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Section 1: 10-Q (10-Q)

10-Q
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 April 1, 2016
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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
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 29, 2016, there were 0 shares of the Registrant’s common stock outstanding.
 


Fox Factory Holding Corp.
FORM 10-Q
Table of Contents
 
 
 
Page 
 
 
 
Condensed Consolidated Balance Sheets as of April 1, 2016 (unaudited) and December 31, 2015
 
Unaudited Condensed Consolidated Statements of Income for the Three Months Ended April 1, 2016 and March 31, 2015
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended April 1, 2016 and March 31, 2015
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2016 and March 31, 2015
 
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)
 
As of
 
As of
 
April 1,
 
December 31,
 
2016
 
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,264

 
$
6,944

Accounts receivable (net of allowances of $483 and $407 at April 1, 2016 and December 31, 2015, respectively)
33,874

 
43,660

Inventory
74,988

 
68,202

Prepaids and other current assets
14,586

 
13,135

Total current assets
132,712

 
131,941

Property, plant and equipment, net
29,319

 
26,094

Deferred tax assets
2,545

 
1,065

Goodwill
57,678

 
57,653

Intangibles, net
60,146

 
60,849

Other assets
—

 
114

Total assets
$
282,400

 
$
277,716

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
40,449

 
$
32,072

Accrued expenses
12,801

 
23,234

Reserve for uncertain tax positions
8,528

 
8,924

Current portion of long-term debt
3,142

 
2,790

Current portion of contingent consideration
6,889

 
6,950

Total current liabilities
71,809

 
73,970

Line of credit
11,500

 
1,500

Long-term debt, less current portion
42,580

 
43,591

Deferred rent
686

 
695

Contingent consideration, less current portion
6,000

 
5,700

Total liabilities
132,575

 
125,456

Commitments and contingencies (Note 7)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value — 10,000 authorized and no shares issued or outstanding as of April 1, 2016 and December 31, 2015
—

 
—

Common stock, $0.001 par value — 90,000 authorized; 37,422 shares issued and 36,532 outstanding as of April 1, 2016; 37,415 shares issued and 37,025 outstanding as of December 31, 2015
37

 
37

Additional paid-in capital
104,276

 
102,860

Treasury stock, at cost; 890 common shares as of April 1, 2016 and 390 common shares as of December 31, 2015
(13,754
)
 
(5,807
)
Accumulated other comprehensive loss
(1,119
)
 
(1,953
)
Retained earnings
60,385

 
57,123

Total stockholders’ equity
149,825

 
152,260

Total liabilities and stockholders’ equity
$
282,400

 
$
277,716

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
 
April 1, 2016

March 31, 2015
Sales
$
80,217

 
$
67,788

Cost of sales
55,099

 
49,005

Gross profit
25,118

 
18,783

Operating expenses:
 
 
 
Sales and marketing
6,553

 
5,297

Research and development
4,392

 
3,402

General and administrative
5,921

 
4,641

Amortization of purchased intangibles
795

 
1,840

Fair value adjustment of contingent consideration and acquisition related compensation
1,763

 
2,064

Total operating expenses
19,424

 
17,244

Income from operations
5,694

 
1,539

Other expense, net:
 
 
 
Interest expense
383

 
330

Other expense (income), net
904

 
(15
)
Other expense, net
1,287

 
315

Income before income taxes
4,407

 
1,224

Provision for income taxes
1,145

 
454

Net income
$
3,262

 
$
770

Earnings per share:
 
 
 
Basic
$
0.09

 
$
0.02

Diluted
$
0.09

 
$
0.02

Weighted average shares used to compute earnings per share:
 
 
 
Basic
36,935

 
37,052

Diluted
37,859

 
37,941

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
 
April 1, 2016

March 31, 2015
Net income
$
3,262

 
$
770

Other comprehensive loss:
 
 
 
Foreign currency translation adjustments, net of tax effects
834

 
(66
)
Other comprehensive loss
834

 
(66
)
Comprehensive income
$
4,096

 
$
704

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
 
April 1, 2016
 
March 31, 2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
3,262

 
$
770

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,027

 
2,867

Cost of goods on acquired inventory step up
53

 
1,084

Provision for doubtful accounts
70

 
12

Stock-based compensation
1,381

 
1,052

Excess tax benefit from exercise of stock options
—

 
(188
)
(Gain) loss on disposal of property and equipment
—

 
(6
)
Deferred taxes
(1,476
)
 
(193
)
Amortization of loan fees
49

 
49

Change in fair value of contingent consideration
239

 
52

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,999

 
7,871

Inventory
(6,403
)
 
(12,425
)
Income taxes payable
(2,070
)
 
(468
)
Prepaids and other assets
(946
)
 
(834
)
Accounts payable
7,853

 
10,397

Accrued expenses
(8,832
)
 
(434
)
Deferred rent
(10
)
 
(7
)
Net cash provided by operating activities
5,196

 
9,599

INVESTING ACTIVITIES:
 
 
 
Acquisition of businesses
—

 
(765
)
Purchases of property and equipment
(4,354
)
 
(1,548
)
Proceeds from sale of property and equipment
—

 
6

Net cash used in investing activities
(4,354
)
 
(2,307
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from line of credit
16,000

 
6,000

Payments on line of credit
(6,000
)
 
(6,000
)
Repurchase of common stock
(7,948
)
 
(3,733
)
Repayment of debt
(709
)
 
(709
)
Proceeds from stock compensation, net
36

 
117

Excess tax benefit from exercise of stock options
—

 
188

Net cash provided by (used in) financing activities
1,379

 
(4,137
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
99

 
(163
)
CHANGE IN CASH AND CASH EQUIVALENTS
2,320

 
2,992

CASH AND CASH EQUIVALENTS—Beginning of period
6,944

 
4,212

CASH AND CASH EQUIVALENTS—End of period
$
9,264

 
$
7,204

 
 
 
 

4
Table of Contents

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
4,300

 
$
1,085

Interest
$
310

 
$
275

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

5
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 ride dynamics products primarily for bicycles, side-by-side vehicles, on-road and off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company acts both as a tier one supplier to leading action sports original equipment 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 wholly owned operating subsidiaries on a consolidated basis.
Change in Fiscal Year - For fiscal year 2016, the Company has changed from a calendar year ending on December 31 to a 52-53 week fiscal year ending on the Friday nearest to December 31, effective beginning with the first quarter of 2016. Therefore, the financial results of certain future fiscal years and quarters, which will contain 53 and 14 weeks, respectively, will not be exactly comparable to the prior and subsequent fiscal years and quarters, which contain 52 and 13 weeks, respectively. The adoption of a 52-53 week year was not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or 15d-10; hence, no transition reports are required. The Company has made the change in fiscal years on a prospective basis and thus will not revise the Company’s previously reported financial statements as of and for the year ended December 31, 2015 or any interim period therein.

This change in fiscal year was identified as a best practice in connection with the Company’s previously disclosed global enterprise resource planning system, which the Company began implementing in May 2015. The Company believes this change will provide numerous benefits, including but not limited to, better alignment with manufacturing scheduling and improved comparability between periods.
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 ("US") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. 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 year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K as filed with the SEC. In management’s opinion, the unaudited interim 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 the three months ended April 1, 2016 are not necessarily indicative of the results that may be expected for the year ending December 30, 2016.
Principles of Consolidation - These condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Summary of Significant Accounting Policies - There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that have had a material impact on our condensed consolidated financial statements and related notes.

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.



6
Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

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.
 
Recent Accounting Pronouncements - In May 2014, the FASB and International Accounting Standards Board issued their
converged standard on revenue recognition, Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with
Customers. 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 revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will apply the new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted after December 15, 2016. The Company can choose to apply this standard retrospectively for each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application in retained earnings. The Company expects to complete its assessment of the impact of the new guidance on its consolidated financial statements in 2016.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 requires the presentation of debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset.  Amortization of such costs will continue to be reported as interest expense.  The Company adopted ASU 2015-03 effective January 1, 2016 on a retrospective basis. As a result, debt issuance costs of $781 have been reclassified from other assets to long-term debt in the December 31, 2015 condensed consolidated balance sheet.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The guidance applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company does not expect this guidance to have a significant impact on the consolidated financial statements.

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 twelve months on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. The Company early adopted the guidance effective January 1, 2016. As provided in the guidance, the Company made a policy election to account for forfeitures as they occur rather than on an estimated basis. The policy election and amendments related to the timing of when excess tax benefits are recognized and their recognition in the income tax provision were applied utilizing the modified retrospective transition method. The impact of the forfeiture policy election on the results of operations and opening equity was immaterial. The Company elected to adopt the amendments related to the presentation of excess tax benefits on the statement of cash flows using a prospective transition method.





7
Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


2. Inventory
Inventory consisted of the following:
 
As of
April 1,
 
As of  
 December 31,
 
2016
 
2015
Raw materials
$
48,259

 
$
43,468

Work-in-process
2,068

 
1,921

Finished goods
24,661

 
22,813

Total inventory
$
74,988

 
$
68,202


3. Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
 
As of
April 1,
 
As of  
 December 31,
 
2016
 
2015
Machinery and manufacturing equipment
$
24,403

 
$
22,488

Information systems, office equipment and furniture
11,038

 
9,829

Transportation equipment
2,307

 
2,243

Building and land
4,358

 
3,469

Leasehold improvements
7,388

 
6,970

Total
49,494

 
44,999

Less: accumulated depreciation and amortization
(20,175
)
 
(18,905
)
Property, plant and equipment, net
$
29,319

 
$
26,094



8
Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

4. Intangibles, net
Intangible assets, excluding goodwill, are comprised of the following:
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Weighted
average life
(years)
April 1, 2016:
 
 
 
 
 
 
 
Customer relationships
$
39,021

 
$
(13,655
)
 
$
25,366

 
13
Core technology
33,400

 
(32,599
)
 
801

 
8
Other
1,335

 
(1,008
)
 
327

 
4
Total
$
73,756

 
$
(47,262
)
 
26,494

 
 
Trademarks and brands, not subject to amortization
 
 
 
 
33,652

 
 
Total
 
 
 
 
$
60,146

 
 
December 31, 2015:
 
 
 
 
 
 
 
Customer relationships
$
39,004

 
$
(13,013
)
 
$
25,991

 
13
Core technology
33,400

 
(32,559
)
 
841

 
8
Other
1,335

 
(889
)
 
446

 
4
Total
$
73,739

 
$
(46,461
)
 
27,278

 
 
Trademarks and brands, not subject to amortization
 
 
 
 
33,571

 
 
Total
 
 
 
 
$
60,849

 
 
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
Amortization of intangibles
$
795

 
$
1,840


Future amortization expense for finite-lived intangibles as of April 1, 2016 is as follows:
For the fiscal years ending,
Amortization Expense
2016 (remaining nine months)
$
2,198

2017
2,801

2018
2,776

2019
2,715

2020
2,015

Thereafter
13,989

Total expected future amortization
$
26,494

Goodwill activity consisted of the following:
 
Balance as of December 31, 2015
$
57,653

Currency translation and other adjustments
25

Balance as of April 1, 2016
$
57,678



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:
 
As of
April 1,
 
As of  
 December 31,
 
2016
 
2015
Payroll and related expenses
$
4,262

 
$
8,143

Management earn-out
2,162

 
7,242

Warranty
3,868

 
3,914

Income tax payable
333

 
1,949

Other accrued expenses
2,176

 
1,986

Total
$
12,801

 
$
23,234

Activity related to warranties is as follows:
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
Beginning warranty liability
$
3,914

 
$
4,215

Charge to cost of sales
858

 
830

Costs incurred
(904
)
 
(875
)
Ending warranty liability
$
3,868

 
$
4,170


6. Debt
Amended and Restated 2013 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 “Amended and Restated 2013 Credit Facility”). The 2013 Amended and Restated Credit Facility, which matures on December 12, 2019, provides a revolving line of credit and a maturing secured term loan with initial draws totaling $80,000, which were funded as a result of 2014 amendments. The term loan is subject to quarterly amortization payments.
The Amended and Restated 2013 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 April 1, 2016, the one month LIBOR and prime rates were 0.44% and 3.50%, respectively. The Amended and Restated 2013 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 April 1, 2016.

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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 Amended and Restated 2013 Credit Facility:
 
As of
April 1,
 
2016
Amount outstanding
$
11,500

Available borrowing capacity
$
48,500

Maximum borrowing capacity
$
60,000

Interest rate at April 1, 2016
3.52
%
Maturity date
December 12, 2019
 
 
As of April 1, 2016, future principal payments for long-term debt, including the current portion, are summarized as follows:
Fiscal Year
 
2016 (remaining nine months)
$
2,128

2017
4,256

2018
4,256

2019
35,813

Total
46,453

Debt issuance cost
(731
)
Long-term debt, net of issuance cost
45,722

Less: current portion
(3,142
)
Long-term debt less current portion
$
42,580



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 13 - Related Party Transactions 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.

Legal Proceedings - The Company is currently involved in legal matters that arise in the normal 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 and cash flows. Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, there exists the possibility of a material adverse impact on the results of operations in the future.

11
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FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


Other Commitments - As of April 1, 2016, in connection with the acquisition of businesses, the Company is committed to pay up to $26,198 in additional consideration and acquisition related compensation through 2017, contingent upon the achievement of certain financial performance goals and in some cases continued employment through 2016. A portion of the obligation is denominated in Canadian dollars. See Note 9 - Fair Value Measurements. No other material contractual obligation has changed since the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on February 29, 2016.


8. Stockholders' Equity

Share Repurchase Program and Secondary Offering
On February 25, 2016, the Company's Board of Directors authorized the Company's 2016 stock repurchase program (the "2016 Repurchase Program"), permitting repurchases of up to an aggregate of $40,000 in shares of our common stock. The plan expires on December 31, 2017, unless extended by the Company's Board of Directors. Shares of common stock repurchased under this program are accounted for as treasury stock under the cost method.
On March 11, 2016, the Company entered into an agreement ("the Underwriting Agreement") with Jefferies LLC (the "Underwriter"), Compass Group Diversified Holdings LLC and Robert C. Fox, a founder and minority stockholder of the Company ("Compass", together with Mr. Fox, the "Selling Stockholders"). Pursuant to the Underwriting Agreement, Compass sold 2,500 shares of the Company's common stock, $0.001 par value per share, held by Compass to the Underwriter at a price of $15.895 per share, and Mr. Fox granted the Underwriter an over-allotment option to purchase up to 375 shares of the Company's common stock owned by Mr. Fox at a price of $15.895 per share. The over-allotment option to purchase shares from Mr. Fox expired in April 2016. The offering and sale of the common stock by the Selling Stockholders was made pursuant to the Company's registration statement on Form S-3, and closed on March 16, 2016. Concurrently, pursuant to the 2016 Repurchase Program and a stock repurchase agreement between Compass and the Company, the Company repurchased 500 shares of its common stock held by Compass for a total of $7,948.
At April 1, 2016, $32,052 remains available for repurchase under the 2016 Repurchase Program. The Company has 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.

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
 
April 1, 2016
 
March 31, 2015
Cost of sales
$
31

 
$
11

Sales and marketing
126

 
82

Research and development
70

 
23

General and administrative
1,154

 
936

Total
$
1,381

 
$
1,052



12
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 activity for the Company's unvested restricted stock units ("RSU") for the three months ended April 1, 2016.
 
Unvested RSUs
 
Number of shares outstanding
 
Weighted-average grant date fair value
Unvested at December 31, 2015
773

 
$
17.07

Granted
226

 
$
14.41

Forfeited
(3
)
 
$
16.80

Unvested at April 1, 2016
996

 
$
16.47


During the three months ended April 1, 2016 and March 31, 2015, there were no shares of common stock issued due to the vesting of RSUs. There were no RSUs granted or forfeited during the three months ended March 31, 2015.
During the three months ended April 1, 2016 and March 31, 2015, 7 and 44 shares of common stock, respectively, were issued due to the exercise of stock options, resulting in proceeds to the Company of approximately $36 and $117, respectively.  There were no stock options granted or forfeited during the three months ended April 1, 2016 and March 31, 2015.

As of April 1, 2016, the Company had approximately $12,700 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.70 years. Additionally, as of April 1, 2016, the Company had approximately $291 of unrecognized stock-based compensation expense related to stock options, which will be recognized over the remaining weighted-average vesting period of approximately 1.32 years.

9. Fair Value Measurements
The FASB's Accounting Standards Codification 820, "Fair Value Measurements and Disclosures" requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows:
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).
As of April 1, 2016, the carrying amount of the principal under the Company’s Amended and Restated 2013 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. As of April 1, 2016, the Company used Level 2 inputs to determine the fair value of its Amended and Restated 2013 Credit Facility.
The Company measured its contingent consideration liability arising from a prior acquisition using Level 3 unobservable inputs. The contingent consideration liability is associated with the achievement of adjusted EBITDA targets, and is estimated at each balance sheet date by considering among other factors, the Company's most recent financial projection.  The unobservable input to the valuation model that has the most significant effect on the estimated fair value of the Company's contingent consideration liability is the projected financial result for fiscal 2016.  The change in fair value is recorded as a component of fair value adjustment of contingent consideration and acquisition related compensation in the accompanying condensed consolidated statements of income for the three months ended April 1, 2016.

The following table provides a reconciliation of the beginning and ending balances for the Company's contingent consideration liability measured at fair value using Level 3 inputs:

13
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FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

 
Contingent consideration liability (level 3 measurement)
Balance at December 31, 2015
$
12,650

Change in fair value
239

Balance at April 1, 2016
$
12,889


10. Income Taxes
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
Provision for income taxes
$
1,145

 
$
454

Effective tax rates
26.0
%
 
37.1
%

Effective January 1, 2016, the Company sold its Taiwan branch operations and Fox Factory IP Holding Corp. to Fox Factory Switzerland GmbH (“Fox Switzerland”). The Company’s Taiwan operations were as a result, organized as a branch of Fox Switzerland. Fox Switzerland and its Taiwan branch own a portion and license the remainder of the Company’s non-US intangible property and generate earnings that are not subject to US income taxes so long as they are permanently invested outside the US. Under ASC 740-30, the Company is not required to accrue US income taxes on permanently reinvested unremitted earnings of Fox Switzerland. The Company considers the following matters, among others, in evaluating its plans for indefinite reinvestment: (i) the financial requirements of both the Company and its foreign operations, both for the long term and for the short term; (ii) the ability to manage cash globally through royalty remittances and intercompany loans created in the licensing and transfer of assets to Fox Switzerland; (iii) the tax consequences of any decision to reinvest the earnings of Fox Switzerland, including any changes in US tax law relating to the treatment of these unremitted earnings; and (iv) any US and foreign government programs or regulations relating to the repatriation of these unremitted earnings. If unremitted earnings are no longer permanently reinvested, the Company would need to make provision for deferred income taxes on these unremitted earnings, which could materially adversely affect its results of operations.

For the three months ended April 1, 2016, the difference between the Company's 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, tax credits, and the domestic production activity benefit. These benefits were partially offset by state taxes.

For the three months ended March 31, 2015, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from state taxes. The increase was partially offset by a benefit from the domestic production activity deduction.

The Company's federal tax returns for 2012 forward are subject to examination by tax authorities.  The Company’s 2011 and 2012 state tax returns are currently under examination by the California Franchise Tax Board, and 2009 and 2013 forward California tax returns are subject to future examination. 

As of April 1, 2016, the Company had $8,528 of unrecognized tax benefits, of which approximately $7,694, if recognized, would favorably impact the effective tax rate. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company believes it is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving the deductibility of amortization and depreciation deductions which were incurred as a result of the acquisition of the Company in 2008 and the resolution of issues under examination in the audit of the Company's 2011 and 2012 California tax returns. The Company estimates that it is reasonably possible that the unrecognized tax benefits at April 1, 2016 could be reduced by approximately $1,848 in the next twelve months.


14
Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

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 April 1, 2016.

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 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 restricted stock units, which are reflected in diluted earnings per share by application of the treasury stock method.
The following table presents the calculation of basic and diluted earnings per share:
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
Net income
$
3,262

 
$
770

Weighted average shares used to compute basic earnings per share
36,935

 
37,052

Dilutive effect of employee stock plans
924

 
889

Weighted average shares used to compute diluted earnings per share
37,859

 
37,941

Earnings per share:
 
 
 
Basic
$
0.09

 
$
0.02

Diluted
$
0.09

 
$
0.02

The Company did not exclude any potentially dilutive shares from the calculation of diluted earnings per share for the three months ended April 1, 2016 and March 31, 2015, as none of these shares would have been antidilutive.

12. 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 in 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.
The following table summarizes total sales generated by geographic location of the customer:
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
United States
$
44,176

 
$
32,793

Asia
15,637

 
12,345

Europe
19,644

 
15,065

Rest of the world
760

 
7,585

Total sales
$
80,217

 
$
67,788


15
Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The Company’s long-lived assets by geographic location are as follows:
 
As of
April 1,
 
As of  
 December 31,
 
2016
 
2015
United States
$
26,440

 
$
23,241

International
2,879

 
2,853

Total long-lived assets
$
29,319

 
$
26,094


The following table summarizes total sales by product category:
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
Bikes
$
45,114

 
$
35,619

Power vehicles
35,103

 
32,169

Total sales
$
80,217

 
$
67,788



13. Related Party Agreement
In September 2014, the Company entered into an agreement with Compass to assist with compliance requirements pursuant to the Sarbanes-Oxley Act of 2002, as amended. Fees paid for services provided for compliance associated with the audit of our fiscal 2015 financial statements were approximately $135, including $72 expensed in the quarter ended April 1, 2016.

Fox Factory, Inc. has a triple-net building lease for its manufacturing and office facilities in Watsonville, California. The building is owned by Mr. Fox. Rent expense under this lease was $301 and $301 for the three months ended April 1, 2016 and March 31, 2015, 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.


16
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 year ended December 31, 2015, as filed with the Securities and Exchange Commission ("SEC") on February 29, 2016 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 wholly owned operating subsidiaries, on a consolidated basis.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report includes forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. 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 Quarterly Report on Form 10-Q 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 ability to improve operating and supply chain efficiencies;
•
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 transition of the majority of our mountain bike manufacturing operations to Taiwan and our expectations related to such transition;
•
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;
•
our ability to successfully identify, evaluate and manage potential acquisitions and to benefit from such acquisitions; and
•
future economic or market conditions.

17
Table of Contents

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 discussed in Item 1A, "Risk Factors" of Part I of our 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016 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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
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

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that have had a material impact on our condensed consolidated financial statements and related notes.

Recent Accounting Pronouncements

See Note 1 to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Seasonality
Our business is seasonal. In each of the last three fiscal years, our quarterly sales have been the lowest in the first quarter and the
highest during our third quarter of the year. We believe this seasonality is due to the delivery of new products, including our
suspension products related to the new mountain bike season, during the late spring and summer each year.


18
Table of Contents

Results of Operations
The table below summarizes our results of operations:
 
For the three months ended
(in thousands)
April 1, 2016
 
March 31, 2015
Sales
$
80,217

 
$
67,788

Cost of sales
55,099

 
49,005

Gross profit
25,118

 
18,783

Operating expenses:
 
 
 
Sales and marketing
6,553

 
5,297

Research and development
4,392

 
3,402

General and administrative
5,921

 
4,641

Amortization of purchased intangibles
795

 
1,840

Fair value adjustment of contingent consideration and acquisition related compensation
1,763

 
2,064

Total operating expenses
19,424

 
17,244

Income from operations
5,694

 
1,539

Other expense, net:
 
 
 
Interest expense
383

 
330

Other expense (income), net
904

 
(15
)
Other expense, net
1,287

 
315

Income before income taxes
4,407

 
1,224

Provision for income taxes
1,145

 
454

Net income
$
3,262

 
$
770


The following table sets forth selected statement of income data as a percentage of sales for the periods indicated:
 
For the three months ended
 
April 1, 2016
 
March 31, 2015
Sales
100.0
%
 
100.0
%
Cost of sales
68.7

 
72.3

Gross profit
31.3

 
27.7

Operating expenses:
 
 
 
Sales and marketing
8.2

 
7.8

Research and development
5.5

 
5.0

General and administrative
7.4

 
6.8

Amortization of purchased intangibles
1.0

 
2.7

Fair value adjustment of contingent consideration and acquisition related compensation
2.2

 
3.0

Total operating expenses
24.3

 
25.3

Income from operations
7.0

 
2.4

Other expense, net:
 
 
 
Interest expense
0.5

 
0.5

Other income, net
1.1

 
—

Other expense, net
1.6

 
0.5

Income before income taxes
5.4

 
1.9

Provision for income taxes
1.4

 
0.7

Net income
4.0
%
 
1.2
%

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Table of Contents

Three months ended April 1, 2016 compared to three months ended March 31, 2015
Sales
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Bikes
$
45.1

 
$
35.6

 
$
9.5

 
26.7
%
Power Vehicles
35.1

 
32.2

 
2.9

 
9.0

Total sales
$
80.2

 
$
67.8

 
$
12.4

 
18.3
%
Sales for the three months ended April 1, 2016 increased approximately $12.4 million, or 18.3%, compared to the same period in 2015. The sales increase reflects a 26.7% increase in bike products and a 9.0% increase in powered vehicle products for the three months ended April 1, 2016 compared to the same prior year period. The increase in bike product sales was primarily due to higher OEM sales of $7.5 million and increased aftermarket sales of $2.0 million. The increase in sales of powered vehicle products was primarily due to higher demand for on and off-road suspension products.
Cost of sales
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Cost of sales
$
55.1

 
$
49.0

 
$
6.1

 
12.4
%
Cost of sales for the three months ended April 1, 2016 increased approximately $6.1 million, or 12.4%, compared to the same period in 2015. The increase in cost of sales was driven primarily by an increase in sales, partially offset by lower costs associated with various operational improvements as well as the non-recurrence of costs associated with the West Coast port slow down in the first quarter of 2015 and lower amortization of inventory adjustments related to acquisitions.
For the three months ended April 1, 2016, our gross margin increased 360 basis points from 31.3% compared to 27.7% for the same period in 2015. The increase in our gross profit margin was attributable primarily to favorable product and customer mix, as well as cost improvements.
Operating expenses
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
$
6.5

 
$
5.3

 
$
1.2

 
22.6
 %
Research and development
4.4

 
3.4

 
1.0

 
29.4

General and administrative
5.9

 
4.6

 
1.3

 
28.3

Amortization of purchased intangibles
0.8

 
1.8

 
(1.0
)
 
(55.6
)
Fair value adjustment of contingent consideration and acquisition related compensation
1.8

 
2.1

 
(0.3
)
 
(14.3
)
Total operating expenses
$
19.4

 
$
17.2

 
$
2.2

 
12.8
 %
Total operating expenses for the three months ended April 1, 2016 increased approximately $2.2 million, or 12.8%, over the same period in 2015. When expressed as a percentage of sales, operating expenses decreased to 24.3% of sales for the three months ended April 1, 2016 compared to 25.3% of sales in the same period in 2015.
Within operating expenses, our sales and marketing expenses increased approximately $1.2 million primarily due to a $0.3 increase in promotional expenses to support the growth of our products and brands, $0.3 million increase in wages and related expenses, and $0.3 million increase in professional fees for outside services. Research and development increased approximately $1.0 million due to investments in our product lines aimed at producing new products and technologies to maintain our premium position

20
Table of Contents

in the marketplace and to pursue new markets. Marketing, research and development expense increases are largely the result of timing as we have accelerated spending in preparation for the launch our model year 2017 products. General and administrative expenses increased approximately $1.3 million primarily due to a $0.6 million increase in professional fees for outside services associated with our enterprise resource planning system implementation and the secondary public offering which closed on March 16, 2016. Additionally, stock compensation and wages and related expenses increased by $0.4 million compared to the same period in 2015.
Amortization of purchased intangible assets for the three months ended April 1, 2016 decreased by approximately $1.0 million as compared to the same period in the prior year. The decrease is primarily due to technology and customer relationship assets from Compass' acquisition of the Company becoming fully amortized as of December 31, 2015.
During the three months ended April 1, 2016, we incurred $1.8 million in acquisition related compensation in connection with management earn-out arrangements.
Income from operations
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Income from operations
$
5.7

 
$
1.5

 
$
4.2

 
280.0
%
As a result of the factors discussed above, income from operations for the three months ended April 1, 2016 increased approximately $4.2 million, or 280.0%, compared to income from operations for the same period in 2015.
Other expense, net
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Other expense, net:
 
 
 
 
 
 
 
Interest expense
$
0.4

 
$
0.3

 
$
0.1

 
33.3
%
Other expense (income), net
0.9

 
—

 
0.9

 
NA

Other expense, net
$
1.3

 
$
0.3

 
$
1.0

 
333.3
%
Other expense, net for the three months ended April 1, 2016 increased by approximately $1.0 million to $1.3 million for the three months ended April 1, 2016, compared to $0.3 million for the same period in 2015. Other expense, net increased by $0.9 million due to foreign currency transaction losses, $0.5 million of which resulted from the settlement of Canadian Dollar denominated acquisition related compensation liability resulting from the acquisition of RaceFace/Easton. Interest expense increased in the three months ended April 1, 2016 by $0.1 million due to additional borrowings as compared to the same period in the prior year.
Income taxes
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Provision for income taxes
$
1.1

 
$
0.5

 
$
0.6

 
120.0
%
The effective tax rates were 26.0% and 37.1% for the three months ended April 1, 2016 and March 31, 2015, respectively. For the three months ended April 1, 2016, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from the reorganization of our foreign entities and permanent reinvestment of foreign earnings in jurisdictions with lower tax rates. Additionally, we benefited from tax credits and the domestic production activity deduction. These benefits were partially offset by state taxes. For the three months ended March 31, 2015, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from state taxes. The increase was partially offset by a benefit from the domestic production activity deduction.

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Table of Contents

Net income
 
For the three months ended
 
 
 
 
(in millions)
April 1, 2016
 
March 31, 2015
 
Change ($)
 
Change (%)
Net income
$
3.3

 
$
0.8

 
$
2.5

 
312.5
%
As a result of the factors described above, our net income increased $2.5 million, or 312.5%, to $3.3 million in the three months ended April 1, 2016 from $0.8 million for the same period in 2015.

Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions and acquisition-related compensation, debt repayments and share repurchases. We have generally financed our historical 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)
April 1, 2016
 
March 31, 2015
Net cash provided by operating activities
$
5,196

 
$
9,599

Net cash used in investing activities
(4,354
)
 
(2,307
)
Net cash provided by (used in) financing activities
1,379

 
(4,137
)
Effect of exchange rate changes on cash
99

 
(163
)
Increase in cash and cash equivalents
$
2,320

 
$
2,992

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, recognition of acquired inventory step up adjustments, fair value adjustments of our contingent consideration, and net cash invested in working capital.
In the three months ended April 1, 2016, cash provided by operating activities was $5.2 million and consisted of net income of $3.3 million plus non-cash items totaling $2.3 million less changes in operating assets and liabilities totaling $0.4 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $2.0 million, stock-based compensation of $1.4 million, fair value adjustments of contingent consideration of $0.2 million, provision for doubtful accounts of $0.1 million and cost of goods on acquired inventory step up of $0.1 million. Our investment in operating assets and liabilities is a result of a decrease in accrued expenses of $8.8 million, an increase in inventory of $6.4 million, a decreased in income taxes payable of $2.1 million, and an increase in prepaids and other assets of $0.9 million, offset by a decrease in accounts receivable of $10.0 million and increase in accounts payable of $7.9 million. The decrease in accounts receivable reflects lower sales in the first quarter of 2016 relative to the fourth quarter of 2015 as a result of the seasonality, partially offset by growth of our business. 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, partially offset by the accrual of 2016 acquisition related compensation. Additionally, our income tax payable decreased primarily due to our lower effective tax rate and timing of payments.

In the three months ended March 31, 2015, cash provided by operating activities was $9.6 million and consisted of net income of $0.8 million plus non-cash items totaling $4.7 million plus changes in operating assets and liabilities and other adjustments totaling $4.1 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $2.9 million and stock-based compensation of $1.1 million, partially offset by a $0.2 million change in deferred taxes and an excess tax benefit from the exercise of stock options of $0.2 million. Cash generated by changes in operating assets and liabilities is a result of a decrease in accounts receivable of $7.9 million and an increase in accounts payable of $10.4 million, partially offset by increases in inventory and prepaid and other assets of $12.4 million and $0.8 million, respectively, as well as an increase in income taxes payable of $0.5 million. The increase in inventory and corresponding increase in accounts payable are due to seasonal impacts

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as we prepare for the Spring selling season. The reduction in accounts receivable is also attributable to seasonality as the first quarter of each year is typically our lowest of the year. Additionally, the increase in prepaid expenses and other current assets resulted primarily from annual contracts being renewed in the first quarter.
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 April 1, 2016, cash used in investing activities was $4.4 million which consisted entirely of purchases of property and equipment.

In the three months ended March 31, 2015, cash used in investing activities was $2.3 million which consisted of $1.5 million in
purchases of property and equipment and well as $0.8 million in consideration paid in connection with an acquisition.
Financing activities
Cash provided by (used in) 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 April 1, 2016, net cash used in financing activities was $1.4 million, which consisted primarily of net borrowings of $10.0 million under our line of credit, partially offset by $7.9 million paid to repurchase 500,000 shares of our common stock under our share repurchase program authorized by our Board of Directors in February 2016, and $0.7 million paid on our term debt under the 2013 Amended and Restated Credit Facility.

In the three months ended March 31, 2015, net cash used in financing activities was $4.1 million, which consisted primarily of $3.7 million paid to repurchase our common stock under our share repurchase program authorized by our Board of Directors in 2014. We also made net repayments of $0.7 million of term debt under the 2013 Amended and Restated Credit Facility, partially offset by $0.3 million provided by the exercise of stock options and related excess tax benefits.

Amended and Restated 2013 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, 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. On December 12, 2014, we amended the existing Amended and Restated 2013 Credit Facility. The amendment increased the Term Loan principal amount by $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. 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.
The Amended and Restated 2013 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 2.75:1.0, both ratios calculated as defined in the Amended and Restated 2013 Credit Facility. We were in compliance with the covenants as of April 1, 2016.

Other Commitments

No material contractual obligation has changed since the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on February 29, 2016.
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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
There have been no material changes in 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 31, 2015 and filed with the SEC on February 29, 2016.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 April 1, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are 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, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 1, 2016.
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.
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 controls 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.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings incidental to our business, in particular intellectual property related
disputes, product liability claims, as well as other litigation in the ordinary course of business. Based on information currently
available, we do not believe that the ultimate resolution of these matters will have a material adverse effect on our financial
condition, results of operations and cash flows. In connection with ASC 450, Contingencies, we have not accrued for material
loss contingencies relating to any legal proceedings because we believe that, although unfavorable outcomes in proceedings
may be possible, they are not considered by our management to be probable and reasonably estimable. Were an unfavorable
ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the
ruling occurs.
ITEM 1A. RISK FACTORS

Our business, financial condition, operating results and prospects could be materially and adversely affected by various risks and uncertainties. In addition to the risks and uncertainties discussed elsewhere, you should carefully consider the risks and uncertainties described below. If any of the 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 $17.0 million, $13.6 million and $10.4 million for our research and development efforts in 2015, 2014 and 2013, 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

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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.
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 benefits 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.

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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 2015, approximately 58% 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.
A disruption in the operations of our manufacturing facilities could have a negative effect on our business, financial condition or results of operations.
During 2015, we transitioned the majority of our bike suspension component product manufacturing to our bike suspension component facility in Taichung, Taiwan. As a result of the transition, we have 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. Also, the transition process could cause manufacturing problems and give rise to execution risks, including disruptions to employees, negative impact on employee morale and retention, delays in recognizing efficiencies or increased costs of manufacturing, and adverse impacts on our product quality and delivery times. In addition, we could encounter unforeseen difficulties resulting from the distance and time zone differences between our main operations in California and our Taiwan manufacturing 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.
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 U.S. 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 such 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.

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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 twelve 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 $306.7 million in 2014 to approximately $366.8 million in 2015. 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.
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.

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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%, 34% and 42% of our sales in fiscal years 2015, 2014 and 2013, 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 12%, 14% and 17% of our sales in 2015, 2014 and 2013, 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.
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. 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. Furthermore, pursuant to the acquisition agreement and subsequent amendments we are obligated to pay $10.5 million Canadian Dollars of earn-out compensation as of April 1, 2016 (equivalent to approximately $8.1 million U.S. Dollars at the April 1, 2016 rate). 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;

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•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.
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 stand-alone 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, and we could incur substantial costs to, redesign our products or defend legal actions, and such costs could negatively affect our business, financial condition or results of operations.

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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 this may adversely affect our business. Defending our intellectual property rights can be very expensive and time consuming, and there is no assurance that we will be successful.
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 experience higher than expected warranty costs if we become aware of an underperforming product. For example, in 2012 we increased our reserve and included additional costs of approximately $1.8 million to reflect the costs of repairing or replacing certain dampers in our suspension products and experienced other related costs of approximately $1.0 million. We may in the future encounter similar situations and be forced to make other adjustments to our warranty reserves or incur costs in excess of these reserves which could adversely affect our results of operations.

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We may also be required to or voluntarily participate in recalls involving our products or components if any prove to be defective. For example, during calendar year 2013, we initiated a voluntary recall of certain model year 2013 32 and 34 Evolution Series suspension forks having 120 mm - 160 mm of travel with certain dampers manufactured by us between March 1, 2012 and November 30, 2012. In addition to the direct costs related to this or other recalls we may be forced to undertake in the future, such events could 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 and 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 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 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 Amended and Restated 2013 Credit Facility places operating restrictions on us and creates default risks.
The Amended and Restated 2013 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.
If we are unable to comply with the covenants contained in our Amended and Restated 2013 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 facilities, 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.

We and our subsidiaries may be able to incur substantial additional debt in the future from further amendments to the Amended and Restated 2013 Credit Facility, additional lending sources subject to the restrictions contained in the Amended and Restated 2013 Credit Facility, or as a result of certain debt instruments described in our Shelf Registration Statement on Form S-3 which was filed with the SEC in March 2015.

As of April 1, 2016, we had $57.2 million of indebtedness and $48.5 million available to borrow under the 2013 Amended and Restated Credit Facility. Our ability to borrow under the 2013 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;
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limiting our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt obligations and other general corporate requirements;
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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;
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limiting our flexibility to engage in certain transactions or to plan for, or react to, changes in our business and industry;
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putting us at a disadvantage compared to competitors that have less relative and/or less restrictive debt; and
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subjecting us to additional restrictive financial and other covenants.


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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 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 Amended and Restated 2013 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 Amended and Restated 2013 Credit Facility will increase our interest expense.
As of April 1, 2016, we had $57.2 million of indebtedness, bearing interest at a variable rate, outstanding under the Amended and Restated 2013 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 $57.2 million of variable interest rate indebtedness that was outstanding as of April 1, 2016, a hypothetical 100 basis point increase or decrease in the interest rate would have resulted in an approximately $0.1 million change to our interest expense for the three months ended April 1, 2016.

Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance.

We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our tax liabilities 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.

In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, expiration of favorable tax holidays in foreign jurisdictions, and the discovery of new information in the course of our tax return preparation process. Beginning in 2016, we are asserting permanent reinvestment of the earning of certain of our foreign subsidiaries. If circumstances change such that we are unable to indefinitely reinvest our foreign earnings outside the United States, future income tax expense and payments may differ significantly from historical amounts and could materially adversely affect our results of operations. There are proposals for tax legislation that have been introduced or that are being considered that could have a significant adverse effect on our tax rate, the carrying value of deferred tax assets, or our deferred tax liabilities. Any of these changes could affect our financial performance.
We are subject to certain risks in our manufacturing and in the testing of our products.
As of April 1, 2016, we employed approximately 1,500 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.
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

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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 United States Consumer Product Safety Commission, the National Highway Safety Administration, and 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.
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.
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 in the past incurred expenditures relating to such matters.
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, 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. 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 in the future, which could have a negative effect on our business, financial condition or results of operations.

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We do not control our suppliers or OEMs, 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 or OEMs or their labor, environmental or other practices. A violation of labor, environmental, intellectual property or other laws by our suppliers or OEMs, 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 OEMs if these violations or failures were to occur. We do not inspect or audit compliance by our suppliers or OEMs with these laws or practices, and we do not require our suppliers or OEMs or licensees 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.
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 and results of operations could be materially and adversely impacted.
In addition, we 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 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, or the 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 and/or financial condition.

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The transition of a majority 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 2015, we transitioned the majority of the manufacturing of our bike suspension component products to our facility in Taiwan. 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.
We may incur higher employee costs in the future.
 We maintain a self-insured healthcare plan for our US based employees. 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 healthcare 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 new ERP is being phased in over the next few fiscal years beginning with fiscal 2016. 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 cyber security 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 cyber security 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 and results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means.
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 financial condition, business and results of operations.

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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.
We have significant earn-out payment obligations relating to the acquisitions of the businesses of Sport Truck and Race Face/Easton, which may adversely affect our liquidity and financial condition and results of operations.
In March 2014, we acquired the business of Sport Truck for approximately $40.8 million. Under the terms of the asset purchase agreement for the acquisition, we will be obligated to make additional earn-out payments up to an aggregate of approximately $18.2 million based upon the achievement of certain EBITDA (as defined in the acquisition agreement) performance goals for the years ending December 31, 2015 and 2016. As of April 1, 2016, the recorded fair value of the contingent consideration liability associated with the acquisition on Sport Truck was $12.9 million, based on actual results for 2015 and management’s financial projections for 2016.
If, in the future, management's estimation techniques indicate an increase to the contingent consideration liability or if higher EBITDA (as defined in the acquisition agreement) for 2016 is actually achieved, we will need to accrue and pay additional amounts. Such additional accrual along with the payment of the contingent consideration could adversely impact our liquidity, financial condition and results of operations.
On December 12, 2014, we acquired the businesses of Race Face/Easton for approximately $29.9 million U.S. Dollars. The terms of the asset purchase agreement included a potential earn-out opportunity of up to a maximum of $19.5 million Canadian Dollars of earn-out compensation, of which $10.5 million remains due (equivalent to approximately $8.1 million U.S. Dollars at the April 1, 2016 rate). In November 2015, the Company entered into an amendment to the purchase agreement to remove the performance-based financial targets associated with the earn-out and guarantee the maximum earn-out amount payable in 2016 and 2017, subject to conditions including continued employment by the Race Face/Easton Chief Executive. In accounting for the acquisition of Race Face/Easton, the earn-out payments have been excluded from the consideration paid. We recognize the estimated value of the earn-out liability on a ratable basis as services are performed under the employment obligation. Our recognition of the earn-out liability and payment of amounts due could adversely impact our liquidity, financial condition and results of operations.
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 quarterly fluctuations that we report in the future 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 over each of the past few years due to the rapid growth in sales we have experienced during the same period.

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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.
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 $20.75 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. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. A suit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management’s attention.
Future sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.
If our existing stockholders sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell, the trading price of our common stock could decline. As of April 1, 2016, we had 36,532,043 shares of common stock outstanding of which 17,268,161 are freely tradable in the public market. As of April 1, 2016, 19,263,882 shares of common stock outstanding were held by directors, executive officers and other affiliates and are subject to volume and manner of sale limitations under Rule 144 under the Securities Act.
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.

In March, 2015 we filed a Shelf Registration Statement on Form S-3 with the SEC to enable us, and certain of our stockholders, to quickly go to market should we, or certain of our stockholders, wish to sell our common stock, or additionally, in our case, certain other debt instruments. In March 2016, pursuant to the Form S-3, Compass sold 2,500,000 shares of the Company's common stock at $15.895 per share in an underwritten transaction, and Mr. Fox granted the underwriter an over-allotment option to purchase up to 375,000 shares of the Company's common stock owned by Mr. Fox. Concurrently, the Company repurchased 500,000 shares of its common stock held by Compass for a total of $7.9 million, pursuant to a stock repurchase program that was authorized by our board of directors in February 2016.

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In addition, our Amended and Restated Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, of 36,532,043 which shares were outstanding as of April 1, 2016. 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 or otherwise. If any of these additional shares described are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an "emerging growth company," as defined in the JOBS Act. For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding advisory "say-on-pay" and "say-when-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of our IPO; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.
We cannot predict if investors will find our common stock less attractive to the extent we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
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.
Compass and our directors and officers and insiders have substantial control over us and will be able to influence corporate matters.
As of April 1, 2016, Compass beneficially owns approximately 33.1% of our outstanding common stock. Compass, our directors and executive officers, and their affiliates beneficially own, in the aggregate, approximately 47.3% of our outstanding common stock. As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors, amendment of our Amended and Restated Certificate of Incorporation, and approval of any merger, consolidation, or sale of all, or substantially all, of our assets or other significant corporate transactions. In addition, Compass continues to have input on all matters before our board of directors because our director Elias Sabo is affiliated with Compass. Compass may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other stockholders. So long as Compass or any of its affiliates continue to indirectly own a significant amount of our outstanding common stock, they will continue to be able to significantly influence our decisions.
In addition, Compass is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that may compete directly or indirectly with us. Compass may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us.
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, or 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;

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•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;
•from and after the date that Compass and its affiliates no longer collectively beneficially own (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly, at least a majority of the voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors, or the Trigger Date, prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders;
•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) or, until the Trigger Date, Compass;
•from and after the Trigger Date, 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, or 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.
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.









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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 April 1, 2016:
Period
 
Total Number of Shares Purchased
 
Weighted Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (1)
1/1 - 2/5
 
—

 
$
—

 
—

 
$
40,000,000

2/6 - 3/4
 
—

 
$
—

 
—

 
$
40,000,000

3/5 - 4/1
 
500,000

 
$
15.895

 
500,000

 
$
32,052,500

Total
 
500,000

 
$
15.895

 
500,000

 
$
32,052,500

 
 
 
 
 
 
 
 
 
(1) On February 25, 2016, the Company's Board of Directors authorized a share repurchase program for up to $40 million of the Company’s common shares outstanding. The repurchase program expires on December 31, 2017.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

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ITEM 6. EXHIBITS
 
 
Incorporated by Reference
 
Exhibit Number
Exhibit Description
Form
File No.
Filing Date
Filed Herewith
 
 
 
 
 
 
3.1
Amended and Restated Certificate of Incorporation
10-Q
001-36040
September 19, 2013
 
 
 
 
 
 
 
3.2
Amended and Restated Bylaws
10-Q
001-36040
September 19, 2013
 
 
 
 
 
 
 
10.1
Employment Agreement, dated July 22, 2013, by and between Fox Factory Holding Corp. and Wes Allinger



 
 
 
X
 
 
 
 
 
 
10.2
Employment Agreement, dated January 26, 2015, by and between Fox Factory Holding Corp. and Tom Wittenschlaeger



 
 
 
X
 
 
 
 
 
 
10.3
Amendment dated May 2, 2016 to the Lease Agreement, dated July 1, 2003, by and between Fox Factory, Inc. and Robert C. Fox, Jr.
 
 
 
X
 
 
 
 
 
 
10.4
Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, by and between Fox Factory Holding Corp., Fox Factory, Inc., ST USA Holding Corp., Suntrust Bank and other parties thereto, dated March 31, 2016
 
 
 
X
 
 
 
 
 
 
10.5
Stock Repurchase Agreement, by and between Fox Factory Holding Corp., and Compass Group Diversified Holdings, LLC, dated March 9, 2016
8-K
001-36040
March 15, 2016
 
 
 
 
 
 
 
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
 
 
 
X
 
 
 
 
 
 
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
 
 
 
X
 
 
 
 
 
 
32.1*
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.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 4, 2016
 
Zvi Glasman, Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)

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Section 2: EX-10.1 (EXHIBIT 10.1)

Exhibit



FOX FACTORY HOLDING CORP.
EMPLOYMENT AGREEMENT
(Wes Allinger)
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is executed on August 29, 2013, 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 Vice President and General Manager, Mountain Bike of the Company (such division being referred to herein as the “Division”) 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 Chief Executive Officer of the Company, all subject to the power and authority of the Company’s 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 Senior Vice President, Business Divisions 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 $215,000 per annum (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. Executive’s Base Salary (as defined below) 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 thereafter, at the discretion of the Compensation Committee.

(b)Performance Bonus. Beginning with the fiscal year ending December 31, 2013, 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) EBITDA targets (the “EBITDA Bonus”) and (ii) the EBITDA targets of the Division (the “Division EBITDA Bonus”), and a discretionary component based on the achievement of individual performance ratings (the “Individual Performance Rating Criteria”) established by the Chief Executive Officer (the “Rating Bonus”). The term “Executive’s Base Salary” means the Executive’s actual base salary, exclusive of any other compensation received by Executive regardless of form, received in the fiscal year for which the Performance Bonus is to be 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 Division’s EBITDA, the portion of EBITDA attributable to the Division and calculated in accordance with the generally accepted accounting principles used in determining Division 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, management fees paid to Compass Group Management LLC or any affiliate thereof, 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) 10% plus the product of 1% 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 17% times Executive’s Base Salary (10% + (1% x 7) = 17%). 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) 20% plus the product of 1% 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 27% times Executive’s Base Salary (20% + (1% x 7) = 27%).

(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) 30% times (B) Executive’s Base Salary.

(iv)Division Minimum Target. If, for a particular year, the Division’s EBITDA for the year is less than Division Target EBITDA but equals or exceeds 90% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to the product of (i) 4% plus the product of 0.40% times each full one percentage point positive variance to 90% of Division Target EBITDA, times (ii) Executive’s Base Salary. For example, if Division’s actual EBITDA is 97.6% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to 6.8% times Executive’s Base Salary (4% + (0.40% x 7) = 6.8%). For clarity, if Division’s EBITDA is under 90% of Division Target EBITDA, then Executive shall not receive any bonus based on Division EBITDA.    

(v)Division Target Level. If, for a particular year, the Division’s EBITDA for the year is more than Division Target EBITDA but less than 110% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to the product of (i) 8% plus the product of 0.40% times each full one percentage point positive variance to Division Target EBITDA, times (ii) Executive’s Base Salary. For example, if Division’s actual EBITDA is 107.6% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to 10.8% times Executive’s Base Salary (8% + (0.40% x 7) = 10.8%).

(vi)Division Maximum Target. If, for a particular year, the Division’s EBITDA for the year equals or exceeds 110% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to (i) 12% 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 6% 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 12% 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 18% 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
6.00%
6.50 - 6.99
8.00%
7.00 - 7.49
10.00%
7.50 - 7.99
12.00%
8.00 - 8.49
14.00%
8.50 - 8.99
16.00%
9.00 +
18.00%

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

(ix)2013 Performance Bonus Pro Rated.  Executive’s Performance Bonus shall be pro-rated for the fiscal year ending December 31, 2013, 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 31, 2013, and the denominator of which is 365.

(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)Paid Time Off. Executive shall be entitled to a minimum of four weeks’ 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 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 a Vice President and General Manager (or at least 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
610 Fair Avenue
Santa Cruz, CA 95060

Notices to the Company:
Fox Factory Holding Corp.
915 Disc Drive
Scotts Valley, CA 95066
Attn: Chief Executive Officer
Facsimile: (770) 331-2904

Fox Factory Holding Corp.




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


With a copy to:
Paul Hastings LLP
695 Town Center Drive, 17th Floor
Costa Mesa, CA 92626
Attention: William J. Simpson
Facsimile: (714) 668-6305

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 31, 2013, 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) January 1, 2013 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/ Mario Galasso    

Its: Senior Vice President


EXECUTIVE:
/s/ Wes Allinger 8/23/2013        
Name: Wes Allinger


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Section 3: EX-10.2 (EXHIBIT 10.2)

Exhibit



FOX FACTORY, Inc.
EMPLOYMENT AGREEMENT
(Tom Wittenschlaeger)
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is executed on January 26, 2015 (the “Effective Date”), between Fox Factory, Inc., a California corporation (the “Company”), and Tom Wittenschlaeger (“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 Vice President and General Manager, Powered Vehicles Group of the Company (such “Group” being also referred to herein as the “Division”) 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, Business Divisions of the Company, all subject to the power and authority of 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, Business Divisions 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 $250,000 per annum (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. Executive’s Base Salary (as defined below) 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 thereafter, at the discretion of the Compensation Committee.

(b)Performance Bonus. Beginning with the fiscal year ending December 31, 2015, 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) EBITDA targets (the “EBITDA Bonus”) and (ii) the EBITDA targets of the Division (the “Division EBITDA Bonus”), and a discretionary component based on the achievement of individual performance ratings (the “Individual Performance Rating Criteria”) established by the Chief Executive Officer (the “Rating Bonus”). The term “Executive’s Base Salary” means the Executive’s actual base salary, exclusive of any other compensation received by Executive regardless of form, received in the fiscal year for which the Performance Bonus is to be 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 Division’s EBITDA, the portion of EBITDA attributable to the Division and calculated in accordance with the generally accepted accounting principles used in determining Division 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, management fees paid to Compass Group Management LLC or any affiliate thereof, 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) 12.5% plus the product of 1.25% 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 21.25% times Executive’s Base Salary (12.5% + (1.25% x 7) = 21.25%). 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) 25.0% plus the product of 1.25% 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 33.75% times Executive’s Base Salary (25% + (1.25% x 7) = 33.75%).

(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) 37.5% times (B) Executive’s Base Salary.

(iv)Division Minimum Target. If, for a particular year, the Division’s EBITDA for the year is less than Division Target EBITDA but equals or exceeds 90% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to the product of (i) 5.0% plus the product of 0.50% times each full one percentage point positive variance to 90% of Division Target EBITDA, times (ii) Executive’s Base Salary. For example, if Division’s actual EBITDA is 97.6% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to 8.5% times Executive’s Base Salary (5% + (0.50% x 7) = 8.5%). For clarity, if Division’s EBITDA is under 90% of Division Target EBITDA, then Executive shall not receive any bonus based on Division EBITDA.    

(v)Division Target Level. If, for a particular year, the Division’s EBITDA for the year is more than Division Target EBITDA but less than 110% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to the product of (i) 10.0% plus the product of 0.50% times each full one percentage point positive variance to Division Target EBITDA, times (ii) Executive’s Base Salary. For example, if Division’s actual EBITDA is 107.6% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to 13.5% times Executive’s Base Salary (10% + (0.50% x 7) = 13.5%).

(vi)Division Maximum Target. If, for a particular year, the Division’s EBITDA for the year equals or exceeds 110% of Division Target EBITDA, then Executive’s Division EBITDA Bonus shall be equal to (i) 15% 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 5.0% 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 10.0% 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 15% 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
5.00%
6.50 - 6.99
7.00%
7.00 - 7.49
8.50%
7.50 - 7.99
10.00%
8.00 - 8.49
11.50%
8.50 - 8.99
13.00%
9.00 +
15.00%

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

(ix)2015 Performance Bonus Pro-Rated.  Executive’s Performance Bonus shall be pro-rated for the fiscal year ending December 31, 2015, 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 31, 2015, and the denominator of which is 365.
(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)Paid Time Off. Executive shall be entitled to a minimum of four weeks’ 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 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 a Vice President and General Manager (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.