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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Peloton Interactive, Inc.
(Exact name of registrant as specified in its charter)
Delaware
47-3533761
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
441 Ninth Avenue, Sixth Floor10001
New York, New York
(Zip Code)
(Address of principal executive offices)
(917671-9198
(Registrant’s telephone number, including area code)
Not Applicable
(former name, former address and former fiscal year, if changed since last report)

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



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 January 31, 2022, the number of shares of the registrant’s Class A common stock outstanding was 302,996,134 and the number of shares of the registrant’s Class B common stock outstanding was 28,604,062.






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




SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements 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 the expected benefits from our restructuring initiative and cost saving measures, 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 effectively manage our growth;

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

our ability to execute and achieve the benefits of our restructuring initiative and other cost saving measures;

our ability to anticipate consumer preferences and successfully develop and introduce new products and services;

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

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

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

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

our reliance on and our ability to partner with third parties such as music licensors, service providers, and suppliers;

declines in sales of our Bike and Bike+;

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

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 sections 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 of this Quarterly Report on Form 10-Q, 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.

3


RISK FACTOR SUMMARY

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our Class A common stock. Some of the principal risks and uncertainties include the following:

We have incurred operating losses in the past, may incur operating losses in the future, and may not achieve or maintain profitability in the future.
We may be unable to attract and retain Subscribers, which could have an adverse effect on our business and rate of growth.
We have grown rapidly in recent years and have limited operating experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer.
Our operating results have been, and could in the future be, adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory.
We may not successfully execute or achieve the expected benefits of our restructuring initiative and other cost saving measures we may take in the future, and our efforts may result in further actions and/or additional asset impairment charges and adversely affect our business.
If we are unable to anticipate consumer preferences, and successfully develop and introduce new, innovative, and updated products and services in a timely manner, or effectively manage the introduction of new or enhanced products and services, our business may be adversely affected.
The connected fitness market is relatively new and, if the general market and specific demand for our products and services does not continue to grow, grows more slowly than we expect, or fails to grow as much as we expect, our business, financial condition, and operating results may be adversely affected.
We have a limited operating history from which to predict our long-term performance, and our past financial results may not be indicative of our future performance. Further, our revenue growth rate is likely to slow as our business matures.
The full impact of the COVID-19 pandemic is uncertain and cannot be predicted. The COVID-19 pandemic could worsen or its effects may be prolonged, including as a result of variants, which could have an adverse effect on our business, results of operations, and financial condition.
We operate in a highly competitive market and we may be unable to compete successfully against existing and future competitors.
We derive a significant majority of our revenue from sales of our Bike and Bike+. A decline in sales of our Bike and Bike+ would negatively affect our future revenue and operating results.
We rely on a limited number of suppliers, contract manufacturers, and logistics partners for our Connected Fitness Products. A loss of any of these partners could negatively affect our business.
We have limited control over our suppliers, contract manufacturers, and logistics partners, which may subject us to significant risks, including the potential inability to produce or obtain quality products and services on a timely basis or in sufficient quantity.
We depend upon third-party licenses for the use of music in our content. An adverse change to, loss of, or claim that we do not hold necessary licenses may have an adverse effect on our business, operating results, and financial condition.
Our success depends on our ability to maintain the value and reputation of the Peloton brand.



4


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
December 31,June 30,
20212021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$1,606.9 $1,134.8 
Marketable securities
 472.0 
Accounts receivable, net
94.7 71.4 
Inventories, net
1,541.3 937.1 
Prepaid expenses and other current assets
213.7 202.8 
Total current assets
3,456.6 2,818.1 
Property and equipment, net
737.6 591.9 
Intangible assets, net
229.2 247.9 
Goodwill
224.4 210.1 
Restricted cash
87.7 0.9 
Operating lease right-of-use assets, net705.5 580.1 
Other assets
41.6 36.7 
Total assets
$5,482.5 $4,485.6 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
$1,136.0 $989.1 
Customer deposits and deferred revenue
240.5 164.8 
Operating lease liabilities, current80.8 61.9 
Other current liabilities
24.4 27.2 
Total current liabilities
1,481.7 1,243.0 
Convertible senior notes, net846.7 829.8 
Operating lease liabilities, non-current743.7 620.4 
Other non-current liabilities
41.5 38.3 
Total liabilities
3,113.6 2,731.5 
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, $0.000025 par value; 2,500,000,000 and 2,500,000,000 Class A shares authorized, 302,778,818 and 270,855,356 shares issued and outstanding as of December 31, 2021 and June 30, 2021, respectively; 2,500,000,000 and 2,500,000,000 Class B shares authorized, 28,668,327 and 29,291,774 shares issued and outstanding as of December 31, 2021 and June 30, 2021, respectively.
  
Additional paid-in capital
4,048.8 2,618.9 
Accumulated other comprehensive income18.3 18.2 
Accumulated deficit
(1,698.2)(883.0)
Total stockholders’ equity
2,368.9 1,754.1 
Total liabilities and stockholders’ equity
$5,482.5 $4,485.6 
See accompanying notes to these unaudited condensed consolidated financial statements.
5

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(unaudited)
(in millions, except share and per share amounts)
Three Months Ended December 31,Six Months Ended December 31,
2021202020212020
Revenue:
Connected Fitness Products
$796.4 $870.1 $1,297.4 $1,471.5 
Subscription
337.5 194.7 641.7 351.2 
Total revenue
1,133.9 1,064.8 1,939.1 1,822.7 
Cost of revenue:
Connected Fitness Products
745.5 562.8 1,186.2 927.0 
Subscription
108.3 77.2 210.0 142.2 
Total cost of revenue
853.7 640.0 1,396.2 1,069.2 
Gross profit
280.2 424.8 543.0 753.5 
Operating expenses:
Sales and marketing
349.6 177.4 633.9 292.1 
General and administrative
248.7 141.1 489.0 249.7 
Research and development
100.0 47.5 197.7 84.1 
Impairment expense7.7  7.7  
Total operating expenses
705.9 366.0 1,328.3 625.8 
(Loss) income from operations
(425.7)58.8 (785.4)127.7 
Other (expense) income, net:
Interest expense
(8.8)(0.4)(17.4)(0.8)
Interest income
0.3 2.3 0.9 5.1 
Foreign exchange losses(1.7)(0.1)(7.6)(0.8)
Other expense, net
(0.4) (0.4) 
Total other (expense) income, net(10.6)1.8 (24.6)3.5 
(Loss) income before provision for income taxes
(436.3)60.6 (809.9)131.2 
Income tax expense (benefit)
3.1 (3.0)5.4 (1.7)
Net (loss) income
$(439.4)$63.6 $(815.3)$132.8 
Net (loss) income attributable to Class A and Class B common stockholders$(439.4)$63.6 $(815.3)$132.8 
Net (loss) income per share attributable to common stockholders, basic$(1.39)$0.22 $(2.64)$0.46 
Net (loss) income per share attributable to common stockholders, diluted$(1.39)$0.18 $(2.64)$0.39 
Weighted-average Class A and Class B common shares outstanding, basic317,110,297 292,462,184 309,119,648 290,591,037 
Weighted-average Class A and Class B common shares outstanding, diluted317,110,297 347,886,695 309,119,648 344,994,314 
Other comprehensive income:
Net unrealized losses on marketable securities$(0.2)$(1.3)$(0.4)$(2.6)
Change in foreign currency translation adjustment1.9 5.3 2.1 9.1 
Net unrealized loss on hedging derivatives(0.5) (1.5) 
Total other comprehensive income1.2 4.0 0.1 6.5 
Comprehensive (loss) income$(438.2)$67.5 $(815.2)$139.4 
See accompanying notes to these unaudited condensed consolidated financial statements.



6

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

Six Months Ended December 31,
20212020
Cash Flows from Operating Activities:
Net (loss) income$(815.3)$132.8 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization expense64.2 24.2 
Stock-based compensation expense124.8 67.1 
Non-cash operating lease expense41.7 28.2 
Amortization of premium from marketable securities3.4 3.5 
Amortization of debt discount and issuance costs17.1 0.2 
Impairment expense7.7  
Net foreign currency adjustments6.9  
Loss (gain) on disposals2.3 2.1 
Changes in operating assets and liabilities:
Accounts receivable(23.4)(18.0)
Inventories(601.5)(273.0)
Prepaid expenses and other current assets(50.8)(35.2)
Other assets(8.4)0.7 
Accounts payable and accrued expenses172.2 331.9 
Customer deposits and deferred revenue75.8 245.7 
Operating lease liabilities, net(24.9)4.1 
Other liabilities0.6 (3.9)
Net cash (used in) provided by operating activities(1,007.6)510.5 
Cash Flows from Investing Activities:
Purchases of marketable securities (449.1)
Maturities of marketable securities211.0 300.6 
Sales of marketable securities306.7  
Purchases of property and equipment(178.4)(119.4)
Business combinations, net of cash acquired(11.0) 
Asset acquisitions, net of cash acquired(16.0)(78.1)
Internal-use software costs and other(12.7)(0.7)
Net cash provided by (used in) investing activities299.6 (346.7)
Cash Flows from Financing Activities:
Proceeds from public offering, net of issuance costs1,218.8  
Proceeds from employee stock purchase plan withholdings15.2 7.2 
Proceeds from exercise of stock options54.2 53.3 
Taxes withheld and paid on employee stock awards (16.5)
Principal repayments of finance leases(1.0)(0.5)
Net cash provided by financing activities1,287.2 43.6 
Effect of exchange rate changes(20.3)5.5 
Net change in cash, cash equivalents, and restricted cash558.9 212.9 
Cash, cash equivalents, and restricted cash — Beginning of period1,135.7 1,037.0 
Cash, cash equivalents, and restricted cash — End of period$1,694.6 $1,249.9 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$0.5 $0.3 
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PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)

Cash paid for income taxes$9.1 $1.3 
Supplemental Disclosures of Non-Cash Investing and Financing Information:
Property and equipment accrued but unpaid$36.0 $47.2 
Stock-based compensation capitalized for software development costs$5.1 $1.8 
See accompanying notes to these unaudited condensed consolidated financial statements.
8

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions)
Class A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance - September 30, 2020
291.8 $ $2,412.9 $12.7 $(624.6)$1,801.0 
Activity related to stock-based compensation2.4 — 59.9 — — 59.9 
Other comprehensive income— — — 4.0 — 4.0 
Net income— — — — 63.6 63.6 
Balance - December 31, 2020
294.3 $ $2,472.7 $16.6 $(561.0)$1,928.3 
Balance - September 30, 2021
302.8 $ $2,748.6 $17.1 $(1,258.8)$1,506.9 
Activity related to stock-based compensation1.5 — 81.5 — — 81.5 
Issuance of common stock pursuant to public offering, net of issuance costs27.2 — 1,218.7 — — 1,218.7 
Other comprehensive income— — — 1.2 — 1.2 
Net loss— — — — (439.4)(439.4)
Balance - December 31, 2021
331.4 $ $4,048.8 $18.3 $(1,698.2)$2,368.9 
Class A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance - June 30, 2020
288.1 $ $2,361.8 $10.1 $(693.9)$1,678.0 
Activity related to stock-based compensation5.9 — 105.8 — — 105.8 
Issuance of common stock under employee stock purchase plan0.2 — 5.1 — — 5.1 
Other comprehensive income— — — 6.5 — 6.5 
Net income— — — — 132.8 132.8 
Balance - December 31, 2020
294.3 $ $2,472.7 $16.6 $(561.0)$1,928.3 
Balance - June 30, 2021
300.1 $ $2,618.9 $18.2 $(883.0)$1,754.1 
Activity related to stock-based compensation3.8 — 199.5 — — 199.5 
Issuance of common stock under employee stock purchase plan0.3 — 11.7 — — 11.7 
Issuance of common stock pursuant to public offering, net of issuance costs27.2 — 1,218.7 — — 1,218.7 
Other comprehensive income— — — 0.1 — 0.1 
Net loss— — — — (815.3)(815.3)
Balance - December 31, 2021
331.4 $ $4,048.8 $18.3 $(1,698.2)$2,368.9 

See accompanying notes to these unaudited condensed consolidated financial statements.
9

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





1. Description of Business and Basis of Presentation
Description and Organization
Peloton Interactive, Inc. (“Peloton” or the “Company”) is the largest interactive fitness platform in the world with a loyal community of Members, which we define as any individual who has a Peloton account through a paid Connected Fitness Subscription or a paid Peloton Digital Subscription. The Company pioneered connected, technology-enabled fitness with the creation of its interactive fitness equipment (“Connected Fitness Products”) and the streaming of immersive, instructor-led boutique classes to its Members anytime, anywhere. The Company makes fitness entertaining, approachable, effective, and convenient while fostering social connections that encourage 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, 2021, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on August 27, 2021 (the “Form 10-K”). However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, cash flows, and the changes in equity for the interim periods. The results for the three and six months ended December 31, 2021 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending June 30, 2022, or any other period.
Certain monetary amounts, percentages, and other figures included elsewhere in these financial statements have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
Except as described elsewhere in Note 2 - Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q under the heading “Recently Issued Accounting Pronouncements”, there have been no material changes to the Company’s significant accounting policies as described in the Form 10-K.
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2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, the realizability of inventory, content costs for past use reserve, fair value measurements, the incremental borrowing rate associated with lease liabilities, 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, valuation of the debt component of convertible senior notes, contingent consideration, and commitments and contingencies. Actual results may differ from these estimates.
Derivative Instruments and Hedging Activities
Our Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of foreign currency exchange risk. As required by ASC 815, the Company records all derivatives on the balance sheet at fair value in the following line items: Prepaid expenses and other current assets; and Other current liabilities.
The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company does not currently have fair value or net investment hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
In addition to our derivatives where we apply hedge accounting, the Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
The Company evaluates its convertible instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives requiring separate recognition in the Company’s financial statements in accordance with the criteria under ASC 815-15. As of December 31, 2021, the Company did not have any material derivative contracts or contracts with material embedded derivative features requiring bifurcation.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Recently Adopted
ASU 2020-01
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance clarifies the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company has completed its assessment and adopted this standard on July 1, 2021. The adoption of this standard did not materially impact the Company’s condensed consolidated financial statements.

ASU 2020-04 and ASU 2021-01
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which refines the scope of Topic ASC 848 and clarifies some of its guidance. The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The guidance in both updates was effective upon issuance and generally can be applied through December 31, 2022. The Company adopted this standard after LIBOR was discontinued on December 31, 2021. The adoption of this standard did not materially impact the Company's condensed consolidated financial statements.
Accounting Pronouncements Not Yet 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 will simplify 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
11


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 eliminates 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 will be 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. Upon adoption, the Company expects a decrease to Additional paid-in capital to remove the equity component separately recorded for the conversion features associated with the Notes (as defined in Note 7 - Debt of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), an increase in the carrying value of its Notes to reflect the full principal amount of the Notes outstanding net of issuance costs, and an increase to Accumulated deficit. The Company expects the adoption of this standard to reduce its reported Interest expense.

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) income.
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 which is recognized over the warranty period and service revenue which 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
12


Connected Fitness Products within Sales and marketing in the Company’s condensed consolidated statements of operations and comprehensive (loss) income.

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

Amounts paid for subscription fees, net of refunds are included within Customer deposits and deferred revenue 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) income.

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, and Tread+ components from the date of original delivery. The Company has the obligation, at its option, to either repair or replace the defective product. At the time revenue is recognized, an estimate of future warranty costs 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 December 31,Six Months Ended December 31,
2021202020212020
(in millions)
Balance at beginning of period$44.4 $38.6 $51.5 $34.2 
Provision for warranty accrual18.8 6.8 26.1 17.5 
Warranty claims(14.7)(12.8)(29.1)(19.1)
Balance at end of period$48.5 $32.6 $48.5 $32.6 
The Company also offers the option for customers in some markets to purchase an extended warranty and service contract that extends or enhances the technical support, parts, and labor coverage offered as part of the base warranty included with the Connected Fitness Product for an additional period of 12 to 27 months.

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) income.
Disaggregation of Revenue
The Company’s revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 13- Segment Information of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The Company’s revenue disaggregated by geographic region, were as follows:
Three Months Ended December 31,Six Months Ended December 31,
2021202020212020
(in millions)
North America
$1,035.0 $1,007.8 $1,763.8 $1,729.7 
International98.9 57.0175.3 93.0 
Total revenue$1,133.9 $1,064.8 $1,939.1 $1,822.7 

During the three and six months ended December 31, 2021, the Company’s revenue attributable to the United States was $982.7 million and $1,678.9 million or 87% and 87% of total revenue, respectively. During the three and six months ended December 31, 2020, the Company’s revenue attributable to the United States was $971.4 million and $1,673.7 million or 91% and 92% of total revenue, respectively.

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Customer Deposits and Deferred Revenue
As of December 31, 2021 and June 30, 2021, customer deposits of $159.9 million and $92.2 million, respectively, and deferred revenue of $80.6 million and $72.6 million, respectively, were included in Customer deposits and deferred revenue on the Company’s condensed consolidated balance sheets.

In the six months ended December 31, 2021 and 2020, the Company recognized revenue of $64.9 million and $22.1 million, respectively, that was included in the deferred revenue balance as of June 30, 2021 and 2020, 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. Fair Value Measurements
Fair Value Measurements of Other Financial Instruments
The following table presents 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 December 31, 2021
Level 1Level 2Level 3Total
(in millions)
Convertible Senior Notes$ $852.3 $ $852.3 
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.
5. Inventories
Inventories were as follows:
December 31, 2021June 30, 2021
(in millions)
Raw materials$100.3 $109.8 
Work-in-process5.5 7.9 
Finished products(1)
1,522.0 879.5 
Total inventories1,627.8 997.2 
Less: Reserves(86.5)(60.1)
Total inventories, net$1,541.3 $937.1 
_________________________
(1) Includes $572.3 million and $249.9 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 December 31, 2021 and June 30, 2021, respectively.
6. Acquisitions

Business Combination
Precor Incorporated
On April 1, 2021, the Company acquired the Precor business, which consisted of 15 legal entities (“Precor”) from Amer Sports Corporation (“Amer”) for a purchase price of approximately $412.0 million, net of cash acquired, which was paid in cash. During the six months ended December 31, 2021, the purchase consideration was reduced by $2.9 million associated with working capital adjustments, resulting in a revised purchase price of $409.2 million. Upon completion of the transaction, Precor became wholly owned subsidiaries of the Company.
During the fourth quarter of fiscal 2021, the Company completed a preliminary analysis to determine the fair values of the assets acquired and liabilities assumed and the amounts recorded reflected management’s initial assessment of fair value as of the closing date. Based on additional information obtained to date, the Company refined its initial assessment of fair value and, as a result, recognized the following adjustments to the Company’s preliminary purchase price allocation during the first quarter of fiscal 2022: Inventory decreased $4.0 million, Intangible assets, net increased $1.0 million, and deferred tax liability increased $3.4 million. The adjustments resulted in a corresponding increase to Goodwill of $3.5 million, of which $3.4 million relates to the deferred tax liability and $0.1 million relates to the updated fair value assessment. The adjustments did not result in a material impact on the financial results of prior periods.
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The Company expects to finalize its purchase price allocation after management has further analyzed and assessed a number of the factors used in establishing the fair values of assets acquired and liabilities assumed as of the acquisition date including, but not limited to, the working capital acquired. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation.

Other Acquisitions
During the three and six months ended December 31, 2021, the Company completed two transactions to acquire certain developed software and assembled workforce for use in the development of the Company’s data platform and content supply chain. The transactions were completed on November 1, 2021 and November 8, 2021, and were accounted for as a business combination and asset acquisition, respectively.
The acquisitions resulted in the recognition of $12.0 million of Goodwill, and $17.7 million of assets primarily consisting of developed software. The developed software was assigned a useful life of 3 years and is recorded in Property and equipment, net on the Company’s condensed consolidated balance sheets.
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, 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).

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components, using an effective interest rate of 3.69% to determine the fair value of the liability component. The carrying amount of the equity component representing the conversion option was $163.8 million and was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Notes as a whole. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over the contractual term of the Notes.

In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component recorded as additional debt discount were $19.0 million and will be amortized to interest expense using the effective
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interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component of $3.7 million were netted with the equity component in stockholders’ equity.

The net carrying amount of the liability component of the Notes was as follows:
December 31, 2021
(in millions)
Principal$1,000.0 
Unamortized debt discount(137.1)
Unamortized debt issuance costs(16.2)
Net carrying amount$846.7 

The following table sets forth the interest expense recognized related to the Notes:
Three Months Ended December 31, 2021Six Months Ended December 31, 2021
(in millions)
Amortization of debt discount$7.7 $15.3 
Amortization of debt issuance costs0.8 1.6 
Less: Interest capitalized(0.2)(0.2)
Total interest expense related to the Notes$8.3 $16.7 

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.

Amended and Restated Credit Agreement
In 2019, the Company entered into an amended and restated loan and security agreement (“Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provided for a $250.0 million secured revolving credit facility, including up to the lesser of $150.0 million and the aggregate unused amount of the facility for the issuance of letters of credit.

On February 8, 2021, the Company entered into a First Amendment (the “First Amendment”) to the Amended and Restated Credit Agreement to revise certain covenants that restricted the incurrence of indebtedness to permit the Capped Call Transactions and issuance of the Notes.

On March 18, 2021, the Company entered into a Joinder Agreement (the “Joinder”) to the Amended and Restated Credit Agreement, as amended by the First Amendment, to provide for an increase of the commitments available under the revolving credit facility from $250.0 million to $285.0 million.

On December 10, 2021, the Company entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Credit Agreement (as amended by the First Amendment, the Joinder and the Second Amendment, the “Credit Agreement”). The Second Amendment amends certain provisions of the Credit Agreement to, among other changes, increase the lenders’ aggregate commitments to extend credit to the Company from an aggregate amount of $285.0 million in revolving loans to an aggregate amount of $500.0 million in revolving loans, extend the maturity date for $465.0 million of the commitments to December 10, 2026 with $35.0 million of the commitments expiring on June 20, 2024, and modify certain covenants contained therein. Interest on the Amended Credit Agreement is paid based on the Secured Overnight Financing Rate (“SOFR”) plus 2.25% or an Alternative Base Rate plus 1.25% for revolving loans maturing on December 10, 2026, and is paid based on SOFR plus 2.75% or an Alternative Base Rate plus 1.75% for revolving loans maturing on June 20, 2024. The Company is required to pay an annual commitment fee of 0.325% and 0.375% on a quarterly basis based on the unused portion of the revolving credit facility for the revolving loans maturing on December 10, 2026 and June 20, 2024, respectively.
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During the three and six months ended December 31, 2021, the Company incurred total commitment fees of $0.3 million and $0.6 million, respectively, and $0.2 million and 0.5 million during the three and six months ended December 31, 2020, respectively, which are included in Interest expense in the condensed consolidated statements of operations and comprehensive (loss) income.

As of December 31, 2021, the Company had not drawn on the credit facility and did not have outstanding borrowings under the Credit Agreement.
In connection with the execution of the Second Amendment, 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 Credit Agreement.
The Company has the option to repay its borrowings under the Credit Agreement without premium or penalty prior to maturity. The Credit Agreement contains customary affirmative covenants as well as customary covenants that restrict the Company’s 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 Credit Agreement also contains certain financial condition covenants, including maintaining a total level of liquidity of not less than $250.0 million and maintaining a minimum total four-quarter revenue level of $3.0 billion (which are replaced with a covenant to maintain a minimum debt to adjusted EBITDA ratio upon the Company’s meeting a specified adjusted EBITDA threshold). As of December 31, 2021, the Company was in compliance with the covenants under the Credit Agreement. At December 31, 2021, the Company was contingently liable for approximately $4.8 million in standby letters of credit as security for an operating lease obligation. In addition, 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 December 31, 2021, the Company had $86.8 million in letters of credit, which are classified as Restricted cash on its condensed consolidated balance sheets.
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 December 31, 2021:

Future Minimum Payments
Fiscal Year(in millions)
2022 (remaining)$8.6 
202332.5 
202424.6 
20256.0 
Total$71.8 

Content Costs for Past Use Reserve
To secure the rights to stream music on the Peloton platform, the Company must obtain licenses from, and pay royalties to, copyright owners of both sound recordings and musical compositions. The licensors have the right to audit our royalty calculations and routinely exercise those rights. The Company has entered into negotiations with various music rights holders, to pay for any and all uses of musical compositions and sound recordings to date and, at the same time, enter into go-forward license agreements for the use of music in the future.

Prior to the execution of go-forward music license agreements, the Company estimates and records expenses inclusive of estimated content costs for past use as well as normal and recurring music royalty expenses. The Company includes both of these components in its reserve. As of December 31, 2021 and 2020, the Company had previously recorded reserves of $10.2 million and $17.6 million, respectively, included in Accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Product Recall Reserves
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. As a result of these recalls, the Company accrued for a reduction to Connected Fitness Products revenue for actual and estimated future returns of $7.4 million and $18.9 million for the three and six months ended December 31, 2021, respectively, and a return reserve of $26.7 million is included within Accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets related to the impacts of the recall. The estimated returns reserve is primarily based on historical and expected product returns. The Company recorded costs associated with inventory write-downs and logistic costs of $5.2 million and $5.7 million in Connected Fitness Products cost of revenue for the three and six months ended, December 31, 2021, respectively.

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Commitments to Suppliers
We utilize contract manufacturers to build parts of our products. These contract manufacturers acquire components and build products based on demand forecast information we supply, which typically covers a rolling 12-month period. Consistent with industry practice, we acquire 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 our forecasted product and manufacturing requirements for periods ranging from 30 to 90 days. In certain instances, these agreements allow us the option to cancel, reschedule and/or adjust our requirements based on our business needs. While our purchase orders are legally cancellable in most situations, there are some which are not cancellable in the event of a demand plan change or other specific circumstances, such as the procurement of unique, Peloton-specific designs, and/or specific non-cancellable, non-returnable components by our suppliers based on our provided forecasts. As the Company materially reduced its demand plan, we are assessing whether to agree to acquire certain inventory purchased by our suppliers under the original demand plan schedule, where appropriate, in an effort to maintain long-term supply continuity, flexibility, scalability perspective with our supply partners. As of December 31, 2021, our commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of our products were estimated to be approximately $550 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, we received reports of a number of injuries associated with our Tread+ product, one of which led to the death of a child. As a result of those reported Tread+ incidents, in April 2021, the CPSC unilaterally issued a warning to consumers about the safety hazards associated with the Tread+ and is continuing to investigate the matter. In addition to the CPSC investigation and other 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 New York, purportedly on behalf of a class consisting of those individuals who purchased or otherwise acquired our common stock between September 11, 2020 and April 16, 2021 (the "Wilson Action"). Plaintiff Wilson amended her lawsuit on May 6, 2021 to expand the purported class to those who purchased or acquired our common stock between September 11, 2020 and May 5, 2021. On May 24, 2021, Leigh Drori filed a related putative securities class action lawsuit, captioned Drori v. Peloton Interactive, Inc., et al., Case No. 1:21-cv-02925-CBA-PK, also in the United States District Court for the Eastern District of New York (the “Drori Action”). On November 16, 2021, the district judge consolidated the Wilson and Drori Actions under the caption In re Peloton Interactive, Inc. Securities Litigation, Master File No. 21-cv-02369-CBA-PK, and appointed Richard Neswick as lead plaintiff. On January 21, 2022, lead plaintiff filed an amended consolidated complaint in the action purportedly on behalf of a class consisting of those individuals who purchased or otherwise acquired our common stock between September 11, 2020 and May 5, 2021. Lead plaintiff alleges that the Company and certain of its officers made false or misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act of 1934 (“Exchange Act”) regarding the Company’s Tread and Tread+ products and the safety of those products. Defendants’ motion to dismiss the amended consolidated complaint is due March 7, 2022.

On May 20, 2021, Alan Chu filed a verified shareholder derivative action lawsuit purportedly on behalf of the Company against certain of the Company’s executive officers and the members of the board of directors, captioned Chu v. Foley, et al., Case No. 1:21-cv-02862, in the United States District Court for the Eastern District of New York (the “Chu Action”). Plaintiff Chu alleges breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste, and violations of Section 14(a) of the Securities and Exchange Act of 1934, as well as a claim for contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934 against the Company’s Chief Executive Officer and Chief Financial Officer. On August 13, 2021 and August 19, 2021, two related verified shareholder derivative complaints were filed, captioned Genack v. Foley, et al., Case No. 1:21-cv-04583 and Liu v. Foley, et al., Case No. 1:21-cv-04687, also purportedly on behalf of the Company, in the United States District Court for the Eastern District of New York. On October 13, 2021, the parties in the three putative derivative actions filed a stipulation seeking to consolidate the actions, and agreeing to a schedule for plaintiffs to file motions to be appointed lead plaintiff. On October 26, 2021, the court entered the stipulation consolidating the three actions under the caption In re Peloton Interactive, Inc. Derivative Litigation, Master File No. 21-cv-02862-CBA-PK. On November 23, 2021, Anthony Franchi filed a shareholder derivative action in the United States District Court for the Eastern District of New York against certain of the Company’s executive officers and members of the board of directors captioned Franchi v. Blachford, et al., Case No. CV 21-06544 (the “Franchi Action”), which alleges breaches of fiduciary duty, unjust enrichment, and violations of Sections 14(a) and 20(a) of the Exchange Act. On January 24, 2022, the court entered a stipulation consolidating the Franchi Action into In re Peloton Interactive, Inc. Derivative Litigation and appointed each plaintiff a co-lead plaintiff. On February 3, 2022, the parties filed a stipulation to stay the consolidated derivative action, which the Court has not yet entered.

On November 18, 2021, the City of Hialeah Employees’ Retirement System filed a putative securities class action lawsuit against the Company and certain of its officers in the United States District Court for the Southern District of New York, purportedly on behalf of a class consisting of those individuals who purchased or otherwise acquired our common stock between December 9, 2020 and November 4, 2021, captioned City of Hialeah Employees’ Retirement System v. Peloton Interactive, Inc., Case No. 21-cv-09582-ALC (the “Hialeah Action”). On December 2, 2021, Anastasia Deulina filed a related putative securities class action against the same defendants also in the United States District Court for the Southern District of New York captioned Deulina v. Peloton Interactive, Inc., Case No. 21-cv-10266-ALC (the “Deulina Action”). The Hialeah and Deulina Actions allege that Defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act regarding demand for, and supply of, the Company’s products. On January 18, 2022, several purported shareholders filed motions to consolidate the Hialeah and Deulina Actions and to be appointed lead plaintiff. The Court has not yet ruled on those motions. After the Court appoints a lead plaintiff and lead counsel, the parties will negotiate and submit a proposed schedule for lead plaintiff to file a consolidated amended complaint and for defendants to file a motion to dismiss.

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In April 2021, DISH Technologies L.L.C., and Sling TV L.L.C. (DISH) filed a complaint in the United States District Court for the Eastern District of Texas. DISH, along with DISH DBS Corporation, also filed a complaint in the United States International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930 against the Company, along with ICON Health & Fitness, Inc. (now iFIT Inc. f/k/a Icon Health & Fitness, Inc.), FreeMotion Fitness, Inc., NordicTrack, Inc., lululemon athletica, inc., and Curiouser Products Inc. d/b/a MIRROR. The complaints allege infringement of various patents related to fitness devices containing internet-streaming enabled video displays. In the ITC complaint, DISH seeks an exclusion order barring the importation of Peloton Connected Fitness devices, and streaming components and systems containing components thereof that infringe one or more of the asserted patents, as well as a cease and desist order preventing the Company from carrying out commercial activities within the United States related to those products. In the Eastern District of Texas complaint, DISH is seeking an order permanently enjoining the Company from infringing the asserted patents, an award of damages for the infringement of the asserted patents, and an award of damages for lost sales. The ITC investigation is ongoing and the Texas litigation remains stayed pending resolution to the ITC investigation.

On February 2, 2022, iFit Inc. (“iFit”) filed a complaint with the United States International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930 against the Company, along with Peloton Interactive, UK Ltd., Tonic Fitness Technology, Inc., and Rexon Industrial Corp., Ltd., alleging infringement of a continuation of a patent that is already at issue in a separate litigation between the Company and iFit, iFit Inc. v. Peloton Interactive Inc., C.A. No. 21-cv-0507-RGA (D. Del)., and that is related to an exercise system that includes a stationary bicycle having pedals, a free weight cradle, as well as a display with one or more processors and memory and programmed workouts. iFit seeks an exclusion order barring the importation of the Peloton exercise system and components that infringe the asserted patent, as well as a cease and desist order preventing the Company from carrying out certain commercial activities within the United States related to such imported products.

We dispute the allegations in the above-referenced matters, intend to defend the matters vigorously, and believe that the claims are without merit. Some of our legal and regulatory proceedings, such as the above-referenced matters and litigation that centers around intellectual property claims, may be based on complex claims involving substantial uncertainties and unascertainable damages. Accordingly, it is not possible to determine the probability of loss or estimate damages for any of the above matters, and therefore, the Company has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, the Company records a liability, and, if the liability is material, discloses the amount of the liability reserved. Given that such proceedings are subject to uncertainty, there can be no assurance that such legal proceedings, either individually or in the aggregate, will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
9. Stockholders' Equity

On November 16, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC as representatives of the several underwriters named therein (collectively, the “Representatives”) relating to the offer and sale by the Company (the “Offering”) of 27,173,912 shares (the “Shares”) of the Company’s Class A common stock, par value $0.000025 per share, which includes 3,260,869 shares of Class A common stock issued and sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares of Class A common stock pursuant to the Underwriting Agreement. The Company sold the Shares to the underwriters at the public offering price of $46.00 per share less underwriting discounts.

The net proceeds to the Company from the Offering were approximately $1.2 billion after deducting the underwriters’ discounts and commissions.
10. Equity-Based Compensation
2019 Equity Incentive Plan
In August 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (the "2019 Plan"), which was subsequently approved by the Company’s stockholders in September 2019. The 2019 Plan serves as the successor to the 2015 Stock Plan (the "2015 Plan"). The 2015 Plan continues to govern the terms and conditions of the outstanding awards previously granted thereunder. Any reserved shares not issued or subject to outstanding grants under the 2015 Plan on the effective date of the 2019 Plan became available for grant under the 2019 Plan and will be issued as Class A common stock. The number of shares reserved for issuance under the 2019 Plan will increase automatically on July 1 of each of 2020 through 2029 by the number of shares of the Company’s Class A common stock equal to 5% of the total outstanding shares of all of the Company’s classes of common stock as of each June 30 immediately preceding the date of increase, or a lesser amount as determined by the Board of Directors. On July 1, 2021, the number of shares of Class A common stock available for issuance under the 2019 Plan was automatically increased according to its terms by 15,007,356 shares. As of December 31, 2021, 59,172,230 shares of Class A common stock are available for future award under the 2019 Plan.

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Stock Options
The following summary sets forth the stock option activity under the 2019 Plan:
Options Outstanding
Number of Stock Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (years)
Aggregate
Intrinsic
Value (in millions)
Outstanding — June 30, 2021
57,946,608 $18.47 7.3$6,119.2 
Granted3,522,970 $96.07 
Exercised(3,157,764)$9.44 $241.1 
Forfeited(684,266)$58.32 
Outstanding — December 31, 2021
57,627,548 $23.23 7.0$1,226.5 
Vested and Exercisable— December 31, 2021
33,141,759 $11.10 6.2$891.2 

Unvested option activity is as follows:
OptionsWeighted-Average Grant Date Fair Value
Unvested - June 30, 2021
28,160,034 $13.52 
Granted3,522,970 $43.15 
Early exercised unvested(13,501)$2.02 
Vested(6,511,747)$10.95 
Forfeited or expired(671,967)$25.87 
Unvested - December 31, 2021
24,485,789 $18.13 

The aggregate intrinsic value of options outstanding and vested and exercisable, were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2021. The fair value of the common stock is the closing stock price of the Company's Class A common stock as reported on the Nasdaq Global Select Market. The aggregate intrinsic value of exercised options was $241.1 million and $523.4 million for the six months ended December 31, 2021 and 2020, respectively.

For the six months ended December 31, 2021 and 2020, the weighted-average grant date fair value per option was $43.15 and $36.05, respectively. The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:
Six Months Ended December 31, 2021
Weighted average risk-free interest rate(1)
1.0%
Weighted average expected term (in years)
6.0
Weighted average expected volatility(2)
47.0%
Expected dividend yield
____________________________
(1) Based on U.S. Treasury yield curve in effect at the time of grant.
(2) Expected volatility is based on a blended average of average historical stock volatilities of several peer companies over the expected term of the stock options, historical volatility of the Company's stock price, and implied stock price volatility derived from the price of exchange traded options on the Company's stock.

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Restricted Stock and Restricted Stock Units
The following table summarizes the activity related to the Company's restricted stock and restricted stock units:
Restricted Stock Units Outstanding
Number of Awards
Weighted-Average Grant Date Fair Value
Outstanding — June 30, 2021
1,785,946 $99.43 
Granted2,667,778 $96.09 
Vested and converted to shares(669,555)$99.46 
Cancelled(127,989)$105.80 
Outstanding — December 31, 2021
3,656,180 $96.77 

Employee Stock Purchase Plan
In August 2019, the Board of Directors adopted, and in September 2019, the Company's stockholders approved, the 2019 Employee Stock Purchase Plan ("ESPP"), through which eligible employees may purchase shares of the Company's Class A common stock at a discount through accumulated payroll deductions. The ESPP became effective on the date the registration statement, in connection with the Company’s IPO, was declared effective by the SEC (the "Effective Date"). The number of shares of the Company's Class A common stock that will be available for issuance and sale to eligible employees under the ESPP will increase automatically on the first day of each fiscal year of the Company beginning on July 1, 2020 through 2029, equal to 1% of the total number of outstanding shares of all classes of the Company's common stock on the immediately preceding June 30, or such lesser number as may be determined by the Board of Directors or applicable committee in its sole discretion. On July 1, 2021, the number of shares of Class A common stock available for issuance under the ESPP was automatically increased according to its terms by 3,001,471 shares. As of December 31, 2021, a total of 10,568,799 shares of Class A common stock were available for sale to employees under the ESPP.

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

Unless otherwise determined by the Board of Directors, the purchase price for each share of Class A common stock purchased under the ESPP will be 85% of the lower of the fair market value per share on the first trading day of the applicable offering period or the fair market value per share on the last trading day of the applicable purchase period. There was an ESPP reset in the six months ended December 31, 2021 that resulted in a total modification charge of $3.5 million, which is recognized over the new two-year offering period ending August 31, 2023.

The Black-Scholes option pricing model assumptions used to calculate the fair value of shares estimated to be purchased at the commencement of the ESPP offering periods were as follows:
Six Months Ended December 31, 2021
Weighted average risk-free interest rate
0.5%
Weighted average expected term (in years)
1.2
Weighted average expected volatility
64.9%
Expected dividend yield

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

During the three and six months ended December 31, 2021, the Company recorded stock-based compensation expense associated with the ESPP of $4.6 million and $8.2 million, respectively, and $2.2 million and $3.8 million for the three and six months ended December 31, 2020, respectively.

In connection with the offering period which ended on August 31, 2021, employees purchased 293,356 shares of Class A common stock at a weighted-average price of $39.95 under the ESPP. As of December 31, 2021, total unrecognized compensation cost related to the ESPP was $21.6 million, which will be amortized over a weighted-average remaining period of 1.5 years.

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Stock-Based Compensation Expense
The Company's total stock-based compensation expense was as follows:
Three Months Ended December 31,Six Months Ended December 31,
2021202020212020
(in millions)
Cost of revenue
   Connected Fitness Products$6.6 $2.0 $11.0 $3.5 
Subscription5.1 5.1 8.7 9.5 
Total cost of revenue11.7 7.1 19.7 13.0 
Sales and marketing9.0 4.6 15.5 8.0 
General and administrative38.3 21.2 67.8 37.8 
Research and development12.9 4.6 21.7 8.2 
  Total stock-based compensation expense$71.9 $37.5 $124.8 $67.1 

As of December 31, 2021, the Company had $738.1 million of unrecognized stock-based compensation expense related to unvested stock-based awards that is expected to be recognized over a weighted-average period of 3.0 years.
11. Income Taxes
The Company recorded a provision from income taxes of $3.1 million and $5.4 million for the three and six months ended December 31, 2021, respectively, and a benefit of $3.0 million and $1.7 million for the three and six months ended December 31, 2020, respectively. Furthermore, the Company's effective tax rates were (0.71)% and (0.67)% for the three and six months ended December 31, 2021, respectively, and (4.60)% and (1.24)% for the three and six months ended December 31, 2020, respectively. The income tax provision and the effective tax rate is primarily driven by state and international taxes.

The Company maintains a valuation allowance on the majority of its deferred tax assets as it has concluded that it is more likely than not that the deferred assets will not be utilized.
12. Net (Loss) Income Per Share
The computation of basic and diluted net (loss) income per share is as follows:
Three Months Ended December 31,Six Months Ended December 31,
2021202020212020
(in millions, except share and per share amounts)
Basic net (loss) income per share:
Net (loss) income attributable to common stockholders$(439.4)$63.6 $(815.3)$132.8 
Shares used in computation:
Weighted-average common shares outstanding317,110,297