failures (such as a component failure during a race on a mountain bike ridden by an athlete that we sponsor);
negative publicity regarding our sponsored athletes;
high profile injury or death to one of our sponsored athletes;
inconsistent uses of our brand and our other intellectual property assets, as well as failure to protect our intellectual property; and
changes in consumer trends and perceptions.
Any adverse impact on our brand could in turn negatively affect our business, financial condition or results of operations.

29

Table of Contents

A significant portion of our sales are highly dependent on the demand for high-end bikes and a material decline in the demand for these bikes or their suspension components could have a material adverse effect on our business or results of operations.
During 2017, approximately 52% of our sales were generated from the sale of bike products. Part of our success has been attributable to the growth in the high-end bike industry, including increases in average retail sales prices, as better-performing product designs and technologies have been incorporated into these products. If the popularity of high-end or premium-priced bikes does not increase or declines, the number of bike enthusiasts seeking such bikes or premium-priced suspension products, wheels, cranks and other specialty components for their bikes does not increase or declines, or the average price point of these bikes declines, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected. In addition, if current bike enthusiasts stop purchasing our products due to changes in preferences, we may fail to achieve future growth or our sales could be decreased, and our business, financial condition or results of operations could be negatively affected.
Our growth in the powered vehicle category is dependent upon our continued ability to expand our product sales into powered vehicles that require performance suspension and the continued expansion of the market for these powered vehicles.
Our growth in the powered vehicle category is in part attributable to the expansion of the market for powered vehicles that require performance suspension products. Such market growth includes the creation of new classes of vehicles that need our products, such as Side-by-Sides, and our ability to create products for these vehicles. In the event these markets stopped expanding or contracted, or we are unsuccessful in creating new products for these markets or other competitors successfully enter into these markets, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected.
Changes in our customer, channel and product mix could place more rigorous demands on our infrastructure and cause our profitability percentages to fluctuate.
From time to time, we may experience changes in our customer, channel and product mix from changes in demands from existing customers due to shifts in their products and markets.  Additionally, the Company may pursue new customers and markets.  Such changes in customers, channel and product mix could place more rigorous demands on our infrastructure and supply chain and could result in changes to our profitability and profitability percentages.  If customers begin to require more lower-margin products from us and fewer higher-margin products, or place demands on our performance that increase our costs, our business, results of operations and financial condition may suffer.
A disruption in the operations of our manufacturing facilities could have a negative effect on our business, financial condition or results of operations.
During 2017, we completed the process of moving all of the manufacturing of our bike suspension component products to our facility in Taichung, Taiwan. In connection with this move, we are utilizing, and expect to continue to utilize, suppliers who are located closer to our facility in Taichung, Taiwan for a number of materials and components. With the transition of all of our bike suspension component manufacturing to Taichung, Taiwan, we have converted the Watsonville manufacturing facility to be a powered vehicle suspension products manufacturing location exclusively. In the future, we may move additional manufacturing operations as we re-balance existing facilities or expand to new manufacturing locations. As a result, we have incurred, and may continue to incur, costs associated with some duplication of facilities, equipment and personnel, the amount of which could vary materially from our projections. In addition, we could encounter unforeseen difficulties resulting from the distance and time zone differences between our various facilities.
Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service disruptions, curtailments or shutdowns. In the event of a stoppage in production or a slowdown in production due to high employee turnover or a labor dispute at any of our facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers could be severely affected. If there was a manufacturing disruption in any of our manufacturing facilities, we might be unable to meet product delivery requirements and our business, financial condition or results of operations could be negatively affected, even if the disruption was covered in whole or in part by our business interruption insurance. Any significant delay in deliveries to our customers could lead to increased returns or cancellations, expose us to damage claims from our customers or damage our brand and, in turn, negatively affect our business, financial condition or results of operations.

30

Table of Contents

Work stoppages or other disruptions at seaports could adversely affect our operating results.
A significant portion of our goods move through ports on the Western Coast of the United States. We have a global supply chain and we import products from our third-party vendors as well as our Fox Taiwan facility into the United States largely through ports on the West Coast. Freight arriving at West Coast ports must be offloaded from ships by longshoremen, none of whom are our employees. We do not control the activities of these employees or seaports and we could suffer supply chain disruptions due to any disputes, capacity shortages, slowdowns or shutdowns which may occur, as was experienced in February 2015, in relation to certain West Coast ports. While the West Coast ports labor dispute ended with a five-year agreement, it lasted longer than we forecasted, and any similar labor dispute in the future could potentially have a negative effect on both our financial condition and results of operations.
Our business depends substantially on the continuing efforts of our senior management, and our business may be severely disrupted if we lose their services.
We are heavily dependent upon the contributions, talent and leadership of our senior management team, particularly our Chief Executive Officer, Larry L. Enterline. We do not have a "key person" life insurance policy on Mr. Enterline or any other key employees. We believe that the top eleven members of our senior management team are key to establishing our focus and executing our corporate strategies as they have extensive knowledge of our systems and processes. Given our senior management team’s knowledge of the suspension products industry and the limited number of direct competitors in the industry, we believe that it could be difficult to find replacements should any of the members of our senior management team leave. Our inability to find suitable replacements for any of the members of our senior management team could negatively affect our business, financial condition or results of operations.
We depend on skilled engineers to develop and create our products, and the failure to attract and retain such individuals could adversely affect our business.
We rely on skilled and well-trained engineers for the design and production of our products, as well as in our research and development functions. Competition for such individuals is intense, particularly in Silicon Valley near where our headquarters are located. Our inability to attract or retain qualified employees in our design, production or research and development functions or elsewhere in our Company could result in diminished quality of our products and delinquent production schedules, impede our ability to develop new products and harm our business, financial condition or results of operations.
We may not be able to sustain our past growth or successfully implement our growth strategy, which may have a negative effect on our business, financial condition or results of operations.
We grew our sales from approximately $403.1 million in 2016 to approximately $475.6 million in 2017. This growth rate may be unsustainable. Our future growth will depend upon various factors, including the strength of the image of our brands, our ability to continue to produce innovative suspension and ride dynamics products, consumer acceptance of our products, competitive conditions in the marketplace, our ability to make strategic acquisitions, the growth in emerging markets for products requiring high-end suspension products and, in general, the continued growth of the high-end bike and powered vehicle markets into which we sell our products. Our beliefs regarding the future growth of markets for high-end suspension products are based largely on qualitative judgments and limited sources and may not be reliable. If we are unable to sustain our past growth or successfully implement our growth strategy, our business, financial condition or results of operations could be negatively affected.
The professional athletes and race teams who use our products are an important aspect of the image of our brands. The loss of the support of professional athletes for our products or the inability to attract new professional athletes may harm our business.
If our products are not used by current or future professional athletes and race teams, our brands could lose value and our sales could decline. While our sponsorship agreements typically restrict our sponsored athletes and race teams from promoting, endorsing or using competitors’ products that compete directly within our product categories during the term of the sponsorship agreements, we do not typically have long-term contracts with any of the athletes or race teams whom we sponsor.
If we are unable to maintain our current relationships with these professional athletes and race teams, if these professional athletes and race teams are no longer popular, if our sponsored athletes and race teams fail to have success or if we are unable to continue to attract the endorsement of new professional athletes and race teams in the future, the value of our brands and our sales could decline.

31

Table of Contents

We depend on our relationships with dealers and distributors and their ability to sell and service our products. Any disruption in these relationships could harm our sales.
We sell our aftermarket products to dealers and distributors, and we depend on their willingness and ability to market and sell our products to consumers and provide customer and product service as needed. We also rely on our dealers and distributors to be knowledgeable about our products and their features. If we are not able to educate our dealers and distributors so that they may effectively sell our products as part of a positive buying experience, or if they fail to implement effective retail sales initiatives, focus selling efforts on our competitors’ products, reduce the quantity of our products that they sell or reduce their operations due to financial difficulties or otherwise, our brand and business could suffer.
We do not control our dealers or distributors and many of our contracts allow these entities to offer our competitors’ products. Our competitors may incentivize our dealers and distributors to favor their products. In addition, we do not have long-term contracts with a majority of our dealers and distributors, and our dealers and distributors are not obligated to purchase specified amounts of our products. In fact, the majority of our dealers and distributors buy from us on a purchase order basis. Consequently, with little or no notice, many of these dealers and distributors may terminate their relationships with us or materially reduce their purchases of our products. If we were to lose one or more of our dealers or distributors, we would need to obtain a new dealer or distributor to cover the particular location or product line, which may not be possible on favorable terms or at all.
Alternatively, we could use our own sales force to replace such a dealer or distributor, but expanding our sales force into new locations takes a significant amount of time and resources and may not be successful. Further, many of our international distribution contracts contain exclusivity arrangements, which may prevent us from replacing or supplementing our current distributors under certain circumstances.
We are a supplier in the high-end bike and powered vehicles markets, and our business is dependent in large part on the orders we receive from our OEM customers and from their success.
As a supplier to OEM customers, we are dependent in large part on the success of the business of our OEM customers. Model year changes by our OEM customers may adversely impact our sales or cause our sales to vary from quarter to quarter. In addition, losses in market share individually or a decline in the overall market of our OEM customers or the discontinuance by our OEM customers of their products which incorporate our products could negatively impact our business, financial condition or results of operations. For example, if our bike producing OEM customers reduce production of their high-end bikes, their orders to us for our products would in turn be reduced, which could negatively affect our business, financial condition or results of operations.
A relatively small number of customers account for a substantial portion of our sales. The loss of all or a substantial portion of our sales to any of these customers, whether through the temporary or permanent discontinuation of their products which incorporate our products or otherwise, or the loss of market share by these customers could have a material adverse impact on us and our results of operations.
Sales attributable to our five largest OEM customers, which can vary from year to year, collectively accounted for approximately 32%, 30% and 32% of our sales in fiscal years 2017, 2016 and 2015, respectively. The loss of all or a substantial portion of our sales to any of these OEM customers, whether through the temporary or permanent discontinuation of their products which incorporate our products or otherwise, or the loss of market share by these customers could have a material adverse impact on our business, financial condition or results of operations.
In particular, sales to Giant, an OEM and contract manufacturer used by certain of our bike OEM customers, accounted for approximately 10%, 14% and 12% of our sales in 2017, 2016 and 2015, respectively. In the event Giant were to experience manufacturing or other problems, or were to fail to pay us, it could have a material adverse impact on our business, financial condition or results of operations.

32

Table of Contents

Currency exchange rate fluctuations could impact gross margins and expenses.
Foreign currency fluctuations could in the future have an adverse effect on our business, financial condition or results of operations. We sell our products inside and outside of the United States primarily in U.S. Dollars and New Taiwan Dollars. However, some of the OEMs purchasing products from us sell their products in Europe and other foreign markets using the Euro and other foreign currencies. As a result, as the U.S. Dollar appreciates against these foreign currencies, our products will become relatively more expensive for these OEMs. Accordingly, competitive products that our OEM customers can purchase in other currencies may become more attractive and we could lose sales as these OEMs seek to replace our products with cheaper alternatives. In addition, should the U.S. Dollar depreciate significantly, this could have the effect of decreasing our gross margins and adversely impact our business, financial condition or results of operations.
With a majority of our manufacturing operations for our bike products occurring in Taiwan, a percentage of our sales and expenses are denominated in the New Taiwan Dollar. Should the New Taiwan Dollar appreciate against the U.S. Dollar, this could have the effect of decreasing our sales, increasing our expenses, and decreasing our profitability.
Additionally, with the acquisition of Race Face/Easton in 2014, certain of our operations take place in Canada and a percentage of our sales and expenses are denominated in Canadian Dollars. Our operating profitability could be negatively impacted as a result of changes in the exchange rate between the U.S. Dollar and the Canadian Dollar.
Our international operations are exposed to risks associated with conducting business globally.
As a result of our international presence, we are exposed to increased risks inherent in conducting business outside of the United States. In addition to foreign currency risks, these risks include:
difficulty in transporting materials internationally, including labor disputes at West Coast ports, which handle a large amount of our products;
increased difficulty in protecting our intellectual property rights and trade secrets;
changes in tax laws and the interpretation of those laws;
exposure to local economic conditions;
unexpected government action or changes in legal or regulatory requirements;
geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war and other political uncertainty;
changes in tariffs, quotas, trade barriers and other similar restrictions on sales;
the effects of any anti-American sentiments on our brands or sales of our products;
increased difficulty in ensuring compliance by employees, agents and contractors with our policies as well as with the laws of multiple jurisdictions, including but not limited to the U.S. Foreign Corrupt Practices Act, local international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce;
increased difficulty in controlling and monitoring foreign operations from the United States, including increased difficulty in identifying and recruiting qualified personnel for our foreign operations; and
increased difficulty in staffing and managing foreign operations or international sales.
An adverse change in any of these conditions could have a negative effect upon our business, financial condition or results of operations.
U.S. policies related to global trade and tariffs could have a material adverse effect on our results of operations.
The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. The U.S. recently imposed tariffs of 25 percent on steel and 10 percent on aluminum and during the first quarter, the U.S. Government announced potential tariffs on certain imports from China and suggested additional tariffs could be added at a later date. While we have limited exposure to implemented tariffs at this time, any expansion in the types of tariffs implemented has the potential to negatively impact our gross margin and our operating performance. Additionally, there is a risk that the U.S. tariffs on imports are met with tariffs on U.S. produced exports and that a broader trade conflict could ensue. This has the potential to significantly impact global trade and economic conditions in many of the regions where we do business and have a material adverse effect on our results of operations.

33

Table of Contents

Our sales could be adversely impacted by the disruption or cessation of sales by other bike component manufacturers or if other bike component manufacturers enter into the specialty bike component market.
Most of the bikes incorporating our suspension products also utilize products and components manufactured by other bike component manufacturers. If such component manufacturers were to cease selling their products and components on a standalone basis, their sales are disrupted, or their competitive market position or reputation is diminished, customers could migrate to competitors that sell complementary bike products which we do not sell. Moreover, such bike component manufacturers could begin manufacturing bike suspension products, wheels, or cranks, or bundle their bike components with suspension products, wheels or cranks manufactured by competitors. If any of the foregoing were to occur, our sales could decrease and our business, financial condition or results of operations could suffer.
We have been and may become subject to intellectual property disputes that could cause us to incur significant costs or pay significant damages or that could prohibit us from selling our products.
As we develop new products or attempt to utilize our brands in connection with new products, we seek to avoid infringing the valid patents and other intellectual property rights of our competitors. However, from time to time, third parties have alleged, or may allege in the future, that our products and/or trademarks infringe upon their proprietary rights. We will evaluate any such claims and, where appropriate, may obtain or seek to obtain licenses or other business arrangements. To date, there have been no significant interruptions in our business as a result of any claims of infringement, and we do not hold patent infringement insurance. Any claim, regardless of its merit, could be expensive, time consuming to defend and distract management from our business. Moreover, if our products or brands are found to infringe third-party intellectual property rights, we may be unable to obtain a license to use such technology or associated intellectual property rights on acceptable terms. A court determination that our brands, products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes or preclude our ability to use certain brands. In most circumstances, we are not indemnified for our use of a licensor’s intellectual property, if such intellectual property is found to be infringing. Any of the foregoing results could cause us to redesign our products or defend legal actions, which could cause us to incur substantial costs that could negatively affect our business, financial condition or results of operations.
If we are unable to enforce our intellectual property rights, our reputation and sales could be adversely affected.
Intellectual property is an important component of our business. We patent our proprietary technologies related to vehicle suspension and other products in the U.S. and various foreign patent offices. Additionally, we have registered or have applied for trademarks and service marks with the United States Patent and Trademark Office and a number of foreign countries, including the marks FOX®, FOX RACING SHOX®, RACE FACE® and REDEFINE YOUR LIMITS®, to be utilized with certain goods and services. When appropriate, we may from time to time assert our rights against those who infringe on our patents, trademarks, trade dress, or other intellectual property. We may not, however, be successful in enforcing our patents or asserting trademark, trade name or trade dress protection with respect to our brand names and our product designs, and third parties may seek to oppose or challenge our patents or trademark registrations. Further, these legal efforts may not be successful in reducing sales of suspension products by those infringing. In addition, our pending patent applications may not result in the issuance of patents, and even issued patents may be contested, circumvented or invalidated and may not provide us with proprietary protection or competitive advantages. If our efforts to develop and enforce our intellectual property are unsuccessful, or if a third party misappropriates our rights, this may adversely affect our business, financial condition or results of operations. Additionally, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. Furthermore, other competitors may be able to successfully produce products which imitate certain of our products without infringing upon any of our patents, trademarks or trade dress. The failure to prevent or limit infringements and imitations could have a permanent negative impact on the pricing of our products or reduce our product sales and product margins, even if we are ultimately successful in limiting the distribution of a product that infringes our rights, which in turn may affect our business, financial condition or results of operations.
Although we enter into non-disclosure agreements with employees, OEMs, distributors and others to protect our confidential information and trade secrets, we may be unable to prevent such parties from breaching these agreements with us and using our intellectual property in an unauthorized manner. If our efforts to protect our intellectual property are unsuccessful, or if a third party misappropriates our rights, our business may be adversely affected. Defending our intellectual property rights can be very expensive and time consuming, and there is no assurance that we will be successful.

34

Table of Contents

If we inaccurately forecast demand for our products, we may manufacture insufficient or excess quantities or our manufacturing costs could increase, which could adversely affect our business.
We plan our manufacturing capacity based upon the forecasted demand for our products. In the OEM channel, our forecasts are based in large part on the number of our product specifications for new bikes and powered vehicles and on projections from our OEM customers. In the aftermarket channel, our forecasts are based partially on discussions with our dealers and distributors as well as our own assessment of markets. If we incorrectly forecast demand, we may incur capacity issues in our manufacturing plant and supply chain, increased material costs, increased freight costs, additional overtime, and costs associated with excess inventory, all of which in turn adversely impact our cost of sales and our gross margin. Economic weakness and uncertainty in the United States, Europe and other countries may make accurate forecasting particularly challenging.
In the future, if actual demand for our products exceeds forecasted demand, the margins on our incremental sales in excess of anticipated sales may be lower due to temporary higher costs, which could result in a decrease in our overall margins. While we generally manufacture our products upon receipt of customer orders, if actual demand is less than the forecasted demand for our products and we have already manufactured the products or committed to purchase materials in support of forecasted demand, we could be forced to hold excess inventories. In short, either excess or insufficient production due to inaccurate forecasting could have a negative effect on our business, financial condition or results of operations.
Product recalls, and significant product repair and/or replacement due to product warranty costs and claims have had, and in the future, could have, a material adverse impact on our business.
Unless otherwise required by law, we generally provide a limited warranty for our products for a one or two-year period beginning on: (i) in the case of OEM sales, the date the bike or powered vehicle is purchased from an authorized OEM where our product is incorporated as original equipment on the purchased bike or powered vehicle; or (ii) in the case of aftermarket sales, the date the product is originally purchased from an authorized dealer. From time to time, our customers may negotiate for longer or different warranty coverage. In the ordinary course of business, we incur warranty costs and reserve against such costs in our financial statements. However, there is a risk that we could become aware of an underperforming product and be forced to make adjustments to our warranty reserves or incur costs in excess of these reserves which could adversely affect our results of operations.
Our products and items where our product is incorporated as original equipment on the purchased item are subject to regulation by various agencies, including the National Highway Traffic Safety Administration ("NHTSA"), the U.S. Consumer Product Safety Commission ("CPSC") and similar state and international regulatory authorities. We have had in the past, and may have in the future, recalls (both voluntary and involuntary) of our products or of items that incorporate our products. For example, in October 2016, we initiated a voluntary recall of certain bicycle Float X2 shock absorber products. Most recently, in May 2017, we announced a voluntary recall of approximately 2,460 of FOX's Harley Davidson specific aftermarket motorcycle shock absorbers. In addition to the direct costs related to these or other recalls, in the future, we may be forced to undertake such recalls which could adversely affect our aftermarket and OEM sales if we or our OEM customer do not have a replacement for such recalled product ready in a timely manner. Such recall events could also adversely affect our brand image and have a negative effect on our relationships with our OEMs, sponsored athletes and race teams, or otherwise have a negative effect on our business, financial condition or results of operations.
An adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.
The use of our products by consumers, often under extreme conditions, exposes us to risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result in and could give rise to product liability claims against us, which could adversely affect our brand image or reputation. We have encountered product liability claims in the past and carry product liability insurance to help protect us against the costs of such claims, although our insurance may not be sufficient to cover all losses. Any losses that we may suffer from any product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, financial condition or results of operations.
Our Second Amended and Restated Credit Facility places operating restrictions on us and creates default risks.
The Second Amended and Restated Credit Facility contains covenants that place restrictions on our operating activities. These covenants, among other things, limit our ability to:
pay dividends or make distributions to our stockholders or redeem our stock;
incur additional indebtedness or permit additional encumbrances on our assets; and
make acquisitions or complete mergers or sales of assets, or engage in new businesses.
These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may have a material adverse effect on our business, financial condition or results of operations.

35

Table of Contents

If we are unable to comply with the covenants contained in our Second Amended and Restated Credit Facility, it could constitute an event of default and our lenders could declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable. If we are unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing our credit facility, which constitutes substantially all of our assets.
We will continue to have the ability to incur debt and our levels of debt may affect our operations and our ability to pay the principal of and interest on our debt.
In the future, we and our subsidiaries may be able to incur substantial additional debt from further amendments to the Second Amended and Restated Credit Facility, additional lending sources subject to the restrictions contained in the Second Amended and Restated Credit Facility, or as a result of certain debt instruments similar to those described in our Shelf Registration Statement on Form S-3, which was filed with the SEC in March 2015, and expired in April 2018.
As of March 30, 2018, we had $79.2 million of indebtedness and $78.5 million in revolving credit available to borrow under the Second Amended and Restated Credit Facility. Our ability to borrow under the Second Amended and Restated Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the facility.
Our indebtedness could be costly or have adverse consequences, such as:
requiring us to dedicate a substantial portion of our cash flows from operations to payments on our debt;
limiting our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt obligations and other general corporate requirements;
making us more vulnerable to adverse conditions in the general economy or our industry and to fluctuations in our operating results, including affecting our ability to comply with and maintain any financial tests and ratios required under our indebtedness;
limiting our flexibility to engage in certain transactions or to plan for, or react to, changes in our business and industry;
putting us at a disadvantage compared to competitors that have less relative and/or less restrictive debt; and
subjecting us to additional restrictive financial and other covenants.
If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on existing indebtedness and our creditworthiness generally.
Our outstanding indebtedness under the Second Amended and Restated Credit Facility bears interest at a variable rate, which makes us more vulnerable to increases in interest rates and could cause our interest expense to increase and decrease cash available for operations and other purposes.
Borrowings under our Second Amended and Restated Credit Facility bear interest on a variable rate which increases and decreases based upon changes in the underlying interest rate and/or our leverage ratio. Any such increases in the interest rate or increases of our borrowings under the Second Amended and Restated Credit Facility will increase our interest expense.
As of March 30, 2018, we had $79.2 million of indebtedness, bearing interest at a variable rate, outstanding under the Second Amended and Restated Credit Facility. Recent interest rates in the United States have been at historically low levels, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes. Although from time to time we may enter into agreements to hedge a portion of our interest rate exposure, these agreements may be costly and may not protect against all interest rate fluctuations. Accordingly, we may experience material increases in our interest expense as a result of increases in interest rate levels generally. Based on the $79.2 million of variable interest rate indebtedness that was outstanding as of March 30, 2018, a hypothetical 100 basis point increase or decrease in the interest rate would have resulted in an approximately $0.8 million change to our interest expense for the three months ended March 30, 2018.

36

Table of Contents

Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance.
Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations by reducing the U.S. corporate income tax rate, adopting elements of a territorial tax system, imposing a one-time transition tax (or "deemed repatriation tax") on all undistributed earnings and profits of certain U.S. owned foreign corporations, revising the rules governing net operating losses and the rules governing foreign tax credits, repealing the performance-based compensation exception to the $1 million deduction limit on executive compensation and expanding the scope of employees to whom the limit applies, eliminating the deductibility of certain fringe benefits, permitting immediate expensing of certain capital expenditures, limiting interest deductions, modifying the tax treatment of like kind exchanges, and introducing new anti-base erosion provisions. Many of these changes were effective immediately upon the passage of the legislation, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation of regulations by the Treasury and IRS, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities, or how the changes will be viewed by foreign governments.
Our analysis and interpretation of this legislation is preliminary and ongoing, and the financial statement impact of the elements of tax reform is incomplete. We have asserted permanent reinvestment of the earnings of certain of our foreign subsidiaries since 2016, and discontinued this assertion as a result of the changes in legislation. As a result, we have identified the deemed repatriation tax, the accrual of state income and foreign withholding taxes on unremitted earnings, and certain other changes to U.S. taxation of amounts earned abroad as having an impact on our financial statements. Additionally, the reduction in the U.S. corporate tax rate, the revision of rules governing foreign tax credits, and changes in the rules regarding the sourcing of income are expected to have an impact on our ability to utilize our existing and future foreign tax credits, and, as such, we have provided a partial valuation allowance on these tax assets. A full valuation allowance was avoided primarily due to the decision to implement a prudent and feasible tax planning strategy to restructure business functions such that both U.S. taxable income and foreign sourced income will increase in future years, allowing a portion of the foreign tax credits to be utilized. However, there can be no assurance that we will be able to implement such a plan. Our potential inability to utilize the net book value of our foreign tax credits could have a material impact on our tax provision, net income and cash flows.
There may be other material adverse effects resulting from the legislation that we have not yet identified. While some of the changes made by the tax legislation may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial. We continue to work with our tax advisors to determine the full impact that the recent tax legislation as a whole will have on us.
We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our tax liabilities in the United States and abroad are affected by the amounts we charge in intercompany transactions for inventory, services, licenses, funding and other items. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters, and may assess additional taxes as a result. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.
We are subject to certain risks in our manufacturing and in the testing of our products.
As of March 30, 2018, we employed approximately 1,850 full-time employees worldwide, a large percentage of which work at our manufacturing facilities. Our business involves complex manufacturing processes that can be inherently dangerous. Although we employ safety procedures in the design and operation of our facilities, there is a risk that an accident or death could occur in one of our facilities. Also, prior to the introduction of new products, our employees test the products under rigorous conditions, which involve the risk of injury or death. Any accident could result in manufacturing or product delays, which could negatively affect our business, financial condition or results of operations. The outcome of litigation is difficult to assess or quantify and the cost to defend litigation can be significant. As a result, the costs to defend any action or the potential liability resulting from any such accident or death or arising out of any other litigation, and any negative publicity associated therewith, could have a negative effect on our business, financial condition or results of operations.

37

Table of Contents

We are subject to extensive United States federal and state, foreign and international safety, environmental, employment practices and other government regulations that may require us to incur expenses or modify product offerings in order to maintain compliance with such regulation, which could have a negative effect on our business and results of operations.
We are subject to extensive laws and regulations relating to safety, environmental, and other laws and regulations promulgated by the United States federal and state governments, as well as foreign and international regulatory authorities. Although we believe that our products, policies and processes comply with applicable safety, environmental, and other standards and related regulations, future regulations may require additional safety standards that would require additional expenses and/or modification of product offerings in order to maintain such compliance. Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our business, financial condition or results of operations.
Moreover, certain of our customer contracts require us to comply with the standards of voluntary standard-setting organizations, such as the CPSC, the NHTSA, and the European Committee for Standardization ("CEN"). Failure to comply with the voluntary requirements of such organizations could result in the loss of certain customer contracts, which could have an adverse effect on our business, financial condition or results of operations.
Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions could adversely affect our business.
Certain of our products are subject to extensive statutory and regulatory requirements governing emission and noise, including standards imposed by the EPA, the EU, state regulatory agencies (such as the CARB) and other regulatory agencies around the world. We have made, and continue to make, capital and research expenditures to ensure our certain of our products comply with these emission standards. Developing products to meet numerous changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing  products efficiently for multiple markets complicated and could result in additional costs that may be difficult to recover in certain markets. In some cases, we may be required to develop new products to comply with new regulations, particularly those relating to air emissions. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent emission standards is unpredictable. Any delays in implementation or enforcement could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming necessary later than expected, which in turn could delay, diminish or eliminate the expected return and may adversely affect our business.
Increasing focus on environmental, social and governance responsibility, may impose additional costs on us and expose us to new risks
Regulators, stockholders and other interested constituencies have focused increasingly on the environmental, social and governance practices of companies.  Our customers may require us to implement environmental, social or governance responsibility procedures or standards before they will continue to do business with us. Additionally, we may face reputational challenges in the event our environmental, social or governance responsibility procedures or standards do not meet the standards set by certain constituencies. The occurrence of any of the foregoing could have a material adverse effect on the price of our shares and our business, financial condition and results of operations.
We are subject to employment practice laws and regulations, and as, such are exposed to litigation risks.
We are subject to extensive laws and regulations relating employment practices, including wage and hour, wrongful termination and discrimination. Complying with such laws and regulations, and defending against allegations of our failure to comply (including meritless allegations), can be expensive and time consuming. We believe that our policies and processes comply with applicable employment standards and related regulations, however, we are subject to risks of litigation by employees and others which might involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour violations and employment discrimination, misclassification of independent contractors as employees, wrongful termination and other concerns, which could require additional expenditures.

38

Table of Contents

We are subject to environmental laws and regulation and potential exposure for environmental costs and liabilities.
Our operations, facilities and properties are subject to a variety of foreign, federal, state and local laws and regulations relating to health, safety and the protection of the environment. These environmental laws and regulations include those relating to the use, generation, storage, handling, transportation, treatment and disposal of solid and hazardous materials and wastes, emissions to air, discharges to waters and the investigation and remediation of contamination. Many of these laws impose strict, retroactive, joint and several liability upon owners and operators of properties, including with respect to environmental matters that occurred prior to the time the party became an owner or operator. In addition, we may have liability with respect to third party sites to which we send waste for disposal. Failure to comply with such laws and regulations can result in significant fines, penalties, costs, liabilities or restrictions on operations that could negatively affect our business, financial condition or results of operations. From time to time, we have been involved in administrative or legal proceedings relating to environmental, health or safety matters and have incurred expenditures relating to such matters in the past.
We believe that our operations are in substantial compliance with applicable environmental laws and regulations. However, additional environmental issues relating to presently known or unknown matters could give rise to currently unanticipated investigation, assessment or expenditures. Compliance with more stringent laws or regulations, as well as different interpretations of existing laws, more vigorous enforcement by regulators or unanticipated events, could require additional expenditures that may materially affect our business, financial condition or results of operations.
Federal, state, local, foreign and international laws and regulations relating to land-use, and noise and air pollution may have a negative impact on our future sales and results of operations.
The products in our powered vehicles line are used in vehicles which are subject to numerous federal, state, local, foreign and international laws and regulations relating to noise and air pollution. Powered vehicles, and even bikes, have become subject to laws and regulations prohibiting their use on certain lands and trails. For example, in San Mateo County, California, mountain bikes are not allowed on county trails, and ATV and Side-by-Side riding is not allowed in Zion National Park, among many other national and state parks. In addition, recreational snowmobiling has been restricted in some national parks and federal lands in Canada, the United States and other countries. If more of these laws and regulations are passed and the users of our products lose convenient locations to ride their mountain bikes and powered vehicles, our sales could decrease and our business, financial condition or results of operations could suffer.
Fuel shortages, or high prices for fuel, could have a negative effect on the use of powered vehicles that use our products.
Gasoline or diesel fuel is required for the operation of the powered vehicles that use our products. There can be no assurance that the supply of these fuels will continue uninterrupted, that rationing will not be imposed or that the price of or tax on these petroleum products will not significantly increase in the future. Future shortages of gasoline and diesel fuel and substantial increases in the price of fuel could have a material adverse effect on our powered vehicle product category, which could have a negative effect on our business, financial condition or results of operations.
We do not control our suppliers, OEMs, other customers or partners, or require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.
We do not control our suppliers, OEMs, other customers or partners, or their labor, environmental or other practices. A violation of labor, environmental, intellectual property or other laws by our suppliers, OEMs, other customers or partners, or a failure of these parties to follow generally accepted ethical business practices, could create negative publicity and harm our reputation. In addition, we may be required to seek alternative suppliers or partners if these violations or failures were to occur. We do not inspect or audit compliance of our suppliers, OEMs, customers or partners with these laws or practices, and we do not require our suppliers, OEMs, customers or partners such to comply with a formal code of conduct. Any conduct or actions that our suppliers could take could reduce demand for our products, harm our ability to meet demand or harm our reputation, brand image, business, financial condition or results of operations.

39

Table of Contents

We depend on a limited number of suppliers for our materials and component parts for some of our products, and the loss of any of these suppliers or an increase in cost of raw materials could harm our business.
We depend on a limited number of suppliers for certain components. If our current suppliers, in particular the minority of those which are "single-source" suppliers, are unable to timely fulfill orders, or if we are required to transition to other suppliers, we could experience significant production delays or disruption to our business. We define a single-source supplier as a supplier from which we purchase all of a particular raw material or input used in our manufacturing operations, although other suppliers are available from which to purchase the same raw material or input or an equivalent substitute. We do not maintain long-term supply contracts with any of our suppliers and instead purchase these components on a purchase order basis. As a result, we cannot force any supplier to sell us the necessary components we use in creating our products and we could face significant supply disruptions should they refuse to do so. As the majority of our bike component manufacturing occurs in Taiwan, we could experience difficulties locating qualified suppliers geographically located closer to these facilities. Furthermore, such suppliers could experience difficulties in providing us with some or all of the materials we require, which could result in disruptions in our manufacturing operations. If we experience difficulties with our suppliers or manufacturing delays caused by our suppliers, whether in connection with our manufacturing operations in the United States or in Taiwan, our business, financial condition or results of operations could be materially and adversely impacted.
We also purchase various raw materials in order to manufacture our products. The main commodity items purchased for production include aluminum, magnesium, steel and carbon. Historically, price fluctuations for these components and raw materials have not had a material impact on our business. In the future, however, if we experience material increases in the price of components or raw materials and are unable to pass on those increases to our customers, or there are shortages in the availability of such component parts or raw materials, it could negatively affect our business, financial condition or results of operations.
In addition to our various single-source suppliers, we also rely on one "sole-source" supplier, Miyaki Corporation, or Miyaki. We define a sole-source supplier as a supplier of a raw material or input for which there is no other supplier of the same product or an equivalent substitute. Miyaki is the exclusive producer of the Kashima coating for our suspension component tubes. As part of our agreement with Miyaki, we have been granted the exclusive right to use the trademark "KASHIMACOAT" on products comprising the aluminum finished parts for suspension components (e.g., tubes) and on related sales and marketing material worldwide, subject to certain exclusions. Although we believe we could obtain other coatings of comparable utility from other sources if necessary, we could no longer obtain this specific Kashima coating or use the trademark "KASHIMACOAT" if Miyaki were to stop supplying us with this coating. The need to replace the Kashima coating could temporarily disrupt our business and harm our business, financial condition or results of operations.
Regulations related to conflict minerals may force us to continue to incur additional expenses and otherwise adversely impact our business.
The SEC rules regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies require ongoing due diligence to determine whether such minerals originated from the Democratic Republic of Congo ("DRC"), or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. As a public company, we are required to comply with the reporting obligations annually. There are costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals in our products. The effect of such rules on customer, supplier and/or consumer behavior could adversely affect the sourcing, supply and pricing of materials used in our products. As a result, we may also incur costs with respect to potential changes to products, processes or sources of supply. We may face disqualification as a supplier for customers and reputational challenges if our due diligence procedures do not enable us to verify the origins for all conflict minerals used in our products or to determine if such conflict minerals are conflict-free. Accordingly, these rules could have a material adverse effect on our business, results of operations or financial condition.
The transition of all of the manufacturing of our bike suspension component products to our facility in Taiwan may negatively impact our brand image and consumer loyalty, which in turn could have a material adverse impact on our business and results of operations.
During 2017, we completed the process of moving all of the manufacturing of our bike suspension component products to our facility in Taichung, Taiwan. In connection with this move, we are utilizing, and expect to continue to utilize, suppliers who are located closer to our facility in Taichung, Taiwan for a number of materials and components. With the transition of all of our bike suspension component manufacturing to Taichung, Taiwan, we have converted the Watsonville manufacturing facility to be a powered vehicle suspension products manufacturing location exclusively. No assurances can be given that consumers will not be adversely influenced by the fact that such products will no longer be manufactured in the United States or that consumers and OEM customers may not otherwise perceive that the quality of our products is lowered as a result of the fact that the majority are manufactured overseas. Such perceptions could adversely impact our business, financial condition or results of operations.

40

Table of Contents

We may incur higher employee costs in the future.
We are subject to government mandated wage and benefit laws and regulations in many varying countries and jurisdictions. For example, the State of California, where a substantial number of our employees are located, has passed legislation designed to raise the statewide minimum wage gradually until it reaches $15.00 per hour in 2022. Under the new California law, signed on April 4, 2016, the minimum wage increased to $11.00 per hour effective January 1, 2018, and will gradually increase each calendar year through January 1, 2022, when it will reach $15.00 per hour. As we expand internationally, we are also subject to applicable laws in each such jurisdiction. Increases in the mandated wage in any or all of the jurisdictions in which we operate could subject us to increased costs, thereby impacting our business, financial condition, or results of operations.
We maintain a self-insured healthcare plan for our employees based in the United States. We have insurance coverage in place for individual claims above a specified amount in any year. Inflation in healthcare costs, as well as additional costs we may incur as a result of current or future federal or state healthcare legislation and regulations, could significantly increase our employee healthcare costs in the future. Continued increases in our employee costs could adversely affect our earnings, financial condition and liquidity.
We rely on increasingly complex information systems for management of our manufacturing, distribution, sales and other functions. If our information systems fail to perform these functions adequately or if we experience an interruption in our operations, our business could suffer.
All of our major operations, including manufacturing, distribution, sales and accounting, are dependent upon our complex information systems. Our information systems are vulnerable to damage or interruption from, among other things:
earthquake, fire, flood, hurricane and other natural disasters;
power loss, computer systems failure, internet and telecommunications or data network failure; and
hackers, computer viruses, software bugs or glitches.
Any damage or significant disruption in the operation of such systems or the failure of our information systems to perform as expected could disrupt our operations, reduce our efficiency, delay our fulfillment of customer orders or require significant unanticipated expenditures to correct, and thereby have a negative effect on our business, financial condition or results of operations.
In May 2015, we began the process of implementing a global enterprise resource planning system ("ERP"). The pilot phase of the new ERP was completed in fiscal year 2016. Remaining operations will be phased in over the next few fiscal years. ERP implementations are complex and time consuming projects that involve substantial expenditures on system software and implementation activities. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations. Our business and results of operations may be adversely affected if we experience operating problems or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect.
Additionally, if we do not effectively implement the ERP system as planned or the system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected.
We could be negatively impacted by cybersecurity attacks.
We use a variety of information technology systems in the ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cyber-attacks, including cyber-attacks to our information technology infrastructure and attempts by others to gain access to our propriety or sensitive information, and ranging from individual attempts to advanced persistent threats. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential customer, supplier or employee information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage, which could materially adversely affect our financial condition, business or results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means.
Additionally, security breaches could result in a violation of applicable U.S. and international privacy and other laws and subject us to governmental investigations and proceedings, which could result in our exposure to material civil or criminal liability. For example, the European Union adopted a new regulation that becomes effective in May 2018, called the General Data Protection Regulation (“GDPR”). GDPR requires companies to meet new requirements regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet GDPR requirements could result in financial penalties.

41

Table of Contents

Our operations may be impaired if our information technology systems fail to perform adequately or if they are the subject of a data breach or cyber-attack.
Information technology systems are critically important to operating our business. We rely on information technology systems to manage business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of any of the information technology systems to perform as anticipated could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, which could materially adversely affect our business, financial condition, or results of operations.
We have grown and may continue to grow in the future through acquisitions. Growth by acquisitions involves risks and we may not be able to effectively integrate businesses we acquire or we may not be able to identify or consummate any future acquisitions on favorable terms, or at all.
We intend to selectively evaluate additional acquisitions in the future. Any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our business, financial condition or results of operations. These risks include the inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be spread out in different geographic regions), the inability to achieve anticipated cost savings or operating synergies, the earn-outs we may contractually obligate ourselves to pay, and the risk we may not be able to effectively manage our operations at an increased scale of operations resulting from such acquisitions. In the event we do complete acquisitions in the future, such acquisitions could affect our cash flows and net income as we expend funds, increase indebtedness and incur additional expenses in connection with pursuing acquisitions. We may also issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. We may not be able to identify or consummate any future acquisitions on favorable terms, or at all.
Our operating results are subject to quarterly variations in our sales, which could make our operating results difficult to predict and could adversely affect the price of our common stock.
We have experienced, and expect to continue to experience, substantial quarterly variations in our sales and net income. Our quarterly results of operations fluctuate, in some cases significantly, as a result of a variety of other factors, including, among other things:
the timing of new product releases or other significant announcements by us or our competitors;
new advertising initiatives;
fluctuations in raw materials and component costs; and
changes in our practices with respect to building inventory.
As a result of these quarterly fluctuations, comparisons of our operating results between different quarters within a single year are not necessarily meaningful and may not be accurate indicators of our future performance. Any future quarterly fluctuations that we report may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly. We also believe that the seasonal nature of our business may have been overshadowed throughout the past few years due to the rapid growth in sales we have experienced during those periods.
Our beliefs regarding the future growth of the performance suspension and ride dynamics product market are supported by qualitative data and limited sources and may not be reliable. A reduction or lack of continued growth in the popularity of high-end bikes, bikes or powered vehicles or in the number of consumers who are willing to pay premium prices for well-designed performance-oriented equipment in the markets in which we sell our products could adversely affect our product sales and profits, financial condition or results of operations.
We generate virtually all of our revenues from sales of performance suspension and ride dynamics products. Our beliefs regarding the outlook of the performance suspension product market come from qualitative data and limited sources, which may not be reliable. If our beliefs regarding the opportunities in the market for our products are incorrect or the number of consumers who we believe are willing to pay premium prices for well-designed, performance-oriented equipment in the markets in which we sell our products does not increase, or declines, we may fail to achieve future growth and our business, financial condition or results of operations could be negatively affected.

42

Table of Contents

Failure of our internal control over financial reporting could adversely affect our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act"). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
Risks related to ownership of our common stock
The trading price of our common stock may be volatile, and you might not be able to sell your shares at or above the price you pay for the shares.
The trading price of our common stock could be volatile, and you could lose all or part of your investment in our common stock. Since our IPO in 2013, our stock price has fluctuated between $46.80 and $13.35 per share and such volatility may continue in the future. Factors affecting the trading price of our common stock could include:
variations in our operating results or those of our competitors;
new product or other significant announcements by us or our competitors;
changes in our product mix;
changes in consumer preferences;
fluctuations in currency exchange rates;
the gain or loss of significant customers;
recruitment or departure of key personnel;
changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;
changes in general economic conditions as well as conditions affecting our industry in particular; and
sales of our common stock by us, our significant stockholders or our directors or executive officers.
In addition, in recent years, the stock market has experienced significant price fluctuations. Fluctuations in the stock market generally or with respect to companies in our industry could cause the trading price of our common stock to fluctuate for reasons unrelated to our business, operating results or financial condition. Further, some companies that have had volatile market prices for their securities have had securities class actions filed against them. A lawsuit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management’s attention.
Future issuances and sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.
The issuance of additional shares of our common stock could dilute the ownership interest of our common stockholders and could depress the market price of shares of our common stock.
Our Amended and Restated Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, 37,656,314 of which shares were outstanding as of March 30, 2018. In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisitions, registration statements or otherwise.
After our IPO, we filed a registration statement under the Securities Act to register shares of our common stock that we may issue under our equity plans. As a result, all such shares can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.
We also have a number of institutional stockholders that own significant blocks of our common stock. If one or more of these stockholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing price of shares of our common stock could be negatively affected.

43

Table of Contents

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business or our industry, our stock price would likely decline. If one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our Company.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws (together, our "Charter Documents"), as well as Delaware law, contain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, these provisions:
authorize the issuance of "blank check" preferred stock that could be issued by our Board of Directors to discourage a takeover attempt;
establish a classified Board of Directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
require that directors be removed from office only for cause;
provide that vacancies on our Board of Directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
provide that no action be taken by stockholders by written consent;
provide that special meetings of our stockholders may be called only by our Board of Directors, our Chairperson of the Board of Directors, our Lead Director (if we do not have a Chairperson or the Chairperson is disabled), our Chief Executive Officer or our President (in the absence of a Chief Executive Officer);
require supermajority stockholder voting for our stockholders to effect certain amendments to our Charter Documents; and
establish advance notice requirements for nominations for elections to our Board of Directors or for proposing other matters that can be acted upon by stockholders at stockholder meetings.
In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware ("DGCL"), which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with a stockholder owning 15% or more of such corporation’s outstanding voting stock for a period of three years following the date on which such stockholder became an "interested" stockholder. In order for us to consummate a business combination with an interested stockholder within three years of the date on which the stockholder became interested, either: (i) the business combination or the transaction that resulted in the stockholder becoming interested must be approved by our Board of Directors prior to the date the stockholder became interested; (ii) the interested stockholder must own at least 85% of our outstanding voting stock at the time the transaction commences (excluding voting stock owned by directors who are also officers and certain employee stock plans); or (iii) the business combination must be approved by our Board of Directors and authorized by at least two-thirds of our stockholders (excluding the interested stockholder) at a special or annual meeting (not by written consent). This provision could have the effect of delaying or preventing a change in control, whether or not it is desired by or beneficial to our stockholders. Any delay or prevention of a change in control transaction or changes in our Board of Directors and management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares of our common stock.

44

Table of Contents

Our Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our Amended and Restated Certificate of Incorporation provides that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of our Company owed to us or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our Charter Documents; (iv) any action to interpret, apply, enforce or determine the validity of our Charter Documents; or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains the details related to the repurchase of common stock based on the date of trade during the quarter ended March 30, 2018:
Period
 
Total Number of Shares Purchased (1)
 
Weighted Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
12/30 - 2/2
 

 
$

 

2/3 - 3/2
 
35,583

 
$
38.65

 

3/3 - 3/30
 

 
$

 

Total
 
35,583

 
$
38.65

 

 
 
 
 
 
 
 
(1) Includes shares acquired from holders of restricted stock unit awards to satisfy tax withholding obligations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

45

Table of Contents

ITEM 5. OTHER INFORMATION

On May 1, 2018, the Company entered into a new Employment Agreement with Wesley Allinger in connection with his appointment to the new role of Executive Vice President, Cycling Business Unit, Specialty Sports Group of the Company. Mr. Allinger’s new employment agreement (the “Employment Agreement”) provides for a base salary of $280,000. Additionally, Mr. Allinger is eligible to receive a cash bonus comprised of three parts: (i) a bonus based on the achievement of Company EBITDA targets (the “Company Performance Bonus”), (ii) a bonus based on the achievement of EBITDA targets of the Specialty Sports Group (the “Group Performance Bonus”) and (iii) a discretionary component based on the achievement of individual performance objectives (the “Rating Bonus”, and collectively with the Company Performance Bonus and the Group Performance Bonus, the “Cash Bonus”). Mr. Allinger is eligible to receive a Company Performance Bonus ranging from 0% to 18% of his annual base salary based on the achievement of certain EBITDA targets of the Company as provided for in the Employment Agreement. Mr. Allinger is eligible to receive a Group Performance Bonus ranging from 0% to 30% of his annual base salary based on the achievement of certain EBITDA targets of the Specialty Sports Group as provided for in the Employment Agreement. Finally, Mr. Allinger is eligible to receive a Rating Bonus ranging from 0% to 12% of his annual base salary based on his achievement of individual performance measures. Further, Mr. Allinger is eligible to receive equity awards in accordance with the Company’s 2013 Omnibus Plan, as amended. In addition to base salary, a Cash Bonus and equity awards, the Employment Agreement provides for paid time off and the ability to participate in the Company’s employee benefit plans on the same terms as other similarly situated executive officers.

Mr. Allinger’s Employment Agreement also provides him with certain payments and benefits upon termination of his employment under certain circumstances. Specifically, under the terms of the Employment Agreement, in the event that he resigns without “Good Reason” (as defined in the Employment Agreement), or his employment terminates due to mutual agreement, death, disability, or for “Cause” (as defined in the Employment Agreement), Mr. Allinger is entitled to receive the following payments and compensation: (i) accrued and unpaid annual base salary for services rendered prior to the date of termination or resignation, and (ii) reimbursement of any un-reimbursed business expenses as of the date of termination or resignation. In addition, in the event of termination of Mr. Allinger’s employment due to his death or disability, he would also be entitled to receive a pro rata lump sum cash payment of his Cash Bonus (which he would have earned under the Employment Agreement if employed for the entire fiscal year in which such termination occurs, and payable during the year the applicable audited financial statements become available). In the event Mr. Allinger’s employment is terminated for any reason other than death, disability, or for “Cause,” or if Mr. Allinger resigns for “Good Reason,” he is entitled, provided he executes a release in favor of the Company, to receive the following payments and compensation: (i) accrued and unpaid annual base salary for services rendered prior to the date of termination or resignation; (ii) reimbursement of any un-reimbursed business expenses as of the date of termination or resignation; (iii) severance in an amount equal to his annual base salary as of the date of termination, unless his base salary was reduced in such a way as to trigger a “Good Reason” resignation, in which case the severance amount will be equal to his annual base salary prior to such reduction, provided that such severance amount is greater than his base salary at termination, payable in 12 substantially equal payments following execution of a release; (iv) a pro rata payment of his Cash Bonus; and (v) continued Company sharing in the cost of health care insurance during the period Mr. Allinger receives severance.


46

Table of Contents



ITEM 6. EXHIBITS
 
 
Incorporated by Reference
 
Exhibit Number
Exhibit Description
Form
File No.
Filing Date
Filed Herewith
 
 
 
 
 
 
Amended and Restated Certificate of Incorporation
10-Q
001-36040
September 19, 2013
 
 
 
 
 
 
 
Amended and Restated Bylaws
10-Q
001-36040
September 19, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Employment Agreement, dated May 1, 2018, by and between Fox Factory, Inc. and Wes Allinger
 
 
 
X
 
 
 
 
 
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
 
 
 
X
 
 
 
 
 
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
 
 
 
X
 
 
 
 
 
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
 
 
 
X
 
 
 
 
 
 
101.INS
XBRL Instance Document
 
 
 
X
 
 
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
 
X
 
 
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
X
 
 
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
 
X
 
 
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
 
X
 
 
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
X
    
*
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.



47

Table of Contents


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
FOX FACTORY HOLDING CORP.
 
 
 
 
By:
/s/ Zvi Glasman
May 2, 2018
 
Zvi Glasman, Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)

48
(Back To Top)

Section 2: EX-10.1 (EXHIBIT 10.1 ALLINGER EMPLOYMENT AGREEMENT)

Exhibit



FOX FACTORY, Inc.
EMPLOYMENT AGREEMENT
(Wes Allinger)

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is executed on May 1, 2018 (the “Effective Date”), between Fox Factory, Inc., a California corporation (the “Company”), and Wes Allinger (“Executive”).
In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.
Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company (or, as applicable, a Subsidiary of the Company), upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 4 hereof. The employment relationship between Executive and the Company and any Subsidiary shall at all times be “at-will.” This means that the employment relationship is at the “will” of Executive and the Company and either Executive or the Company may elect to terminate the employment relationship at any time, for no particular reason or cause, upon notice to the other (including, if applicable, any notice required by Section 4(a) (v) or (vi) below), without further obligation to one another except as provided herein.

2.
Position and Duties.

a.
Executive shall serve as the Executive Vice President, Cycling Business Unit, Specialty Sports Group of the Company (such “Group” being also referred to herein as the ”Group”) and shall have the normal duties, responsibilities, functions and authority customarily associated with such position and such other duties and responsibilities as may be assigned from time to time to Executive by the President, Specialty Sports Group, the Company’s Chief Executive Officer, Board of Directors (the “Board”) and Executive Committee of the Board (the “Executive Committee”) to expand or limit such duties, responsibilities, functions and authority and to overrule actions of officers of the Company.

b.
Executive shall report to the Company’s President, Specialty Sports Group and Executive shall devote Executive’s full-time energies and attention to the business and affairs of the Company and its Subsidiaries. Executive shall perform Executive’s duties, responsibilities and functions to the Company and its Subsidiaries hereunder in a diligent, trustworthy, professional, ethical and efficient manner and shall comply with the policies and procedures of the Company and its Subsidiaries and will cooperate fully with the Board in the advancement of the best interests of the Company. So long as Executive is employed by the Company or any Subsidiary, Executive shall not, except as provided herein or without the prior written consent of the Board, render to any other person, corporation, firm, company, joint venture or other entity any services of any kind for compensation, or engage in any other activity, that would compete with the Company or its Subsidiaries, and/or interfere with the performance of Executive’s duties for the Company and its Subsidiaries. Notwithstanding, Executive may engage in charitable, civic, fraternal and trade association activities that do not interfere materially with Executive’s obligations to the Company or any Subsidiary. Further, nothing in this Agreement shall limit Executive’s ability to: (i) serve as a member of any board of directors for any non-profit organization, so long as such membership does not interfere materially or conflict with Executive’s obligations to the Company or any Subsidiary; or (ii) as otherwise agreed by the Board in writing. Executive represents and warrants that Executive does not now, and will not during the Term of employment hereunder, have any financial interest in any competitor, supplier or customer of the Company or its Subsidiaries; provided that passive ownership (i.e., Executive does not directly or indirectly participate in the business or management of the applicable entity) of less than 5% of the stock of a publicly-held corporation whose stock is traded on a national securities exchange shall not be deemed to be a financial interest in a competitor, supplier or customer of the Company or its Subsidiaries.

c.
For purposes of this Agreement, “Subsidiary” shall mean any corporation or other entity of which the securities or other ownership interests having the voting power to elect a majority of the board of directors or other governing body are, now or hereafter, owned directly or indirectly by the Company.

d.
For purposes of this Agreement, “Section 409A” shall mean Section 409A of the Internal Revenue Code of 1986, as amended, and the final regulations issued thereunder.

3.
Compensation and Benefits.






a.
Base Salary. Executive’s base salary shall be $280,000 per annum (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. The Base Salary will be reviewed on an annual basis by the Compensation Committee of the Board (the “Compensation Committee") and may be increased (or decreased as part of substantially similar reductions applicable to all executives) from time to time, at the discretion of the Compensation Committee.

b.
Performance Bonus (40.0% Target). Beginning with the fiscal year ending December 28, 2018, Executive will be eligible to receive a bonus (the “Performance Bonus”) based on three levels: minimum, target and maximum. The bonus for Executive at each level will be comprised of an objective component based on the achievement of (i) Company EBITDA targets (the “Company EBITDA Bonus”) and (ii) the EBITDA targets of the Group (the “Group EBITDA Bonus”), and (iii) a discretionary component based on the achievement of individual performance objectives (the “Individual Performance Rating Criteria”) established by the Chief Executive Officer (the “Rating Bonus”). The term “Executive’s Base Salary” means Executive’s actual Base Salary, exclusive of any other compensation received by Executive regardless of form, in effect as of the date the Performance Bonus is calculated. The term “EBITDA” means the earnings before interest, taxes, depreciation and amortization of the Company on a consolidated basis, calculated in accordance with generally accepted accounting principles utilized in determining the Target EBITDA (as defined below) and applied on a consistent basis (or in the case of determining the Group’s EBITDA, the portion of EBITDA attributable to the Group and calculated in accordance with the generally accepted accounting principles used in determining Group Target EBITDA (as defined below) and applied on a consistent basis). Furthermore, non-operating income, currency translation impact, gains and losses attributable to the disposal of Company and/or its Subsidiaries’ assets, and stock compensation expenses shall be excluded from the calculation of EBITDA in accordance with generally accepted accounting principles. Additionally, from time to time the Compensation Committee, in its sole discretion, may elect to exclude other non-recurring expenses from the calculation of EBITDA. All determinations of EBITDA shall be derived from the Company’s annual audited financial statements and determined by the Compensation Committee, whose determination shall be conclusive and final. Each Performance Bonus under this Section 3(b) shall be paid in cash, in a lump sum, within the same calendar year in which the Company receives its audited financials for such fiscal year.

i.
Minimum Target. If, for a particular year, the Company’s EBITDA for the year is less than Target EBITDA (as defined below) but equals or exceeds 90% of Target EBITDA, then Executive’s EBITDA Bonus shall be equal to the product of (A) 6.0% plus the product of .60% times each full one percentage point positive variance to 90% of Target EBITDA, times (B) Executive’s Base Salary. For example, if actual EBITDA is 97.6% of Target EBITDA, then Executive’s EBITDA Bonus shall be equal to 10.2% times Executive’s Base Salary (6.0% + (.60% x 7) = 10.2%). For clarity, if EBITDA is under 90% of Target EBITDA, then Executive shall not receive any bonus based on EBITDA.    

ii.
Target Level. If, for a particular year, the Company’s EBITDA for the year is more than Target EBITDA but less than 110% of Target EBITDA, then Executive’s EBITDA Bonus shall be equal to the product of (A) 12.0% plus the product of .60% times each full one percentage point positive variance to Target EBITDA, times (B) Executive’s Base Salary. For example, if actual EBITDA is 107.6% of Target EBITDA, then Executive’s EBITDA Bonus shall be equal to 16.2% times Executive’s Base Salary (12.0% + (.60% x 7) = 16.2%).

iii.
Maximum Target. If, for a particular year, the Company’s EBITDA for the year equals or exceeds 110% of Target EBITDA, then Executive’s EBITDA Bonus shall be equal to (A) 18.0% times (B) Executive’s Base Salary.

iv.
Group Minimum Target. If, for a particular year, the Group’s EBITDA for the year is less than the Group Target EBITDA but equals or exceeds 90% of the Group Target EBITDA, then Executive’s Group EBITDA Bonus shall be equal to the product of (i) 10.0% plus the product of 1.0% times each full one percentage point positive variance to 90% of the Group Target EBITDA, times (ii) Executive’s Base Salary. For example, if the Group’s actual EBITDA is 97.6% of the Group Target EBITDA, then Executive’s Group EBITDA Bonus shall be equal to 17.0% times Executive’s Base Salary (10.0% + (1.0% x 7) = 17.0%). For clarity, if the Group’s EBITDA is under 90% of the Group’s Target EBITDA, then Executive shall not receive any bonus based on the Group EBITDA.






v.
Group Target Level. If, for a particular year, the Group’s EBITDA for the year is more than the Group Target EBITDA but less than 110% of the Group Target EBITDA, then Executive’s Group EBITDA Bonus shall be equal to the product of (i) 20.0% plus the product of 1.0% times each full one percentage point positive variance to the Group Target EBITDA, times (ii) Executive’s Base Salary. For example, if the Group’s actual EBITDA is 107.6% of the Group Target EBITDA, then Executive’s Group EBITDA Bonus shall be equal to 27.0% times Executive’s Base Salary (20.0% + (1.0% x 7) = 27.0%).

vi.
Group Maximum Target. If, for a particular year, the Group’s EBITDA for the year equals or exceeds 110% of the Group Target EBITDA, then Executive’s Group EBITDA Bonus shall be equal to (i) 30.0% times (ii) Executive’s Base Salary.

vii.
Rating Bonus. If, for a particular year, the Company’s EBITDA for the year equals or exceeds 90% of Target EBITDA (for clarity, if EBITDA is under 90% then Rating Bonus will not be considered or awarded), then if the Compensation Committee determines, in its sole discretion, that Executive achieved an Individual Rating Criteria as set forth in the chart below, then the Compensation Committee shall further determine the corresponding Rating Bonus percentage based on the chart below. For example, if the Compensation Committee so determines that Executive’s achievement of the Individual Rating Criteria was a 6.00, then Executive’s Rating Bonus shall be equal to 4.0% of the Executive’s Base Salary. If the Compensation Committee so determines that Executive’s achievement of the Individual Rating Criteria was a 7.50, then Executive’s Rating Bonus shall be equal to 8.0% of the Executive’s Base Salary. If the Compensation Committee so determines that Executive’s achievement of the Individual Rating Criteria was a 9.00, then Executive’s Rating Bonus shall be equal to 12.0% of the Executive’s Base Salary. The Compensation Committee may, in its sole discretion, determine that Executive’s Rating Bonus exceed that indicated by Executive’s Individual Rating Criteria.
Individual Rating
Rating Bonus (percent)
6.00 - 6.49
4%
6.50 - 6.99
6%
7.00 - 7.49
7%
7.50 - 7.99 (Target)
8%
8.00 - 8.49
9%
8.50 - 8.99
10%
9.00 +
12%

viii.
Definitions of Company Target EBITDA and Group Target EBITDA. For purposes of this Agreement, "Company Target EBITDA" means, for each fiscal year, the EBITDA set forth in the operating budget of the Company, as approved by the Board, for the particular year and "Group Target EBITDA" means, for each fiscal year, the Specialty Sports Group EBITDA set forth in the operating budget of the Company, as approved by the Board, for the particular year.

ix.
2018 Performance Bonus Pro-Rated.  Executive’s Performance Bonus shall be pro-rated for the fiscal year ending December 28, 2018 by multiplying (A) the bonus Executive would otherwise have received if Executive had been an employee for the entire fiscal year by (B) a fraction, the numerator of which is the number of days from (and including) the Effective Date through (and including) December 28, 2018, and the denominator of which is 365. To clarify for the 2018 Fiscal Year, if Executive is employed through December 28, 2018 (FY 2018 End), Executive’s total 2018 Performance Bonus will be calculated as follows: 33.0% of the Executive’s Performance Bonus will be calculated under Executive’s prior Agreement and 67.0% of the Executive’s Performance Bonus will be calculated under the current Agreement. This is for the 2018 Fiscal Year only.

x.
Continued Employment Requirement.  In order to encourage and reward longevity, except as otherwise specifically provided in Section 4(b)(ii) hereof, Executive shall not be entitled to any Performance Bonus unless Executive is employed by the Company on the day on which the Company actually pays performance bonuses to its executives.

c.
Employee Benefits. Executive shall be included, to the extent eligible under the terms and conditions, as such terms and conditions may be established or changed from time to time by the Board in its sole discretion, in any





and all of the Company plans providing benefits for its executives. Except as otherwise provided herein, nothing contained herein shall obligate the Company to adopt or maintain any benefit plan and nothing herein shall restrict the Company’s right in its sole discretion to adopt, modify or otherwise alter, in whole or in part, any and/or all of its benefit plans, provided that such adoption, abolition, modification or alteration is of general effect and applicable to all of the Company’s employees and/or officers under such plans.

d.
Discretionary Paid Time Off (DTO). Executive shall be entitled to participate in the Company’s Discretionary Paid Time Off (DTO) Policy. Executive may take paid time off each fiscal year in accordance with the policies of the Company in effect for its executive officers from time to time. Executive shall take discretionary paid time off at such time or times as shall be approved by the Company, which approval shall not be withheld unreasonably.

e.
Business Expenses. The Company shall reimburse Executive for all reasonable business expenses incurred by Executive in the course of performing Executive’s duties and responsibilities under this Agreement which are consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company’s requirements with respect to reporting and documentation of such expenses.

f.
Payroll Withholdings. From each payment to Executive of Base Salary and bonus, if any, the Company will report, withhold and pay to the proper governmental authorities any and all amounts required by law to be withheld for federal, state and local income and employment taxes, and any and all other amounts required by law to be reported and/or withheld from Executive’s wages. The Company will also deduct from Executive’s salary payments those sums authorized by Executive in writing and approved by the Company. The Company will make those payments and contributions, such as unemployment insurance premiums, workers’ compensation insurance premiums, the employer’s portion of state disability insurance premiums, and the employer’s portion of federal employment taxes, which are required by law to be made by the Company.

g.
Equity. Executive will be eligible to receive awards of stock options, restricted stock or other equity awards pursuant to any plans or arrangements the Company may have in effect from time to time. The Board or any authorized committee will determine in its discretion whether Executive will be granted any such equity awards and the terms of any such award in accordance with the terms of any applicable plan or arrangement that may be in effect from time to time. The foregoing notwithstanding, all future equity plans and arrangements will: (i) provide participant with the right to “net tax settlement” of restricted share units, (ii) provide participant with the right to “net exercise” of Executive’s vested stock options (whenever exercised), and (iii) include Board approved automatic “net exercise” of Executive’s unexercised stock options on their expiration date to prevent the expiration of stock options due to restrictions placed on the Executive’s trading in Company stock or other circumstances that prevent the Executive from financing stock option exercises using other available methods.

4.
Termination of Employment.

a.
Termination. This Agreement and the employment of Executive by the Company and any Subsidiary may be terminated at any time as follows:

i.
By mutual agreement of the parties;

ii.
By the Company if Executive dies or becomes Disabled. For purposes of this Agreement, “Disabled” shall mean any mental or physical illness or disability that renders Executive unable to perform the essential functions of Executive’s position for a period of 90 consecutive days or 180 days during any twelve month period with or without reasonable accommodation;

iii.
By the Company for Cause. For purposes of this Agreement, “Cause” shall mean with respect to Executive, one or more of the following: (A) willful or grossly negligent violation of any law which causes material injury to the business of the Company (or any Subsidiary) or entry of a plea of nolo contendere (or similar plea) to a charge of such an offense, (B) conduct causing the Company or any of its Subsidiaries significant public disgrace or disrepute, (C) any act or omission aiding or abetting a competitor, supplier or customer of the Company or any of its Subsidiaries to the material disadvantage or detriment of the Company and its Subsidiaries, (D) Executive’s willful violation of Executive’s fiduciary duties to the Company or any Subsidiary, including the duty of loyalty and the corporate opportunity doctrine, (E) commission of, or the act of fraud, dishonesty, misappropriation or





embezzlement, or Executive’s commission of any felony offense, (F) material breach of Executive’s representations, warranties, or covenants under this Agreement or any other agreement between the parties hereto that, if curable and unrelated to a breach of Section 5 of this Agreement, remains uncured for 15 days following written notice thereof from the Company to the Executive, and (G) refusal to comply with the Company’s reasonable orders or directives (including refusal to perform, other than as a result of death or Disability, material assigned duties or responsibilities that are consistent with normal business practices and this Agreement) or the Company’s (or its Subsidiaries’) material and reasonable rules, regulations, policies, procedures or practices that are not inconsistent with the terms of this Agreement or applicable law, which continues uncured for 15 days following written notice thereof from the Company to Executive.

iv.
By the Company without Cause;

v.
By Executive for Good Reason. For purposes of this Agreement, “Good Reason” means Executive’s resignation from employment at any time within ninety (90) days following the expiration of any Company cure period (discussed below) following the occurrence of one or more of the following: (A) a reduction in Executive’s Base Salary below the amount on the date hereof (other than a substantially similar reduction applicable to all executives), (B) the Company requiring, without Executive’s consent, that Executive relocate Executive’s principal place of business outside a 30-mile radius from the location where Executive is employed as of the Effective Date or such other location as consented to by Executive, (C) material breach by the Company of this Agreement, or (D) without Executive’s consent, a material reduction in Executive’s duties or responsibilities such that Executive is no longer playing the role of an Executive Vice President (or at least an equivalent position). Under this Agreement, Executive will not be able to resign for Good Reason without first providing the Company with written notice of the acts or omissions constituting the grounds for “Good Reason” within ninety (90) days of the initial existence of the grounds for “Good Reason” and, if such grounds are curable, a reasonable cure period of not less than thirty (30) days following the date of such notice; or

vi.
By Executive, voluntarily, at any time; provided that Executive agrees to give the Company not less than 90 days written notice of Executive’s resignation unless such notice period is waived by the Company.

b.
Consequences of Termination. Executive shall be entitled to the following compensation in the event of termination of Executive’s employment pursuant to the terms of paragraph 4(a):

i.
Following any termination under paragraphs 4(a)(i), (ii), (iii) or (vi), Executive (or in the event of Executive’s death, Executive’s estate) shall be entitled to receive, immediately upon termination by the Company for Cause or based on mutual agreement, or within thirty (30) days of the date of termination based on death, Disability, or resignation by Executive without Good Reason, a lump sum payment in cash in an amount equal to Executive’s accrued and unpaid Base Salary plus any authorized business expenses incurred and un-reimbursed as of the date of termination or death. In addition, in the event of Executive’s cessation of employment because he has become Disabled, or due to his death, in addition to any bonus payable pursuant to Section 10(c) below, Executive shall receive a pro rata payment of Executive’s 3(b) Performance Bonus (taking into account the provisions of Section 3(b)(ix)), such pro rata 3(b) Bonus payment being calculated as the product of that fiscal year’s 3(b) Bonus multiplied by a fraction, the numerator of which is the number of days Executive is employed with the Company in the fiscal year in which Executive’s termination from employment occurs and the denominator of which is 365 days, and such bonus payment, if any, shall be made in a cash lump sum within the same calendar year in which the Company receives its audited financials for such fiscal year.

ii.
Following any termination under paragraphs 4(a)(iv) or (v) (and despite his subsequent death), Executive (or, in the event of Executive’s death, Executive’s estate) shall be entitled to receive (A) immediately upon termination by the Company without Cause, or within fifteen (15) days of the date of termination by Executive for Good Reason, a lump sum payment in cash in an amount equal to Executive’s accrued and unpaid Base Salary plus any authorized business expenses incurred and un-reimbursed as of the date of termination, (B) severance (“Severance”) in an amount equal to: Executive’s per annum Base Salary as of the date of termination, unless Executive’s Base Salary was reduced in violation of paragraph 4(a)(v)(A), in which case it shall be an amount equal to Executive’s per annum Base Salary as in effect prior to such reduction, provided such amount is greater than Executive’s Base





Salary on the date of termination; and provided further that such amount shall be payable in twelve substantially equal payments beginning, as provided in Section 4(b)(iii), on the first regular payroll date immediately following the eighth (8th) day following the Executive’s timely execution of a Release, (C) in addition to any bonus payable pursuant to Section 10(c) below, a pro rata payment of Executive’s 3(b) Performance Bonus, such pro rata 3(b) Bonus payment (taking into account the provisions of Section 3(b)(ix)) being calculated as the product of that fiscal year’s 3(b) Bonus multiplied by a fraction, the numerator of which is the number of days Executive is employed with the Company in the fiscal year in which Executive’s termination from employment occurs and the denominator of which is 365 days, and such bonus payment, if any, shall be made in a cash lump sum within the same calendar year in which the Company receives its audited financials for such fiscal year and (D) during the period Executive receives severance, COBRA insurance benefits funded by the Company, and Executive agrees to reimburse the Company for such COBRA expenses in excess of the monthly amount the Company was paying toward Executive’s Company-provided group health insurance coverage immediately prior to Executive’s cessation of employment; provided, however, if the COBRA insurance coverage period expires during the severance period, then during the remainder of the severance period, the Company shall make monthly payments to Executive to subsidize Executive’s health care insurance costs in an amount equal to the monthly dollar amount the Company was paying toward Executive’s Company-provided group health insurance coverage immediately prior to Executive’s cessation of employment. “Change of Control Event” as used herein means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company to any “person” or “group” (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act); or (ii) any person or group, becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have “beneficial ownership” of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than fifty percent (50%) of the total voting power of the voting stock of the Company, including by way of merger, consolidation, or otherwise; provided that a “Change of Control” shall not occur due to beneficial ownership by Compass Group Diversified Holdings LLC (“Compass”) unless both its ownership has previously fallen below fifty percent (50%) of the Company and more than three consecutive years have passed without any Person employed by, or serving as a partner or manager of, Compass, or Compass Group Management LLC, having served as a Board member.

iii.
Notwithstanding anything in this Agreement to the contrary, Severance shall not be paid nor begun prior to the eighth (8th) day following the return by Executive to the Company of an executed release as described in the immediately following sentence (the “Release”) and only if such Release is returned to the Company prior to the sixtieth (60th) day immediately following the Executive’s “separation from service” (within the meaning of Section 409A). Any “Release” shall provide, in effect, that Executive thereby releases and waives, for Executive and Executive’s heirs, executors, administrators and assigns, all claims against the Company and its Subsidiaries, and their respective officers, directors, employees, agents, shareholders, future shareholders, affiliates, divisions, successors, predecessors, representatives, attorneys, and assigns, and any persons acting with them (“Releasees”), from all claims (including claims for attorneys’ fees and costs), demands and causes of action, known or unknown, which Executive may have or claim to have against any Releasee, arising out of, or in any way relating to, Executive’s employment, or the termination of Executive’s employment, with the Company (including its Subsidiaries and affiliates), whether based on any act or omission to act or otherwise.

iv.
Subject to Executive’s timely execution of a release, any payment under paragraphs 4(b)(i) and (ii) shall be made in accordance with the Company’s normal payroll, or other applicable payment, practices, and, other than the payment of such amounts, the Company’s obligation to make any further payments of any kind or provide benefits, other than extended health coverage under 4(b)(ii), to Executive shall cease and terminate upon Executive’s date of termination.

c.
Resignation Upon Termination. Upon termination of Executive’s employment for any reason, Executive agrees and covenants that Executive shall immediately tender a resignation to the Company for any position held by Executive as a member of the Company’s and each of its Subsidiaries’ Boards of Directors and any committee thereof.

d.
Suspension of 409A Payments. Any payment or benefit under this Agreement that Company reasonably determines is subject to Section 409A(a)(2)(B)(i) of the Internal Revenue Code shall be delayed to the extent





required by Section 409A until a date that is six months and one day from the date of Executive’s Separation from Service (as such term is defined herein below) (the “409A Suspension Period”). Within 10 days after the end of the 409A Suspension Period, Company shall pay to Executive a lump sum payment in cash equal to any payments, and any cash payments that the Company would otherwise have been required to provide, but for the imposition of the 409A Suspension Period. After the 409A Suspension Period, Executive shall receive any remaining cash payments or benefits in accordance with the terms of this Agreement (as if there had not been any 409A Suspension Period beforehand). For purposes of this Agreement, “Separation from Service” shall have the meaning set forth in Treasury Regulation Section 1.409A-1(h)(1)(i); provided, however, that pursuant to Treasury Regulation Section 1.409A-1(h)(1)(ii), the parties hereby provide that a “separation from service” shall occur within the meaning of Treasury Regulation Sections 1.409A-1(h)(1)(i) and (ii) as of the first date coincident with or following a termination of employment that the Company and Executive reasonably anticipate a permanent reduction in the level of bona fide services that Executive will perform for Company (and any entity that would be considered the same “service recipient” as Company under Internal Revenue Code Section 409A (collectively, the “Service Recipient”) in the future (whether as an employee or an independent contractor) will decrease to a level equal to twenty percent or less of the average level of bona fide services Executive provided to the Service Recipient in the 36 months immediately preceding such date (or the full period of service to the Service Recipient if Executive has been providing services to the Service Recipient for less than 36 months).

e.
All payments to be made to Executive upon a termination of employment may only be made upon a Separation from Service of Executive or a Change of Control Event. For purposes of Section 409A, (i) each payment made under this Agreement shall be treated as a separate payment; (ii) Executive may not, directly or indirectly, designate the calendar year of payment; and (iii) no acceleration of the time and form of payment of any nonqualified deferred compensation to Executive or any portion thereof, shall be permitted except in relation to a Change of Control Event.

5.
Confidential Information.

a.
Executive acknowledges that the continued success of the Company and its Subsidiaries and affiliates, depends upon the use and protection of a large body of confidential and proprietary information. All of such confidential and proprietary information now existing or to be developed in the future will be referred to in this Agreement as “Confidential Information.” Confidential Information will be interpreted as broadly as possible to include all information of any sort (whether merely remembered or embodied in a tangible or intangible form) that is (i) related to the Company’s or its Subsidiaries’ or affiliates’ current or potential business or is disclosed to the Company or its Subsidiaries by any third party pursuant to a confidentiality agreement and (ii) is not generally or publicly known. Confidential Information includes, without specific limitation, information, observations and data obtained by Executive during the course of Executive’s performance of the services under this Agreement, information concerning acquisition opportunities in or reasonably related to the Company’s or its Subsidiaries’ or affiliates’ business or industry of which Executive becomes aware during the Employment Period, the persons or entities that are current, former or prospective suppliers or customers of any one or more of them during Executive’s course of performance of services under this Agreement, as well as development, transition and transformation plans, methodologies and methods of doing business, strategic marketing, product development and business expansion plans, including plans regarding planned and potential sales and financial projections, employee lists and telephone numbers, locations of sales representatives, product designs and specifications, including any future or proposed products, manufacturing techniques and information, integration processes and financial information and forecasts. Therefore, Executive agrees that Executive shall not at any time, directly or indirectly, (i) disclose or permit the disclosure of any Confidential Information to any person or firm other than Company (or its Subsidiaries) or any person or firm to which such disclosure would be protected by a confidentiality agreement with the Company (or its Subsidiaries), or (ii) use or permit the use of any Confidential Information except in the ordinary course of performance of Executive’s duties. Executive agrees to deliver to the Company at the end of the Employment Period, or at any other time the Company may request in writing, all memoranda, notes, plans, records, reports and other documents relating to the business of the Company or its Subsidiaries or affiliates (including, without limitation, all Confidential Information), whether on paper or in any other form or medium, and all copies thereof that Executive may then possess or have under Executive’s control.

b.
During Executive’s employment with the Company, Executive shall not use or disclose any confidential information or trade secrets, if any, of any former employers or any other person to whom Executive has an obligation of confidentiality, and shall not bring onto the premises of the Company or its Subsidiaries or affiliates any unpublished documents or any property belonging to any former employer or any other person to whom





Executive has an obligation of confidentiality unless consented to in writing by the former employer or person. Executive shall use in the performance of Executive’s duties only information that is (i) generally known and used by persons with training and experience comparable to Executive’s and that is (x) common knowledge in the industry or (y) is otherwise legally in the public domain, (ii) otherwise provided or developed by the Company or its Subsidiaries or affiliates or (iii) in the case of materials, property or information belonging to any former employer or other person to whom Executive has an obligation of confidentiality, approved for such use in writing by such former employer or person. If at any time during this employment with the Company or any Subsidiary, Executive believes Executive is being asked to engage in work that will, or will be likely to, jeopardize any confidentiality or other obligations Executive may have to former employers, Executive shall immediately advise the Board so that Executive’s duties can be modified appropriately.

c.
The obligations of Executive provided in this paragraph 5 shall last, as to any Confidential Information, for so long as that Confidential Information has proprietary value, whether during Executive’s employment or after the termination thereof.

6.
Intellectual Property, Inventions and Patents.

a.
Executive acknowledges that all discoveries, concepts, ideas, inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, patent applications, copyrightable works, mask works and moral rights (in each case, whether or not including any Confidential Information) and all registrations or applications related thereto, all other proprietary information and all similar or related information (whether or not patentable or trademarkable) which (i)(A) are developed using the equipment, supplies, facilities or trade secrets of the Company or its Subsidiaries, or (B) relate to the Company’s or its Subsidiaries’ actual or demonstrably anticipated business, research and development or existing or future products or services, or (C) result from work performed by Executive for the Company or its Subsidiaries, and (ii) which are conceived, developed or made by Executive (whether solely or jointly with others) while employed by or as a result of Executive’s employment with the Company and/or its Subsidiaries, whether before or after the date of this Agreement (“Work Product”), belong to the Company or such Subsidiary. Executive shall promptly disclose such Work Product to the Board and, at the Company’s expense, perform all actions reasonably requested by the Board (whether during or after the Employment Period) to establish, confirm and perfect such ownership in the Company or its Subsidiaries, as applicable (including, without limitation, assignments, consents, powers of attorney, waivers of rights, including moral rights, and other instruments). Executive acknowledges that all original works of authorship protected by copyright included in the Work Product are “works made for hire” as defined in the United States Copyright Act, 17 U.S.C. §101.

b.
As further consideration for the Company’s entering into this Agreement, Executive hereby assigns to the Company all right, title and interest Executive owns or at any time may have to the Work Product (whether during the Employment Period or after the termination of the Employment Period), and to any and all other Work Product in which Executive may have any right, title, or interest or which was at any time used in the business of the Company and its Subsidiaries or its affiliates. At any time, whether during the Employment Period or after the termination of the Employment Period, upon reasonable request of the Company, Executive shall fully cooperate with and assist the Company to protect the Company’s (and its Subsidiaries’) right to and interest in the Work Product in any and all countries of the world, and, upon reasonable request of the Company, shall execute all documents and instruments and do all things that may be required in connection therewith. If Executive is involuntarily terminated, Executive’s subsequent cooperation with the Company will be coordinated, at the Company’s expense, with Executive’s then employment commitments.

7.
Non-Solicitation. In further consideration of the compensation to be paid to Executive hereunder, Executive acknowledges that during the course of Executive’s employment with the Company and its Subsidiaries (including its predecessors) Executive has and shall become familiar with the Company’s (and its Subsidiaries) trade secrets and with other Confidential Information concerning the Company and its Subsidiaries and affiliates and that Executive’s services have been and shall be of special, unique and extraordinary value to the Company and its Subsidiaries and affiliates, and, therefore, Executive agrees (i) that, from the date of this Agreement and for two years after the termination of Executive’s employment for any reason, Executive shall not directly or indirectly solicit or induce, attempt to solicit or induce or assist any person soliciting or inducing any employee of the Company or any Subsidiary to leave the employ of the Company or such Subsidiary, or in any way interfere with the relationship between the Company or any Subsidiary and any employee thereof, and (ii) that, from the date of this Agreement until one year after the termination of Executive’s employment for any reason, Executive shall not make any negative or disparaging statements or communications about the Company, its Subsidiaries or affiliates, or any of their respective directors, officers, employees or stockholders.






8.
Severability; Remedies.

a.
Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction to the extent required to be enforceable under applicable law. If, at the time of enforcement of paragraph 7, a court shall hold that the restrictions stated therein are unreasonable under circumstances then existing, the parties agree such restrictions are divisible and shall be reduced to the extent required to be enforceable under applicable law. Executive acknowledges that the restrictions contained in paragraph 7 are reasonable and that Executive has reviewed this Agreement with Executive’s legal counsel.

b.
In the event of the breach or a threatened breach by Executive of any of the provisions of paragraphs 5, 6, or 7, the Company (and its Subsidiaries) would suffer irreparable harm, and in addition and supplementary to other rights and remedies existing in its favor, the Company (and its Subsidiaries) shall be entitled to specific performance and/or injunctive or other equitable relief from a court of competent jurisdiction in order to enforce or prevent any violations of the provisions thereof (without posting a bond or other security). Nothing herein shall be construed as prohibiting the Company (and its Subsidiaries) from pursuing any other remedies available to them, at law or in equity, for any breach or threatened breach of this Agreement (including, any of the provisions of paragraphs 5, 6 or 7) by Executive, including recovery of damages from Executive and forfeiture of any and all Severance.

9.
Executive’s Representations. Executive hereby represents and warrants to the Company that (a) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which Executive is bound, (b) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (c) upon the execution and delivery of this Agreement by the Company, this Agreement shall be a legal, valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that Executive has consulted with independent legal counsel regarding Executive’s rights and obligations under this Agreement and that Executive fully understands the terms and conditions contained herein.

10.
Miscellaneous.

a.
Survival. Paragraphs 4 through 10 shall survive and continue in full force and effect notwithstanding the termination of Executive’s employment and this Agreement.

b.
Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, sent by reputable overnight courier service or mailed by first class mail, return receipt requested, to the recipient at the address below indicated:

Notices to Executive:

Wes Allinger
327 John Street
Santa Cruz, CA 95060
Home #: 831.457.1804
Mobile #: 831.235.3035

Notices to the Company:
Fox Factory, Inc.
915 Disc Drive
Scotts Valley, CA 95066
Attn: Chief Executive Officer

Fox Factory, Inc.





915 Disc Drive
Scotts Valley, CA 95066
Attn: General Counsel

or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so delivered, sent or mailed.
c.
Termination of Prior Agreement/Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. Upon the Effective Date, Executive’s prior Employment Agreement with the Company (together with all amendments thereto, collectively the “Terminated Agreement”) shall be automatically terminated without further action by the parties; provided, however, that Executive shall be entitled to receive his Performance Bonus under the Terminated Agreement when and if his Performance Bonus would have otherwise been payable, but pro-rated for the fiscal year ending December 28, 2018, by multiplying (A) the bonus Executive would otherwise have received if he had been an employee for the entire fiscal year by (B) a fraction, the numerator of which is the number of days from (and including) December 30, 2017 until the Effective Date (but excluding the Effective Date), and the denominator of which is 365. For the avoidance of doubt, the termination of the Terminated Agreement will not create any severance or other obligations to Executive.

d.
No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.

e.
Counterparts. This Agreement may be executed in separate counterparts (including by means of facsimile or portable document format (PDF)), each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

f.
Successors and Assigns. Subject to the limitations stated herein and in the 2013 Omnibus Plan, this Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets or interests of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the “Company” for purposes of this Agreement). This Agreement will inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees, but will not otherwise be assignable, transferable or delegable by Executive. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as otherwise expressly provided in this paragraph 10(f).

g.
Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California.

h.
Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company (as approved by the Board) and Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement (including, without limitation, the Company’s right to terminate Executive’s employment with or without Cause) shall affect the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any provision of this Agreement. For purposes of clarification, it is understood by the parties that Section 10(h) shall in no way invalidate Executive’s obligation to act within the sixty (60) day time limit of Section 4(b)(iii), as applied to Section 4(b)(ii)(B) and Section 4(b )(iv).

i.
Insurance. The Company may procure in its own name and for its own benefit life and/or disability insurance on Executive in any amount or amounts considered advisable. Executive agrees to cooperate in any reasonable medical or other examination, supply any available information and execute and delivery any applications or other instruments in writing as may be reasonably necessary to obtain and maintain such insurance.






j.
Corporate Opportunity. During his employment, Executive shall submit to the Company all business, commercial and investment opportunities or offers presented to Executive, or of which Executive becomes aware, at any time during Executive’s employment which relate to the business of design, manufacture, distribution, marketing, assembly or sale of suspension products for vehicles, including mountain bikes, snow mobiles, all-terrain vehicles, motorcycles and off-road automotive vehicles (“Corporate Opportunities”). Unless approved by the Board, Executive shall not accept or pursue, directly or indirectly, any Corporate Opportunities on Executive’s own behalf.

k.
Executive’s Cooperation. During his employment and thereafter, Executive shall cooperate, at the Company’s expense, with the Company and its Subsidiaries in any internal investigation or administrative, regulatory or judicial proceeding as reasonably requested by the Company (including, without limitation, Executive being available to the Company upon reasonable notice for interviews and factual investigations, appearing at the Company’s request to give testimony without requiring service of a subpoena or other legal process, volunteering to the Company all pertinent information and turning over to the Company copies of all relevant documents which are or may come into Executive’s possession to the extent they may be provided to the Company without civil or criminal penalty to Executive, all at times and on schedules that are reasonably consistent with Executive’s other permitted activities and commitments).

l.
Clawback Policy. Notwithstanding any other provision contained herein, all amounts payable pursuant to Article 3(b) of this Agreement shall be subject to the Company’s policy entitled “Recoupment of Incentive Compensation Upon Restatement or Misstatement of Financial Results, or as Required by Law” (as may be amended from time to time). Executive hereby acknowledges receipt of a copy of such policy.

m.
Arbitration. Any controversy, claim, cause of action, in law or equity, or dispute involving the parties (or their affiliated persons or entities) directly or indirectly concerning this Agreement, Executive’s employment by the Company or cessation thereof, and/or the subject matter thereof, including its enforcement, performance, breach, or interpretation, shall be resolved solely and exclusively by final and binding arbitration held in Santa Cruz, California by one (1) arbitrator in accordance with the rules of employment arbitration then followed by JAMS or any successor to the functions thereof. The arbitrator shall apply California law in the resolution of all controversies, claims and disputes and shall have the right and authority to determine how his or her decision or determination as to each issue or matter in dispute may be implemented or enforced. Any decision or award of the arbitrator shall be final, conclusive and binding on the parties to this Agreement, and there shall be no appeal therefrom other than from gross negligence or willful misconduct. Notwithstanding the foregoing, claims regarding worker’s compensation and unemployment compensation benefits shall not be subject to arbitration under this Agreement. Each party in any such arbitration shall be responsible for its own attorneys’ fees, costs and necessary disbursements; provided, however, that if one party refuses to arbitrate and the other party seeks to compel arbitration by court order, if such other party prevails, it shall be entitled to recover its reasonable attorneys’ fees, costs and necessary disbursements. Notwithstanding the forgoing, the Company shall pay the arbitrator’s fees.

i.
The parties hereto agree that any action to compel arbitration pursuant to this Agreement may be brought in any appropriate state court in Santa Cruz County, California, and in connection with such action to compel, the laws of California shall control. Application may also be made to such court for confirmation of any decision or award of the arbitrator, for an order of the enforcement and for any other remedies which may be necessary to effectuate such decision or award. The parties hereto hereby consent to the jurisdiction of the arbitrator and of such court and waive any objection to the jurisdiction of such arbitrator and court.

ii.
Notwithstanding the foregoing, the Company shall be entitled to seek injunctive relief and other equitable remedies, in any court of competent jurisdiction, to enforce this Agreement.













IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

COMPANY


FOX FACTORY, INC.



By: /s/ Larry Enterline
Name: Larry Enterline
Title: Chief Executive Officer




EXECUTIVE:

/s/ Wes Allinger
Name: Wes Allinger




(Back To Top)

Section 3: EX-31.1 (EXHIBIT 31.1)

Exhibit


EXHIBIT 31.1


CERTIFICATION OF DISCLOSURE IN FOX FACTORY HOLDING CORP'S
QUARTERLY REPORT FILED ON FORM 10-Q
I, Larry L. Enterline, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Fox Factory Holding Corp.:
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 the statements 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 the financial 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act 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 the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that 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 in accordance 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 effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (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;

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
May 2, 2018
 
/s/ Larry L. Enterline
Larry L. Enterline
Chief Executive Officer
(Principal Executive Officer)