SEC Filing | Peloton Interactive, Inc.

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pton-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2023


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

For the transition period from to

Commission File Number: 001-39058

Peloton Interactive, Inc.

(Exact name of registrant as specified in its charter)



Delaware						47-3533761
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)
441 Ninth Avenue, Sixth Floor						10001
New York, New York						(Zip Code)
(Address of principal executive offices)
(929) 567-0006 (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.000025 par value per share	PTON	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

As of April 28, 2023, the number of shares of the registrant’s Class A common stock outstanding was 336,128,664, and the number of shares of the registrant’s Class B common stock outstanding was 18,209,460.


	TABLE OF CONTENTS
		Page

	Special Note Regarding Forward Looking Statements	3
Part I. Financial Information
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and June 30, 2022	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended March 31, 2023 and 2022 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2023 and 2022 (unaudited)	5
	Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the Three and Nine Months Ended March 31, 2023 and 2022 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

	Part II. Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

SIGNATURES		47

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including, without limitation, statements regarding our execution of and timing of and the expected benefits from our restructuring initiatives and cost-saving measures, the cost savings and other efficiencies of expanding relationships with our third-party partners, details regarding and the timing of the launch of new products and services, our new initiatives with retailer partners and our efforts to optimize our retail store footprint, the prices of our products and services in the future, our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “target,” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements use these words or expressions.

We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions and other important factors that could cause actual results to differ materially from those stated, including, but not limited to:

•our ability to achieve and maintain future profitability;

•our ability to attract and maintain Subscribers;

•our ability to accurately forecast consumer demand of our products and services and adequately maintain our inventory;

•our ability to execute and achieve the expected benefits of our restructuring initiatives and other cost-saving measures;

•our ability to effectively manage our growth;

•our ability to anticipate consumer preferences and successfully develop and offer new products and services in a timely manner, or effectively manage the introduction of new or enhanced products and services;

•demand for our products and services and growth of the connected fitness products industry;

•our reliance on a limited number of suppliers, contract manufacturers, and logistics partners for our Connected Fitness Products (as defined below);

•our reliance on and lack of control over suppliers, contract manufacturers and logistics partners for our Connected Fitness Products;

•our ability to predict our long-term performance and declines in our revenue growth as our business matures;

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

•declines in sales of our Bike and Bike+;

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

•our dependence on third-party licenses for use of music in our content;

•actual or perceived defects in, or safety of, our products, including any impact of product recalls or legal or regulatory claims, proceedings or investigations involving our products;

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

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

•those risks and uncertainties described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 and “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q and the sections titled “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, as such factors may be updated in our filings with the Securities and Exchange Commission (the “SEC”).

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PELOTON INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share amounts)


	March 31,		June 30,
	2023		2022
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	873.6	$	1,253.9
Accounts receivable, net	108.3		83.6
Inventories, net	625.7		1,104.5
Prepaid expenses and other current assets	210.0		192.5
Total current assets	1,817.6		2,634.6
Property and equipment, net	478.6		610.9
Intangible assets, net	29.3		41.3
Goodwill	41.2		41.2
Restricted cash	79.3		3.8
Operating lease right-of-use assets, net	545.7		662.5
Other assets	24.6		34.3
Total assets	$	3,016.3	$	4,028.5
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	514.9	$	797.4
Deferred revenue and customer deposits	200.5		201.1
Current portion of long-term debt and other bank borrowings	7.5		7.5
Operating lease liabilities, current	87.9		86.4
Other current liabilities	2.5		13.2
Total current liabilities	813.2		1,105.5
0% Convertible senior notes, net	986.9		864.0
Term loan, net	690.6		690.0
Operating lease liabilities, non-current	619.5		725.4
Other non-current liabilities	33.1		50.7
Total liabilities	3,143.3		3,435.6
Commitments and contingencies (Note 8)
Stockholders’ (deficit) equity
Common stock, $0.000025 par value; 2,500,000,000 and 2,500,000,000 Class A shares authorized, 336,026,041 and 308,241,938 shares issued and outstanding as of March 31, 2023 and June 30, 2022, respectively; 2,500,000,000 and 2,500,000,000 Class B shares authorized, 18,209,460 and 30,032,078 shares issued and outstanding as of March 31, 2023 and June 30, 2022, respectively.	—		—
Additional paid-in capital	4,543.0		4,291.3
Accumulated other comprehensive income	19.9		12.2
Accumulated deficit	(4,690.0)		(3,710.6)
Total Stockholders’ (deficit) equity	(127.0)		592.9
Total liabilities and stockholders' (deficit) equity	$	3,016.3	$	4,028.5

See accompanying notes to these unaudited condensed consolidated financial statements.

PELOTON INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in millions, except share and per share amounts)


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
Revenue:
Connected Fitness Products	$	324.1	$	594.4	$	909.8	$	1,891.9
Subscription	424.7		369.9		1,248.3		1,011.6

Total revenue	748.9		964.3		2,158.1		2,903.4
Cost of revenue:
Connected Fitness Products	341.7		662.3		1,025.8		1,848.1
Subscription	136.9		117.8		409.8		327.2

Total cost of revenue	478.7		780.1		1,435.6		2,175.3
Gross profit	270.2		184.2		722.4		728.2
Operating expenses:
Sales and marketing	154.6		227.7		510.4		860.8
General and administrative	249.2		242.3		635.3		731.3
Research and development	78.2		77.1		246.3		274.6
Goodwill impairment	—		181.9		—		181.9
Impairment expense	39.4		32.5		111.9		42.5
Restructuring expense	12.0		158.5		167.9		158.5
Supplier settlements	2.9		—		22.0		—
Total operating expenses	536.2		920.0		1,693.8		2,249.4
Loss from operations	(266.0)		(735.8)		(971.3)		(1,521.2)
Other (expense) income, net:
Interest expense	(26.6)		(9.1)		(69.7)		(26.5)
Interest income	7.9		0.2		17.7		1.1
Foreign exchange gain (loss)	9.1		(11.5)		3.9		(19.1)
Other income, net	0.4		1.2		3.0		0.7
Total other expense, net	(9.1)		(19.2)		(45.1)		(43.8)
Loss before provision for income taxes	(275.2)		(755.0)		(1,016.4)		(1,565.0)
Income tax expense	0.8		2.1		3.5		7.5
Net loss	$	(275.9)	$	(757.1)	$	(1,019.9)	$	(1,572.4)
Net loss attributable to Class A and Class B common stockholders	$	(275.9)	$	(757.1)	$	(1,019.9)	$	(1,572.4)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.79)	$	(2.27)	$	(2.97)	$	(4.96)
Weighted-average Class A and Class B common shares outstanding, basic and diluted	350,426,631		333,864,579		343,753,996		317,245,844
Other comprehensive (loss) income:
Net unrealized losses on marketable securities	$	—	$	—	$	—	$	(0.4)
Change in foreign currency translation adjustment	(1.5)		(5.6)		6.7		(3.5)
Derivative adjustments:
Net unrealized loss on hedging derivatives	—		(3.6)		—		(4.7)
Reclassification for derivative adjustments included in Net loss	0.3		1.4		1.0		0.9
Total other comprehensive (loss) income	(1.2)		(7.9)		7.7		(7.8)
Comprehensive loss	$	(277.1)	$	(765.0)	$	(1,012.2)	$	(1,580.2)

See accompanying notes to these unaudited condensed consolidated financial statements.

PELOTON INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)


	Nine Months Ended March 31,
	2023		2022
Cash Flows from Operating Activities:
Net loss	$	(1,019.9)	$	(1,572.4)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	93.1		102.4
Stock-based compensation expense	333.7		241.9
Non-cash operating lease expense	62.5		66.8
Amortization of premium from marketable securities	—		3.4
Amortization of debt discount and issuance costs	10.0		25.5
Impairment expense	111.9		42.5
Goodwill impairment	—		181.9

Net foreign currency adjustments	(5.3)		19.1
Changes in operating assets and liabilities:
Accounts receivable	(24.9)		(3.6)
Inventories	435.1		(473.3)
Prepaid expenses and other current assets	53.6		(40.5)
Other assets	5.2		(6.6)
Accounts payable and accrued expenses	(296.6)		(260.4)
Customer deposits and deferred revenue	(0.7)		46.4
Operating lease liabilities, net	(65.8)		(49.1)
Other liabilities	(24.2)		(1.6)
Net cash used in operating activities	(332.2)		(1,677.8)
Cash Flows from Investing Activities:
Maturities of marketable securities	—		211.0
Sales of marketable securities	—		306.7
Capital expenditures and capitalized internal-use software development costs	(63.8)		(267.7)
Business combinations, net of cash acquired	—		(11.0)
Asset acquisitions, net of cash acquired	—		(16.0)
Proceeds from sales of net assets	12.4		—
Net cash (used in) provided by investing activities	(51.4)		223.0
Cash Flows from Financing Activities:
Proceeds from public offering, net of issuance costs	—		1,218.8
Principal repayment of Term Loan	(5.6)		—

Proceeds from employee stock purchase plan withholdings	5.1		14.9
Proceeds from exercise of stock options	72.6		76.7
Principal repayments of finance leases	(2.0)		(1.3)
Net cash provided by financing activities	70.0		1,309.0
Effect of exchange rate changes	8.9		(23.6)
Net change in cash, cash equivalents, and restricted cash	(304.7)		(169.4)
Cash, cash equivalents, and restricted cash — Beginning of period	1,257.6		1,135.7
Cash, cash equivalents, and restricted cash — End of period	$	952.9	$	966.2
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	56.7	$	1.0
Cash paid for income taxes	$	12.9	$	13.7
Supplemental Disclosures of Non-Cash Investing and Financing Information:

PELOTON INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)


Accrued and unpaid capital expenditures, including software	$	1.5	$	36.0
Stock-based compensation capitalized for software development costs	$	7.7	$	8.0

See accompanying notes to these unaudited condensed consolidated financial statements.

PELOTON INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in millions)


	Class A and Class B Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount
Balance - December 31, 2021	331.4	$	—	$	4,048.8	$	18.3	$	(1,698.2)	$	2,368.9
Activity related to stock-based compensation	5.2	—		138.9		—		—		138.9
Issuance of common stock under employee stock purchase plan	0.4	—		10.2		—		—		10.2

Other comprehensive loss	—	—		—		(7.9)		—		(7.9)
Net loss	—	—		—		—		(757.1)		(757.1)
Balance - March 31, 2022	337.1	$	—	$	4,197.9	$	10.4	$	(2,455.3)	$	1,753.0

Balance - December 31, 2022	344.6	$	—	$	4,423.4	$	21.1	$	(4,414.0)	$	30.5
Activity related to stock-based compensation	9.1	—		115.1		—		—		115.1
Issuance of common stock under employee stock purchase plan	0.5	—		4.5		—		—		4.5

Other comprehensive loss	—	—		—		(1.2)		—		(1.2)
Net loss	—	—		—		—		(275.9)		(275.9)
Balance - March 31, 2023	354.2	$	—	$	4,543.0	$	19.9	$	(4,690.0)	$	(127.0)


	Class A and Class B Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount
Balance - June 30, 2021	300.1	$	—	$	2,618.9	$	18.2	$	(883.0)	$	1,754.1
Activity related to stock-based compensation	9.1	—		338.4		—		—		338.4
Issuance of common stock under employee stock purchase plan	0.7	—		21.9		—		—		21.9
Issuance of common stock pursuant to public offering, net of issuance costs	27.2	—		1,218.7		—		—		1,218.7
Other comprehensive loss	—	—		—		(7.8)		—		(7.8)
Net loss	—	—		—		—		(1,572.4)		(1,572.4)
Balance - March 31, 2022	337.1	$	—	$	4,197.9	$	10.4	$	(2,455.3)	$	1,753.0

Balance - June 30, 2022	338.3	$	—	$	4,291.3	$	12.2	$	(3,710.6)	$	592.9
Activity related to stock-based compensation	15.0	—		403.9		—		—		403.9
Issuance of common stock under employee stock purchase plan	0.9	—		7.9		—		—		7.9
Cumulative effect of adopting ASU 2020-06	—	—		(160.1)		—		40.6		(119.5)

Other comprehensive income	—	—		—		7.7		—		7.7
Net loss	—	—		—		—		(1,019.9)		(1,019.9)
Balance - March 31, 2023	354.2	$	—	$	4,543.0	$	19.9	$	(4,690.0)	$	(127.0)

See accompanying notes to these unaudited condensed consolidated financial statements.

PELOTON INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in millions, except share and per share amounts)

1. Description of Business and Basis of Presentation

Description and Organization

Peloton Interactive, Inc. (“Peloton” or the “Company”) is the largest interactive fitness platform in the world with a loyal community of Members, which we define as any individual who has a Peloton account through a paid Connected Fitness Subscription (“All-Access Membership”) or a paid Peloton App Subscription. The Company pioneered connected, technology-enabled fitness with the creation of its interactive fitness equipment (“Connected Fitness Products”) and the streaming of immersive, instructor-led boutique classes to its Members anytime, anywhere. The Company makes fitness entertaining, approachable, effective, and convenient while fostering social connections that encourage Members to be the best versions of themselves.

Basis of Presentation and Consolidation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. The condensed consolidated balance sheet as of June 30, 2022, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations of the SEC. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the "Form 10-K"). However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, cash flows, and the changes in equity for the interim periods. The results for the three and nine months ended March 31, 2023 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending June 30, 2023, or any other period.

Certain monetary amounts, percentages, and other figures included elsewhere in these financial statements have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

Certain immaterial amounts from the prior year have been reclassified to conform with current-year presentation.

Except as described elsewhere in Note 2 - Summary of Significant Accounting Policies under the section titled “Recently Issued Accounting Pronouncements,” there have been no material changes to the Company’s significant accounting policies as described in the Form 10-K.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, product recall and corrective action cost, the realizability of inventory, content costs for past use reserve, fair value measurements, the incremental borrowing rate associated with lease liabilities, impairment of long-lived and intangible assets, useful lives of long-lived assets, including property and equipment and finite-lived intangible assets, product warranty, goodwill, accounting for income taxes, stock-based compensation expense, transaction price estimates, the fair values of assets acquired and liabilities assumed in business combinations and asset acquisitions, future restructuring charges, and commitments and contingencies. Actual results may differ from these estimates.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

ASU 2020-06

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The guidance simplified the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock, thereby limiting the accounting results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, the guidance eliminated the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. ASU 2020-06 is effective for public companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the standard, effective July 1, 2022, using the modified retrospective transition method. Adoption of the new standard resulted in a reduction to Additional paid-in capital of $160.1 million to remove the equity component separately recorded for the conversion features associated with the Notes (as defined in Note 5 - Fair Value Measurements), an increase of $119.6 million in the carrying value of its Notes to reflect the full principal amount of the Notes outstanding net of issuance costs, and a decrease to Accumulated deficit of $40.6 million.

Accounting Pronouncements Not Yet Adopted

ASU 2021-08

In October 2021, the Financial Accounting Standards Board issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. This standard is effective for annual periods beginning after December 15, 2022, including interim periods therein, with early adoption permitted, and should be applied prospectively to acquisitions occurring on or after the effective date. The Company will continue to evaluate the impact of this guidance, which will depend on the contract assets and liabilities acquired in future business combinations.

3. Revenue

The Company’s primary source of revenue is from sales of its Connected Fitness Products and associated recurring Subscription revenues.

The Company determines revenue recognition through the following steps:

•Identification of the contract, or contracts, with a customer;

•Identification of the performance obligations in the contract;

•Determination of the transaction price;

•Allocation of the transaction price to the performance obligations in the contract; and

•Recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s revenue is reported net of sales returns, discounts, incentives, and rebates to commercial distributors as a reduction of the transaction price. Certain contracts include consideration payable that is accounted for as a payment for distinct goods or services. The Company estimates its liability for product returns and concessions based on historical trends by product category, impact of seasonality, and an evaluation of current economic and market conditions and records the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of revenue. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.

Some of the Company’s contracts with customers contain multiple performance obligations. For customer contracts that include multiple performance obligations, the Company accounts for individual performance obligations if they are distinct. The transaction price is then allocated to each performance obligation based on its standalone selling price. The Company generally determines the standalone selling price based on the prices charged to customers.

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

The Company expenses sales commissions on its Connected Fitness Products when incurred because the amortization period would have been less than one year. These costs are recorded in Sales and marketing in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Connected Fitness Products

Connected Fitness Products include the Company’s portfolio of Connected Fitness Products and related accessories, Precor branded fitness products, delivery and installation services, Peloton branded apparel, extended warranty agreements, and commercial service contracts. The Company recognizes Connected Fitness Product revenue net of sales returns and discounts when the product has been delivered to the customer, except for extended warranty revenue that is recognized over the warranty period and service revenue that is recognized over the term of the service contract. The Company allows customers to return Peloton branded Connected Fitness Products within thirty days of purchase, as stated in its return policy.

The Company records fees paid to third-party financing partners in connection with its consumer financing program as a reduction of revenue, as it considers such costs to be a customer sales incentive. The Company records payment processing fees for its credit card sales for Connected Fitness Products within Sales and marketing in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Subscription

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

Amounts paid for subscription fees, net of refunds are included within Deferred revenue and customer deposits on the Company’s Condensed Consolidated Balance Sheets and recognized ratably over the subscription term. The Company records payment processing fees for its monthly subscription charges within cost of Subscription revenue in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Sales tax collected from customers and remitted to governmental authorities is not included in revenue and is reflected as a liability on the Company’s Condensed Consolidated Balance Sheets.

Standard Product Warranty

The Company offers a standard product warranty that its Connected Fitness Products will operate under normal, non-commercial use for a period of one year covering the touchscreen and most original Bike, Bike+, Tread, Tread+, Row, and Guide components from the date of original delivery. The Company has the obligation, at its option, to either repair or replace the defective product. At the time revenue is recognized, an estimate of future warranty costs are recorded as a component of cost of revenue. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies and business practices. The Company’s products are manufactured both in-house and by contract manufacturers, and in certain cases, the Company may have recourse to such contract manufacturers.

Activity related to the Company’s accrual for our estimated future product warranty obligation was as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
	(in millions)
Balance at beginning of period	$	36.2	$	48.5	$	51.1	$	51.5
Provision for warranty accrual	7.0		14.7		12.8		38.4
Warranty claims	(13.4)		(18.7)		(34.1)		(45.4)
Balance at end of period	$	29.8	$	44.5	$	29.8	$	44.5

The Company also offers the option for customers in some markets to purchase an extended warranty and service contract that extends or enhances the technical support, parts, and labor coverage offered as part of the base warranty included with the Connected Fitness Products for additional periods ranging from 12 to 36 months.

Extended warranty revenue is recognized on a gross basis as the Company has a continuing obligation to perform over the service period. Extended warranty revenue is recognized ratably over the extended warranty coverage period and is included in Connected Fitness Product revenue in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Disaggregation of Revenue

The Company’s revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 12 - Segment Information.

The Company’s revenue disaggregated by geographic region, were as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
	(in millions)
North America	$	692.5	$	873.2	$	1,996.6	$	2,637.0
International	56.4		91.2		161.4		266.5
Total revenue	$	748.9	$	964.3	$	2,158.1	$	2,903.4

During the three and nine months ended March 31, 2023, the Company’s revenue attributable to the United States was $666.8 million and $1,923.6 million, or 89% and 89% of total revenue, respectively. During the three and nine months ended March 31, 2022, the Company’s revenue attributable to the United States was $824.3 million and $2,503.2 million, or 85% and 86% of total revenue, respectively.

Customer Deposits and Deferred Revenue

As of March 31, 2023 and June 30, 2022, customer deposits of $101.6 million and $109.2 million, respectively, and deferred revenue of $98.9 million and $91.9 million, respectively, were included in Deferred revenue and customer deposits on the Company’s Condensed Consolidated Balance Sheets.

In the nine months ended March 31, 2023 and 2022, the Company recognized revenue of $92.0 million and $68.2 million, respectively, that was included in the deferred revenue balance as of June 30, 2022 and 2021, respectively.

Deferred revenue is recorded for nonrefundable cash payments received for the Company’s performance obligation to transfer, or stand ready to transfer, goods or services in the future. Customer deposits represent payments received in advance before the Company transfers a good or service to the customer and are refundable.

4. Restructuring

In February 2022, the Company announced and began implementing a restructuring plan to realign the Company’s operational focus to support its multi-year growth, scale the business, and improve costs (the “Restructuring Plan”). The Restructuring Plan originally included: (i) reducing the Company’s headcount; (ii) closing several assembly and manufacturing plants, including the completion and subsequent sale of the shell facility for the Company’s previously planned Peloton Output Park; (iii) closing and consolidating several distribution facilities; and (iv) shifting to third-party logistics providers in certain locations. The Company expects the Restructuring Plan to be substantially completed by the end of fiscal 2024.

In July 2022, August 2022 and October 2022, the Company took actions to update the Restructuring Plan. On July 12, 2022, the Company announced it is exiting all owned-manufacturing operations and expanding its current relationship with Taiwanese manufacturer Rexon Industrial Corp. Additionally, on August 12, 2022, the Company announced the decision to perform the following restructuring activities: (i) fully transitioning its North American Field Operations to third-party providers, including the significant reduction of its delivery workforce teams; (ii) eliminating a significant number of roles on the North America Member Support team and exiting its real-estate footprints in its Plano and Tempe locations; and (iii) reducing its retail showroom presence. On October 6, 2022, the Company announced approximately 500 global team member positions have been eliminated.

As a result of the Restructuring Plan, the Company incurred the following charges, of which Asset write-downs and write-offs are included within Impairment expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The remaining charges incurred due to the Restructuring Plan are included within Restructuring expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss:


	Three Months Ended March 31, 2023		Nine Months Ended March 31, 2023
Cash restructuring charges:	(in millions)
Severance and other personnel costs	$	6.9	$	68.0
Professional fees and other related charges	4.4		16.4
Total cash charges	11.3		84.4

Non-cash charges:
Asset write-downs and write-offs	36.0		108.6
Stock-based compensation expense	0.7		83.5
Write-offs of inventory related to restructuring activities (1)	—		3.7
Total non-cash charges	36.8		195.8

Total	$	48.0	$	280.2

(1) Write-offs of inventory are included within Cost of revenue: Connected Fitness Products in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

In connection with the Restructuring Plan, the Company committed to the closures of certain warehouse and retail locations, the discontinuation of manufacturing in North America, and the wind down of certain software implementation and development projects. Due to the actions taken, the Company tested certain long-lived assets (asset groups) for recoverability by comparing the carrying values of the asset groups to estimates of their future undiscounted cash flows, which were generally the liquidation value, or for operating lease right-of-use assets, income from a sublease arrangement. Based on the results of the recoverability tests, the Company determined that during the three and nine months ended March 31, 2023, the undiscounted cash flows of certain assets (asset groups) were below their carrying values, indicating impairment. The assets were written down to their estimated fair values, which were determined based on their estimated liquidation or sales value, or for operating lease right-of-use assets, discounted cash flows of a sublease arrangement.

The following tables present a roll-forward of cash restructuring-related liabilities, which is included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets, as follows:


	Severance and other personnel costs		Professional fees and other related charges		Total
	(in millions)
Balance as of December 31, 2022	$	22.3	$	1.1	$	23.4
Charges	6.9		4.4		11.3
Cash payments	(16.3)		(5.5)		(21.9)
Balance as of March 31, 2023	$	12.8	$	—	$	12.8


	Severance and other personnel costs		Professional fees and other related charges		Total
	(in millions)
Balance as of June 30, 2022	$	10.9	$	—	$	10.9
Charges	68.0		16.4		84.4
Cash payments	(66.1)		(16.4)		(82.5)
Balance as of March 31, 2023	$	12.8	$	—	$	12.8

In addition to the above charges, the Company incurred approximately $1.9 million of capital expenditures related to Peloton Output Park during the nine months ended March 31, 2023.

In connection with the Restructuring Plan, the Company estimates that it will incur additional cash charges of approximately $20 million, primarily composed of severance and other exit costs, in fiscal year 2023 and beyond. Additionally, the Company expects to recognize additional non-cash charges of approximately $35 million, primarily composed of asset impairment and stock-based compensation charges in connection with the Restructuring Plan.

5. Fair Value Measurements

Fair Value Measurements of Other Financial Instruments

The following tables present the estimated fair values of the Company’s financial instruments that are not recorded at fair value on the Condensed Consolidated Balance Sheets:


	As of March 31, 2023
	Level 1		Level 2		Level 3		Total
	(in millions)
0% Convertible Senior Notes	$	—	$	760.0	$	—	$	760.0


	As of June 30, 2022
	Level 1		Level 2		Level 3		Total
	(in millions)
0% Convertible Senior Notes	$	—	$	632.2	$	—	$	632.2

The fair value of the 0% Convertible Senior Notes due February 15, 2026 (the “Notes”) is determined based on the closing price on the last trading day of the reporting period.

The carrying value of the Term Loan (as defined below) approximates the fair value of the Term Loan as of March 31, 2023.

6. Inventories

Inventories were as follows:


	March 31, 2023		June 30, 2022
	(in millions)
Raw materials	$	50.0	$	102.5
Work-in-process	—		3.7
Finished products(1)	792.2		1,283.7
Total inventories	842.2		1,389.9
Less: Reserves	(216.4)		(285.4)
Total inventories, net	$	625.7	$	1,104.5

_________________________

(1) Includes $21.1 million and $36.4 million of finished goods inventory in transit, products owned by the Company that have not yet been received at a Company distribution center, as of March 31, 2023 and June 30, 2022, respectively.

The Company periodically assesses and adjusts the value of inventory for estimated excess and obsolete inventory based upon estimates of future demand and market conditions, as well as damaged or otherwise impaired goods. The Company recorded inventory reserves as of March 31, 2023 primarily in the amounts of $99.4 million related to excess accessories and apparel inventory that the Company does not expect to sell above its current carrying value and $86.0 million primarily related to returned Connected Fitness Products that the Company does not expect to sell.

7. Debt

Convertible Notes and the Indenture

In February 2021, the Company issued $1.0 billion aggregate principal amount of the Notes in a private offering, including the exercise in full of the over-allotment option granted to the initial purchasers of $125.0 million. The Notes were issued pursuant to an Indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Notes are senior unsecured obligations of the Company and do not bear regular interest, and the principal amount of the Notes does not accrete. The net proceeds from this offering were approximately $977.2 million, after deducting the initial purchasers' discounts and commissions and the Company’s offering expenses.

Each $1,000 principal amount of the Notes is initially convertible into 4.1800 shares of the Company’s Class A common stock, $0.000025 par value per share (“Class A Common Stock”), which is equivalent to an initial conversion price of approximately $239.23 per share. The conversion rate is subject to customary adjustments under certain circumstances in accordance with the terms of the Indenture. In addition, if certain corporate events that constitute a make-whole fundamental change occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Notes will mature on February 15, 2026, unless earlier converted, redeemed, or repurchased. The Notes will be convertible at the option of the holders at certain times and upon the occurrence of certain events in the future.

On or after August 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of the Class A Common Stock or a combination of cash and shares of the Class A Common Stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. It is the Company’s current intent to settle the principal amount of the Notes with cash.

The Company may redeem for cash all or any portion of the Notes, at its option, on or after February 20, 2024 and on or before the 20th scheduled trading day immediately before the maturity date, if the last reported sale price per share of the Class A Common Stock exceeds 130% of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (2) the trading day immediately before the date the Company sends such notice at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid special interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.

Upon the occurrence of a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date.

The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively subordinated in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other liabilities of current or future subsidiaries of the Company (including trade payables and to the extent the Company is not a holder thereof, preferred equity, if any, of the Company’s subsidiaries).

The net carrying amount of the liability component of the Notes was as follows:


	March 31, 2023
	(in millions)
Principal	$	1,000.0

Unamortized debt issuance costs	(13.1)
Net carrying amount	$	986.9

The following table sets forth the interest expense recognized related to the Notes:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
	(in millions)
Amortization of debt discount(1)	$	—	$	7.7	$	—	$	23.0
Amortization of debt issuance costs	1.1		0.8		3.4		2.5
Less: Interest capitalized	—		(0.1)		—		(0.3)
Total interest expense related to the Notes	$	1.1	$	8.5	$	3.4	$	25.2

(1) The decreases in total interest expense during the three and nine months ended March 31, 2023 were due to the derecognition of the unamortized debt discount, partially offset by the increases in the amortization of issuance costs previously recognized in equity. These changes were the result of the Company’s adoption of ASU No. 2020-06, as of July 1, 2022, as described in Note 2 - Summary of Significant Accounting Policies.

Capped Call Transactions

In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Call Transactions”). The Capped Call Transactions have an initial strike price of approximately $239.23 per share, subject to adjustments, which corresponds to the approximate initial conversion price of the Notes. The cap price of the Capped Call Transactions will initially be approximately $362.48 per share. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, 6.9 million shares of Class A Common Stock. The Capped Call Transactions are expected generally to reduce potential dilution to the Class A Common Stock upon any conversion of Notes and/or offset any potential cash payments the Company would be required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. If, however, the market price per share of Class A Common Stock, as measured under the terms of the Capped Call

Transactions, exceeds the cap price of the Capped Call Transactions, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the Class A Common Stock exceeds the cap price of the Capped Call Transactions.

For accounting purposes, the Capped Call Transactions are separate transactions, and are not part of the terms of the Notes. The net cost of $81.3 million incurred to purchase the Capped Call Transactions was recorded as a reduction to Additional paid-in capital on the Company’s Condensed Consolidated Balance Sheets.

Second Amended and Restated Credit Agreement

In 2019, the Company entered into an amended and restated revolving credit agreement (the “Amended and Restated Credit Agreement”) as amended, modified or supplemented prior to entrance into the Second Amended and Restated Credit Agreement (as defined below). The Amended and Restated Credit Agreement provided for a $500.0 million secured revolving credit facility, including up to the lesser of $250.0 million and the aggregate unused amount of the facility for the issuance of letters of credit.

The Amended and Restated Credit Agreement also permitted the incurrence of indebtedness to permit the Capped Call Transactions and issuance of the Notes.

On May 25, 2022, the Company entered into an Amendment and Restatement Agreement to the Second Amended and Restated Credit Agreement (and as amended, restated or otherwise modified from time to time, the “Second Amended and Restated Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and certain banks and financial institutions party thereto as lenders and issuing banks. Pursuant to the Second Amended and Restated Credit Agreement, the Company amended and restated the Amended and Restated Credit Agreement.

The Second Amended and Restated Credit Agreement provides for a $750.0 million term loan facility (the “Term Loan”), which will be due and payable on May 25, 2027 or, if greater than $200.0 million of the Notes are outstanding on November 16, 2025 (the “Springing Maturity Condition”), November 16, 2025 (the “Springing Maturity Date”). The Term Loan amortizes in quarterly installments of 0.25%, payable at the end of each fiscal quarter and on the maturity date.

The Second Amended and Restated Credit Agreement also provided for a $500.0 million revolving credit facility (the “Revolving Facility”), $35.0 million of which would mature on June 20, 2024 (the “Non-Consenting Commitments”), with the rest ($465.0 million) maturing on December 10, 2026 (the “Consenting Commitments”) or if the Springing Maturity Condition is met and the Term Loan is outstanding on such date, the Springing Maturity Date. On August 24, 2022, the Company amended the Second Amended and Restated Credit Agreement (the “First Amendment”) such that the Company is only required to meet the total liquidity covenant, set at $250.0 million (the “Liquidity Covenant”), and the total revenues covenant, set at $3.0 billion for the four-quarter trailing period, to the extent any revolving loans are borrowed and outstanding. On May 2, 2023, the Company further amended the Second Amended and Restated Credit Agreement (the “Second Amendment”) to, among other things, (i) reduce the aggregate revolving credit commitments from $500.0 million to $400.0 million, with the Non-Consenting Commitments reduced to $28.0 million and the Consenting Commitments reduced to $372.0 million, and (ii) remove the covenant requiring the Company to maintain a minimum total four-quarter revenue level of $3.0 billion at any time when revolving loans are outstanding. Following the Second Amendment, borrowings under the Revolving Facility will be limited to the lesser of (a) $400.0 million and (b) an amount equal to the “Subscription” revenue of the Company and its subsidiaries for the most recently completed fiscal quarter of the Company. The Liquidity Covenant will still be replaced with a covenant to maintain a minimum secured debt to adjusted EBITDA ratio upon our meeting a specified adjusted EBITDA threshold.

The Revolving Facility bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 2.25% per annum or the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 1.25% per annum for the Consenting Commitments, and bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate plus 2.75% per annum or the Alternate Base Rate plus 1.75% per annum for the Non-Consenting Commitments. The Company is required to pay an annual commitment fee of 0.325% per annum and 0.375% per annum on a quarterly basis based on the unused portion of the Revolving Facility for the Consenting Commitments and the Non-Consenting Commitments, respectively.

The Term Loan bears interest at a rate equal to, at our option, either at the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 5.50% per annum or the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 6.50% per annum. As stipulated in the Second Amended and Restated Credit Agreement, the applicable rates applicable to the Term Loan increased one time by 0.50% per annum as the Company chose not to obtain a public rating for the Term Loan from S&P Global Ratings or Moody’s Investors Services, Inc. on or prior to November 25, 2022. Any borrowing at the Alternate Base Rate is subject to a 1.00% floor and a term loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.50% floor and any revolving loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.00% floor.

The Second Amended and Restated Credit Agreement contains customary affirmative covenants as well as customary covenants that restrict our ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Second Amended and Restated Credit Agreement also contains certain customary events of default. Certain baskets and covenant levels have been decreased and will apply equally to both the Term Loan and Revolving Facility for so long as the Term Loan is outstanding. After the repayment in full of the Term Loan, such baskets and levels will revert to those previously disclosed in connection with the Amended and Restated Credit Agreement.

The obligations under the Second Amended and Restated Credit Agreement with respect to the Term Loan and the Revolving Facility are secured by substantially all of our assets, with certain exceptions set forth in the Second Amended and Restated Credit Agreement, and are required to be guaranteed by certain material subsidiaries of the Company if, at the end of future financial quarters, certain conditions are not met.

During the three and nine months ended March 31, 2023, the Company incurred total commitment fees of $0.4 million and $1.2 million, respectively, and $0.4 million and $1.0 million during the three and nine months ended March 31, 2022, respectively, which are included in Interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

As of March 31, 2023, the Company had drawn the full amount of the Term Loan and the Company had not drawn on the Revolving Facility, and the Company had $744.4 million of total outstanding borrowings under the Second Amended and Restated Credit Agreement.

In connection with the execution of the Second Amended and Restated Credit Agreement, the Company incurred debt issuance costs of $1.1 million, which are capitalized and presented as Other assets on the Company’s Condensed Consolidated Balance Sheets. These costs are being amortized to interest expense using the effective interest method over the term of the Second Amended and Restated Credit Agreement.

As of March 31, 2023, we were fully undrawn under our Revolving Facility and as such did not have to test the financial covenants under the Second Amended and Restated Credit Agreement. The Company is required to pledge or otherwise restrict a portion of cash and cash equivalents as collateral for standby letters of credit. As of March 31, 2023, the Company had outstanding letters of credit totaling $79.3 million, which is classified as Restricted cash on the Condensed Consolidated Balance Sheet.

Our proceeds in connection with the Term Loan were $696.4 million, net of discount of $33.8 million and issuance costs of $19.8 million. Both the discount and issuance costs are being amortized to interest expense over the term of the Term Loan using the effective interest rate method. Upon entering into the Term Loan, the effective interest rate was 10.2% and on November 25, 2022 the rate was updated to 13.7%.

The net carrying amount of the Term Loan was as follows:


	March 31, 2023		June 30, 2022
	(in millions)
Principal	$	750.0	$	750.0
Principal payments	(5.6)		—
Unamortized debt discount	(29.2)		(33.1)
Unamortized debt issuance costs	(17.1)		(19.4)
Net carrying amount	$	698.1	$	697.5

The following table sets forth the interest expense recognized related to the Term Loan:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
	(in millions)
Amortization of debt discount	$	1.3	$	—	$	4.0	$	—
Amortization of debt issuance costs	0.8		—		2.4		—
Total interest expense related to the Term Loan	$	2.1	$	—	$	6.4	$	—

8. Commitments and Contingencies

The Company is subject to minimum guarantee royalty payments associated under certain music license agreements.

The following represents the Company's minimum annual guarantee payments under music license agreements for the next three years as of March 31, 2023:


	Future Minimum Payments
Fiscal Year	(in millions)
2023 (remaining)	$	30.5
2024	132.0
2025	48.8
2026	5.0
Total	$	216.4

Tread+ and Tread Product Recall Return Reserves and Cost Estimates

On May 5, 2021, the Company announced separate, voluntary recalls of its Tread+ and Tread products in collaboration with the U.S. Consumer Product Safety Commission ("CPSC") and halted sales of these products to work on product enhancements. On October 18, 2022, the CPSC and the Company jointly announced that consumers now have more time to get a full refund if they wish to return their Tread+. With the extension of the full refund period for one additional year, to November 6, 2023, the Company previously estimated that more Members would opt for a full refund, and accordingly increased the Company’s return reserve during the three months ended September 30, 2022. During the three months ended March 31, 2023, based on lower actual returns than previously estimated, the Company has updated its return reserve assumptions and decreased the Company’s return reserve. In addition, during the three months ended March 31, 2023, the Company recognized a contingent liability for the cost associated with the Tread+ product recall.

The following table details the (benefit)/reduction to Connected Fitness Products revenue for actual and future returns and costs associated with Tread+ and Tread product recalls that were recorded in Connected Fitness Products cost of revenue.


	Three Months Ended March 31,				Nine Months Ended March 31,
	2023		2022		2023		2022
	(in millions)
Returns accrual for reduction to Connected Fitness Products revenue	$	(11.9)	$	17.5	$	14.6	$	36.3
Costs of product recalls	13.2		2.0		15.7		7.6

Return reserves related to the impacts of the Tread+ recall of $29.3 million and $36.7 million were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of March 31, 2023 and 2022, respectively. The estimated return reserves are primarily based on historical and expected product returns.

Bike Corrective Action Plan

During the three months ended March 31, 2023, we accrued $8.4 million of estimated contingent loss expense related to a voluntary corrective action plan (“CAP”) involving certain seat posts in our original model Peloton Bike (not Peloton Bike+). We have voluntarily notified the U.S. Consumer Product Safety Commission (“CPSC”) regarding this issue and are cooperating with the CPSC to finalize a voluntary CAP. The contingent liability accrual was based on an amount that was deemed probable and estimable. It is reasonably possible that any additional accruals for contingent losses related to this matter could be material to the financial statements, however, we are unable to estimate the amount of such additional losses at this time. For more detail on the potential impacts of the CAP to our business, see Part II, Item 1A “Risk Factors - Risks Related to Our Connected Fitness Products and Members.”

Commitments to Suppliers

The Company utilizes contract manufacturers to build its products and accessories. These contract manufacturers acquire components and build products based on demand forecast information the Company supplies, which typically covers a rolling 12-month period. Consistent with industry practice, the Company acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover the Company’s forecasted product and manufacturing requirements for periods that range a number of months. In certain instances, these agreements allow the Company the option to cancel, reschedule, and/or adjust our requirements based on its business needs for a period of time before the order is due to be fulfilled. While the Company’s purchase orders are legally cancellable in many situations, there are some that are not cancellable in the event of a demand plan change or other circumstances, such as where the supplier has procured unique, Peloton-specific designs, and/or specific non-cancellable, non-returnable components based on our provided forecasts.

As of March 31, 2023, the Company’s commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of Peloton products were estimated to be approximately $211.9 million.

Legal and Regulatory Proceedings

The Company is, or may become, a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business.

For example, in May 2021 we initiated a voluntary recall of our Tread+ product in collaboration with the CPSC. In December 2022, to continue our cooperation with the CPSC, we entered into a settlement agreement with the CPSC regarding matters related to the Tread+ recall. In the settlement, which was publicly announced in January 2023, we agreed to pay a $19.1 million civil penalty, resolving the CPSC’s charges that we violated the Consumer Product Safety Act (“CPSA”). We continue to work cooperatively with the CPSC to further enhance the safety of our products. In addition, shortly after the May 2021 recalls, the U.S. Department of Justice (the “DOJ”) and the Department of Homeland Security subpoenaed us for documents and other information related to our statutory obligations under the CPSA and is continuing to investigate the matter. The SEC is also investigating our public disclosures concerning the recall, as well as other matters. In addition to the regulatory investigations, we are presently subject to class action litigation and private personal injury claims related to these perceived defects in the Tread+ and incidents reported to result from its use.

Additionally on April 29, 2021, Ashley Wilson filed a putative securities class action lawsuit against the Company and certain of its officers, captioned Wilson v. Peloton Interactive, Inc., et al., Case No. 1:21-cv-02369-CBA-PK, in the United States District Court for the Eastern District of