What changed in this filing

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Item 1A. Risk Factors

2020-08-31 compared with 2019-08-29 · 235 added, 172 removed, 322 unchanged (56% of the section changed)

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Risks Related to Our Business

General economic conditions, particularly in the United States, affect our industry, demand for our products, and our business and results of operations.

Demand for new recreational powerboats has been significantly influenced in the past by weak economic conditions, low consumer confidence and high unemployment and increased market volatility worldwide, especially in the United States.

Recently, the market has seen a decline in demand for new boat sales and new boat registrations that could potentially begin to impact our consumer demand.

In times of economic uncertainty and contraction, consumers tend to have less discretionary income and defer or avoid expenditures for discretionary items, such as our products.

Any deterioration in general economic conditions that diminishes consumer confidence or discretionary income may reduce our sales and adversely affect our business, financial condition and results of operations.

If general economic conditions deteriorate we cannot predict the duration or strength of an economic recovery, either in the United States or in the specific markets where we sell our products.

Consumers often finance purchases of our products and accordingly, consumer credit market conditions also influence demand for our boats.

If credit conditions worsen, and adversely affect the ability of consumers to finance potential purchases at acceptable terms and interest rates, it could result in a decrease in the sales of our products.

We continue to grow our business through acquisitions, such as our recent acquisition of Pursuit, and we may not be successful in completing or integrating these acquisitions in a way that fully realizes their expected benefits to our business.

We continue to grow our business through acquisitions, including our acquisition of Pursuit in 2018, of Cobalt in 2017 and of our Australian licensee in 2014.

We believe these acquisitions will enable us to acquire complementary skills and capabilities, offer new products, expand our consumer base, enter new product categories or geographic markets and obtain other competitive advantages.

We cannot assure you, however, that we will fully realize these benefits.

Once integrated, acquired operations may not achieve anticipated levels of sales or profitability, or otherwise perform as expected.

Acquisitions also involve special risks, including risks associated with unanticipated challenges, liabilities and contingencies, and diversion of management attention and resources from our existing operations.

Further, we may not be able to identify future acquisition candidates or strategic partners as part of our growth strategy that are suitable to our business, or we may not be able to obtain financing on satisfactory terms to complete such acquisitions.

Our results after our acquisitions of Cobalt and Pursuit may suffer if we do not effectively manage our expanded operations following the acquisitions.

The size of our business increased significantly as a result of our acquisitions of Cobalt and Pursuit.

Further, we plan to increase the sizes of the facilities at both Cobalt and Pursuit over the next few years.

Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of additional operations and associated increased costs and complexity.

There can be no assurances we will be successful or that we will realize the benefits from our acquisitions of Cobalt and Pursuit.

The Cobalt and Pursuit businesses may underperform relative to our expectations.

We continue to integrate the businesses of Cobalt and Pursuit into our operations.

We may not be able to maintain the levels of revenue, earnings or operating efficiency that we, Cobalt and Pursuit have achieved or might achieve separately.

The business and financial performance of Cobalt and Pursuit are subject to certain risks and uncertainties, including the risk of the loss of, or changes to, its relationships with its dealers and suppliers, increased product liability and warranty claims, and negative publicity or other events that could diminish the value of the Cobalt and Pursuit brands.

We may be unable to achieve the same growth, revenues and profitability that Cobalt and Pursuit has each achieved in the past.

Our growth strategy may require us to secure significant additional capital, the amount of which will depend upon the size, timing, and structure of future acquisitions or vertical integrations and our working capital and general corporate needs.

Our growth strategy could include acquiring businesses, similar to our acquisitions of Cobalt and Pursuit, and the integration of new product lines or related products to our boats, similar to our initiatives to integrate the production of our own engines and trailers for our Malibu and Axis models.

These actions may require us to secure significant additional capital through the borrowing of money or the issuance of equity.

Any borrowings made to finance future strategic initiatives could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings that are subject to interest rate fluctuations.

If our cash flow from operations is insufficient to meet our debt service requirements, we could then be required to sell additional equity securities, refinance our obligations or dispose of assets in order to meet our debt service requirements.

Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us.

The failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth prospects.

Further, we could choose to finance acquisitions or other strategic initiatives, in whole or in part through the issuance of our Class A Common Stock or securities convertible into or exercisable for our Class A Common Stock.

If we do so, existing stockholders will experience dilution in the voting power of their Class A Common Stock and earnings per share could be negatively impacted.

The extent to which we will be able and willing to use our Class A Common Stock for acquisitions and other strategic initiatives will depend on the market value of our Class A Common Stock and the willingness of potential third parties to accept our Class A Common Stock as full or partial consideration.

Our inability to use our Class A Common Stock as consideration, to generate cash from operations, or to obtain additional funding through debt or equity financings in order to pursue our strategic initiatives could materially limit our growth.

The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, and those of our dealers and suppliers, thereby adversely affecting our business, financial condition and results of operations.

The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States and the world.

Consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine have been imposed.

We suspended operations at all of our facilities on March 24, 2020.

We resumed operations at our Loudon, Tennessee facility (Malibu and Axis boats) on April 20, 2020, our Neodesha, Kansas facility (Cobalt boats) on April 27, 2020 and our Fort Pierce, Florida facility (Pursuit boats) on May 4, 2020.

Our temporary closure resulted in a reduction in our production of boats that we were not able to fully recover during fiscal year 2020 and resulted in corresponding delays for delivery of our boats to dealers.

As a result, our net sales and unit volume decreased 39.1% and 43.9%, respectively, during the fourth quarter of fiscal year 2020 compared to the fourth quarter of fiscal year 2019.

For the fiscal year ended June 30, 2020, we recognized a decrease in net sales of $30.9 million, or 4.5% , and a decrease of 918 units, or 12.5%, in unit volume compared to fiscal year 2019.

While a number of government measures and recommendations have since been lifted or scaled back since the beginning of the pandemic, intermittent or sustained resurgence of COVID-19 in the United States may result in the reinstatement of certain restrictions or voluntary operational halts in response to efforts to reduce the spread of COVID-19.

It is unclear how long these restrictions or halting of operations may remain in place and they may remain in place in some form for an extended period of time.

As a result, our manufacturing facilities, our dealers, or our suppliers may have to suspend operations again, whether voluntarily or as a result of federal, state or local mandates, and such closures could extend for a longer term than the prior shutdown of our facilities.

If such shutdowns occur, the COVID-19 pandemic could negatively impact our financial results in fiscal year 2021.

While we cannot predict the ultimate impact of the COVID-19 virus on our business at this time, the pandemic and related efforts to mitigate the pandemic have impacted and may continue to impact our business in a number of ways, including but not limited to:

• decreasing consumer confidence as a result of the economic impact of the pandemic, which could result in a decrease in consumer demand for recreational boats;

• disrupting our manufacturing processes, as has already occurred with the temporary closures of our facilities and the delay of supplies being received;

• adversely impacting the financial health of our dealers who typically require financing to purchase our boats;

• adversely impacting the business of our suppliers, which could result in among other things, delays for delivery of raw materials and components needed for the production of our boats;

• impacting our ability to maintain our workforce during this uncertain time;

• increasing employee absenteeism due to fear of infection;

• increasing possible lawsuits or regulatory actions due to COVID-19 spread in the workplace;

• suffering from reputational risk if we experience COVID-19 spread in our workplace;

• increasing the possibility of cybersecurity-related events such as COVID-19 themed phishing attacks and other security challenges resulting from a number of our employees and suppliers working remotely;

• adversely impacting the productivity of management and our employees that are working remotely, including impacting our ability to maintain our financial reporting processes and related controls and our ability to manage complex accounting issues presented by the COVID-19 pandemic.

Any or all of these items may occur, which individually or in the aggregate, may have a material adverse effect on our business, financial condition, results of operations and cash flows.

These risks could accelerate or intensify depending on the severity and length of the pandemic.

In addition, the United States could experience a resurgence of the COVID-19 virus and if the rate of infections continue to rise, these factors likely will be exacerbated.

In late March 2020, we elected to draw the then remaining available funds of $98.8 million from our revolving credit facility to ensure we maintained financial flexibility in light of the uncertainty resulting from the COVID-19 pandemic.

We have since repaid $110 million and as of August 27, 2020, we have approximately $110.0 million available for borrowing under our revolving credit facility, along with $49.9 million of cash on hand.

We may need to borrow more under our revolving credit facility depending on the severity and length of the pandemic.

Our cash position will depend on multiple factors, including our ability to continue operations and production of boats, the COVID-19 pandemic’s effects on our dealers and customers, the availability of sufficient amounts of financing, and our operating performance.

Further, our dealers may seek credit support or other assurances from us that could affect our costs of doing business or liquidity.

As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional capital and such additional debt financing may not be available on commercially reasonable terms, if at all.

As a result of the COVID-19 outbreak, we may be required to record future impairment charges to long-lived assets depending on future events.

In addition, depending on the ongoing impact of the pandemic, we may also be required to reserve for credit losses and/or repurchase commitments.

Any material increase in our reserves could have a corresponding effect on our results of operations.

The ultimate magnitude of COVID-19, including the extent of its impact on our financial condition and results of operations, which could be material, will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time.

While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent of these impacts at this time.

Any potential government crisis relief assistance to help mitigate the adverse impacts of the COVID-19 pandemic could impose significant limitations on our corporate activities, may dilute our stockholders and may not be on terms favorable to us.

Numerous government-sponsored crisis relief programs have been implemented in an effort to mitigate the adverse impacts of the COVID-19 pandemic and others are being considered.

If any government agrees to provide crisis relief assistance that we accept, it may impose certain requirements on the recipients of the aid including restrictions on executive officer compensation, share buybacks, dividends, prepayment of debt, limitations on debt, and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full.

We cannot assure you that any such government crisis relief assistance will not significantly limit our corporate activities or be on terms that are favorable to us.

Such restrictions and terms could adversely impact our business and operations.

In addition, such funding could involve the issuance of warrants, which will be dilutive to our stockholders.

Weak general economic conditions, particularly in the United States, can negatively impact our industry, demand for our products, and our business and results of operations.

Demand for new recreational powerboats can be negatively influenced by weak economic conditions, low consumer confidence and high unemployment, especially in the United States, and by increased market volatility worldwide.

The COVID-19 pandemic has caused a significant economic slowdown and the beginning of a global recession, which could be of an unknown duration.

We recognized a decrease in net sales in the fourth quarter of fiscal year 2020 as a result of facility closures related to the pandemic, but retail sales of our boats have remained strong during this period as consumers have turned to boating and other outdoor activities for leisure and entertainment alternatives during the pandemic.

If, however, the economic slowdown continues for an extended duration or worsens, sales of our boats could be negatively impacted during fiscal year 2021.

In times of economic uncertainty and contraction, like we are currently experiencing, consumers tend to have less discretionary income and defer or avoid expenditures for discretionary items, such as boats.

Sales of our products are highly sensitive to personal discretionary spending levels, and our success depends on general economic conditions and overall consumer confidence and personal income levels, especially in the United States and in the specific regional markets where we sell our products.

Any deterioration in general economic conditions that diminishes consumer confidence or discretionary income is likely to reduce our sales and adversely affect our business, financial condition and results of operations.

If general economic conditions deteriorate further, for instance, due to the increased severity or length of the pandemic, it may exacerbate the impact on our business and may delay significantly any potential economic recovery.

In addition, consumers often finance purchases of our boats and accordingly, consumer credit market conditions can influence demand for our boats.

If credit conditions worsen, which could occur in response to the COVID-19 pandemic, and adversely affect the ability of consumers to finance potential purchases at acceptable terms and interest rates, it could result in a decrease in the sales of our products.

Our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are beyond our control.

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• failure to maintain a premium brand image;

disruption in the operation of our manufacturing facilities;

• disruption in the operation of our manufacturing facilities, such as our temporary shutdown of facilities due to the COVID-19 pandemic;

• variations in the timing and volume of our sales;

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• changes in competitive and economic conditions generally;

• changes in trade policy or the imposition of additional tariffs;

• consumer preferences and competition for consumers’ leisure time;

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We anticipate that fluctuations in operating results will continue in the future.

In addition to the factors noted above, unfavorable weather conditions may have a material adverse effect on our business, financial condition, and results of operations, especially during the peak boating season.

In addition to the factors noted above, unfavorable weather conditions, policies impacting access to waterways and shelter-in-place orders may have a material adverse effect on our business, financial condition, and results of operations, especially during the peak boating season.

Adverse weather conditions in any year in any particular geographic region may adversely affect sales in that region, especially during the peak boating season.

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We may also experience more pronounced seasonal fluctuation in net sales in the future as we continue to expand our businesses.

Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, our sales may be affected to a greater degree than

we have previously experienced.

Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, our sales may be affected to a greater degree than we have previously experienced.

There can be no assurance that weather conditions will not have a material effect on the sales of any of our products.

Many of our customers use our Malibu, Axis and Cobalt boats for recreational water activities and our Pursuit boats for fishing.

Regulatory or commercial policies and practices impacting access to water, including availability of slip locations and/or the ability to transfer boats among different waterways, access to fisheries, or the ability to fish in some areas could negatively affect demand for our products.

Further, in response to the COVID-19 pandemic shelter-in-place orders were in effect for part of spring 2020 and social distancing policies continue to be in effect during the summer months.

These policies and regulations resulted in the closure of our facilities and closure of our dealers and sales of our boats were negatively

impacted during the fourth quarter of fiscal year 2020.

Sales of our boats could be impacted during fiscal year 2021 as a result of the continuation and in some cases reinstatement of shelter-in-place orders and social distancing policies.

We depend on our network of independent dealers, face increasing competition for dealers and have little control over their activities.

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We have agreements with the dealers in our network that typically provide for one-year terms, although some agreements have a term of up to three years.

For fiscal year 2019, our top ten dealers accounted for approximately 50%, 49%, and 83% of units sold in fiscal year 2019 for Malibu U.S., Cobalt and Pursuit, respectively.

Further, sales to our dealers under common control of OneWater Marine, Inc.

represented approximately 15% of consolidated net sales in fiscal year 2019, including approximately 8%, 16% and 33% of consolidated sales in fiscal year 2019 for Malibu U.S., Cobalt and Pursuit, respectively.

Our top ten dealers represented 38.5%, 39.6% and 37.8%, of our net sales for fiscal year 2020, 2019 and 2018, respectively.

The top ten dealers for each of Malibu, Cobalt and Pursuit represented approximately 45.8%, 45.3% and 82.7%, respectively, of net sales in fiscal year 2020.

The top ten dealers for each segment are not the same across all segments.

Sales to our dealers under common control of OneWater Marine, Inc.

represented approximately 15.2%, 15.1% and 10.7% of consolidated net sales in fiscal years 2020, 2019, and 2018 respectively including approximately 7.6%, 15.7% and 34.5% of consolidated sales in fiscal year 2020 for Malibu, Cobalt and Pursuit, respectively.

The loss of a significant number of these dealers could have a material adverse effect on our financial condition and results of operations.

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In addition, independent dealers in the recreational powerboat industry have experienced significant consolidation in recent years, which could result in the loss of one or more of our dealers in the future if the surviving entity in any such consolidation purchases similar products from a competitor.

A substantial deterioration in the number of dealers or quality of our network of dealers, including our network of Cobalt and Pursuit dealers, would have a material adverse effect on our business, financial condition and results of operations.

A substantial deterioration in the number of dealers or quality of our network of dealers would have a material adverse effect on our business, financial condition and results of operations.

Our success depends, in part, upon the financial health of our dealers and their continued access to financing.

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Their financial health may suffer for a variety of reasons, including a downturn in general economic conditions, rising interest rates, higher rents, increased labor costs and taxes, compliance with regulations and personal financial issues.

In addition, our dealers require adequate liquidity to finance their operations, including purchases of our products.

In addition, our dealers have experienced disruptions to their operations during the pandemic, including temporary closures during which they were either unable or significantly limited in their ability to sell our boats.

Our dealers may experience closures again if there are further federal, state or local mandates to suspend operations in light of the increasing rate of infections of COVID-19 in the United States.

Our dealers also require adequate liquidity to finance their operations, including purchases of our boats.

Dealers are subject to numerous risks and uncertainties that could unfavorably affect their liquidity positions, including, among other things, continued access to adequate financing sources on a timely basis on reasonable terms.

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If floor plan financing were not available to our dealers, our sales and our working capital levels would be adversely affected.

The availability and terms of financing offered by our dealers’ floor plan financing providers will continue to be influenced by:

The availability and terms of financing offered by our dealers’ floor plan financing providers may be influenced by:

• their ability to access certain capital markets and to fund their operations in a cost-effective manner;

• changes in interest rates;

• the performance of their overall credit portfolios;

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• the overall creditworthiness of those dealers.

The COVID-19 pandemic has the potential to cause a strain on some of our dealers’ liquidity and depending on the length and severity of the pandemic, it may result in financing sources becoming less available to our dealers on reasonable terms, or at all.

We may be required to repurchase inventory of certain dealers.

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Our obligation to repurchase a repossessed boat for the unpaid balance of our original invoice price for the boat is subject to reduction or limitation based on the age and condition of the boat at the time of repurchase, and in certain cases by an aggregate cap on repurchase obligations associated with a particular floor plan financing program.

For fiscal year 2019, we agreed to accept a return associated with the repurchase of eight units sold in fiscal 2019 from the lender of two of our former dealers.

In fiscal 2020 these boats were resold above their cost and at minimal margin loss.

There is no assurance that a dealer

will not default on the terms of a credit line in the future.

If our dealers suffer material economic harm during the COVID-19 pandemic, the dealers may no longer be able to continue in business or, even if they are, they may not be able to maintain their payment obligations under their floor plan financing arrangements and the boats could be repossessed by the floor plan financing provider and returned to us.

If boats are returned to us, it would have an adverse impact on our net sales and could result in downward pressure on pricing of our boats.

For fiscal year 2020, we repurchased two units from a lender of one of our former dealers and those units were subsequently resold in fiscal year 2020 above their cost and at a minimal margin loss.

For fiscal year 2019, we repurchased eight units from a lender of two of our former dealers and those units were subsequently resold in fiscal year 2020 above their cost and at minimal margin loss.

One or more dealers may default on the terms of a credit line in the future.

In addition, applicable laws regulating dealer relations may also require us to repurchase our products from our dealers under certain circumstances, and we may not have any control over the timing or amount of any repurchase obligation nor have access to capital on terms acceptable to us to satisfy any repurchase obligation.

If we were obligated to repurchase a significant number of units under any repurchase agreement or under applicable dealer laws, our business, operating results and financial condition could be adversely affected.

If we are required to repurchase a significant number of units under any repurchase agreement or under applicable dealer laws, our business, operating results and financial condition could be adversely affected.

We rely solely on General Motors for the supply of Malibu and Axis engines, which we integrate for marine use.

The availability and cost of engines used in the manufacture of our boats are critical.

We purchase engines from General Motors LLC that we then prepare for marine use for our Malibu and Axis boats.

Our current agreement with General Motors LLC provides us with engines through model year 2023.

If we are required to replace General Motors as our engine supplier for any reason, it could cause a decrease in products available for sale or an increase in our cost of sales, either of which could adversely affect our business, financial condition and results of operations.

During fiscal year 2020 we experienced interruption to our engine supply as a result of the United Auto Workers’ strike against General Motors.

During the UAW strike, General Motors suspended delivery of engine blocks to us and we incurred $2.6 million in costs by entering into purchase agreements with two suppliers for additional engines to supplement our inventory of engine blocks for Malibu and Axis boats.

General Motors and Unifor, which represents the Canadian autoworkers, have a labor agreement which expires in September 2020 and the parties are currently in negotiations.

If the Canadian autoworkers were to strike against General Motors upon expiration of the labor agreement we could experience another interruption to our engine supply which could cause a decrease in products available for sale or an increase in our cost of sales, either of which could adversely affect our business, financial condition and results of operations.

We have agreed to purchase substantially all of our outboard motors from Yamaha, which makes us reliant on Yamaha for our supply of outboard engines.

In August 2018, we entered into a joint marketing agreement with Yamaha Motor Corporation, U.S.A., or Yamaha, that became effective upon completion of our acquisition of Pursuit.

Under our agreement with Yamaha, in exchange for certain incentives, we have agreed to purchase Yamaha outboard engines for use in at least 90% of all Pursuit and Cobalt branded boats that are pre-equipped with outboard motors when sold by us.

While we believe that this agreement with Yamaha will provide the engines we need for our Cobalt boats and Pursuit boats, Yamaha could potentially exert significant bargaining power over quality, warranty claims, or other terms relating to the outboard engines we use.

We also must pay penalties to Yamaha if we do not achieve pre-determined purchase volume targets for each year of the agreement and for the entire term of the agreement, which is scheduled to expire on June 30, 2023, unless extended by both parties.

We may not be able to meet the purchase volume targets, which would require us to pay penalties to Yamaha.

In addition to General Motors and Yamaha, we rely on other third-party suppliers and may be unable to obtain adequate raw materials and components.

We depend on third-party suppliers to provide components and raw materials essential to the construction of our boats.

Historically, we have not entered into long-term agreements with our suppliers, but have developed 90-day forecast models with our major suppliers to minimize disruptions in our supply chain.

While we believe that our relationships with our current suppliers are sufficient to provide the materials necessary to meet present production demand, we cannot assure you that these

relationships will continue or that the quantity or quality of materials available from these suppliers will be sufficient to meet our future needs.

Any number of factors, including labor disruptions, catastrophic weather events, the occurrence of a pandemic or contagious disease, contractual or other disputes, unfavorable economic or industry conditions, delivery delays or other performance problems or financial difficulties or solvency problems, could disrupt our suppliers’ operations and lead to uncertainty in our supply chain or cause supply disruptions for us, which could, in turn, disrupt our operations.

During the COVID-19 pandemic, many of our suppliers experienced temporary closures, with the potential to delay our ability to receive certain components and materials that are essential to the construction of our boats.

In addition, the temporary shutdown of our facilities resulted in an inability for us to receive supplies from our vendors.

If we do not receive sufficient supplies of materials for production of our boats or if we are required to replace one or more suppliers of any key components or raw materials, it could cause a disruption to our production schedule or cause us to alter productions schedules or suspend production entirely, thereby decreasing products available for sale or causing an increase in the cost of sales, either of which could adversely affect our business, financial condition and results of operations.

In addition to the above factors, our suppliers could face increased costs or an inability to meet required production levels due to the tariffs the U.S.

has imposed on certain foreign goods, including raw materials and components used in our manufacturing process.

This could negatively impact our cost of sales, by increasing the price of raw materials and components used in our supply chain.

Termination or interruption of informal supply arrangements could have a material adverse effect on our business or results of operations.

We have informal supply arrangements with many of our suppliers.

In the event of a termination of the supply arrangement, there can be no assurance that alternate supply arrangements will be made on satisfactory terms.

If we need to enter into supply arrangements on unsatisfactory terms, or if there are any delays to our supply arrangements, it could adversely affect our business and operating results.

Our ability to meet our manufacturing workforce needs is crucial to our results of operations and future sales and profitability.

We rely on the existence of an available hourly workforce to manufacture our boats.

We cannot assure you that we will be able to attract and retain qualified employees to meet current or future manufacturing needs at a reasonable cost, or at all.

For instance, although there are currently high unemployment rates in the regions where we have manufacturing facilities, it is difficult to retain skilled employees.

Also, although none of our employees are currently covered by collective bargaining agreements, we cannot assure you that our employees will not elect to be represented by labor unions in the future.

Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees.

Significant increases in manufacturing workforce costs could materially adversely affect our business, financial condition or results of operations.

As a result of the COVID-19 pandemic, we suspended operations at all our facilities on March 24, 2020.

While we have resumed operations at all our facilities, we have continued to implement safety precautions, including enhanced and more frequent cleaning of our facilities, providing facemasks to each employee, enforcing social distancing guidelines and screening employees for potential symptoms.

These additional safety precautions have resulted in increases in manufacturing workforce costs and may also impact the productivity and profitability at our facilities.

In addition, we may experience higher levels of absenteeism during the pandemic due to the fear of becoming ill, which may further impact our manufacturing operations.

The nature of our business exposes us to workers' compensation claims and other workplace liabilities.

Certain materials we use require our employees to handle potentially hazardous or toxic substances.

While our employees who handle these and other potentially hazardous or toxic materials receive specialized training and wear protective clothing, there is still a risk that they, or others, may be exposed to these substances.

Exposure to these substances could result in significant injury to our employees and damage to our property or the property of others, including natural resource damage.

Our personnel are also at risk for other workplace-related injuries, including slips and falls.

We have in the past been, and may in the future be, subject to fines, penalties, and other liabilities in connection with any such injury or damage.

While we have implemented safety precautions at our facilities following their reopening after the temporary closures in March 2020 due to the COVID-19 pandemic, we may also be subject to possible lawsuits or regulatory actions or suffer from reputational risk if we experience COVID-19 spread in our workplace.

We may be unable to maintain insurance for these potential liabilities on acceptable terms or such insurance may not provide adequate protection against potential liabilities.

We have grown our business through acquisitions;

however we may not be successful in completing future acquisitions or integrating future acquisitions in a way that fully realizes their expected benefits to our business.

A key part of our growth strategy, as shown by our acquisition of Pursuit in 2018, of Cobalt in 2017 and of our Australian licensee in 2014, has been to acquire other companies that expand our consumer base, enter new product categories or obtain other competitive advantages.

We expect to continue to acquire companies as an element of our growth strategy;

however, we may not be able to identify future acquisition candidates or strategic partners as part of our growth strategy that are suitable to our business, or we may not be able to obtain financing on satisfactory terms to complete such acquisitions.

If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies, or fail to recognize incompatibilities or other obstacles to successful integration.

Our inability to successfully integrate future acquisitions within the intended timeframes or at all could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations.

The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations.

In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities and competitive responses and may cause our stock price to decline.

Even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect.

Our growth strategy includes the possible acquisition of other businesses, such as our acquisitions of Cobalt and Pursuit, and the potential integration of new product lines or related products to our boats, such as our initiatives to integrate the production of our own engines and trailers for our Malibu and Axis models.

These actions may require us to secure significant additional capital through the borrowing of money or the issuance of equity.

Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us.

The failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth prospects.

If we do so, existing stockholders will experience dilution in the voting power of their Class A Common Stock and earnings per share could be negatively impacted.

We have a large fixed cost base that will affect our profitability if our sales decrease.

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During the economic downturn that commenced in 2008, we observed a shift in consumer demand toward purchasing more used boats, primarily because prices for used boats are typically lower than retail prices for new boats.

If this were to occur again, it could have the effect of reducing demand among retail purchasers for our new boats.

If this were to occur again, especially in light of the current economic downturn caused by the COVID-19 pandemic, it could have the effect of reducing demand among retail purchasers for our new boats.

Also, while we have taken steps designed to balance production volumes for our boats with demand, our competitors could choose to reduce the price of their products, which could have the effect of reducing demand for our new boats.

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Negative publicity, including that resulting from recalls or from severe injuries or accidents occurring in the sports and activities in which our products are used, could negatively affect our reputation and result in restrictions or bans on the use of our products.

For instance, we recently announced a recall with respect to fuel pumps supplied to us by a third-party vendor and used in certain Malibu and Axis models.

For instance, during fiscal year 2019 we announced a recall with respect to fuel pumps supplied to us by a third-party vendor and used in certain Malibu and Axis models.

While the recall also impacted other manufacturers in the recreational powerboat industry, our announcement of the recall could adversely impact the reputation of our brands.

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To implement this strategy, we must be successful in our continuous improvement efforts, which depend on the involvement of management, production employees and suppliers.

Examples of initiatives under our manufacturing strategy include the manufacturing of our own trailers and our own engines for our Malibu and Axis models.

As part of our manufacturing strategy, we commenced an initiative in 2016 to produce our own supply of engines for our Malibu and Axis models.

Our engines, branded as Malibu Monsoon engines, were in all Malibu and Axis boats for model year 2020.

This strategy required significant additional capital, increased the fixed costs of our operations, and may still require further capital investment.

Because the integration of engines into our manufacturing process is new to us, we must be successful in continuous improvement efforts, which depend on the involvement of management, production employees and suppliers.

We are in the early stages of this strategy and if we are not successful in implementing our engine integration strategy, it could adversely impact the profitability of our products and our ability to deliver desirable products to our consumers.

Any inability to achieve our objectives under our manufacturing strategy could adversely impact the profitability of our products and our ability to deliver desirable products to our consumers.

Our engine integration strategy, resulting in the production of our own engines for all Malibu and Axis 2020 models, has required significant investment and we may not be able to execute this strategy successfully, which could cause our profitability to suffer.

We commenced an initiative in 2016 to produce our own supply of engines for our Malibu and Axis models.

We entered an engine supply agreement with General Motors LLC for the supply of engines to us through model year 2023, which engines we then modify for marine use in our Malibu and Axis models.

Our engines, branded as Malibu Monsoon engines, will be in all Malibu and Axis boats for model year 2020.

Unlike our prior strategy that purchased engines already prepared for marine use, we will be solely responsible for integrating the engines for marine use.

We adopted this strategy in order to more directly control product path (design, innovation, calibration and integration) of our largest dollar procured part, to differentiate our product from our competitors, and to increase our ability to respond to ongoing changes in the marketplace.

This strategy has required significant additional capital and may require further capital investment as we introduce our engines to the market.

We purchased an additional facility adjacent to our current manufacturing facility for the production of these engines.

We have made a total investment through expenditures, working capital, and capital expenses of approximately $18.0 million for the three years since entering the engine supply agreement in November 2016, which we have financed and intend to continue to finance with cash from operations and our revolving credit facility.

In addition, this strategy will increase the fixed costs of our operations.

And, because the integration of engines into our manufacturing process is new to us, we must be successful in continuous improvement efforts, which depend on the involvement of management, production employees and suppliers.

If we are not successful in our engine integration strategy, it could adversely impact the profitability of our products and our ability to deliver desirable products to our consumers.

As a result of our engine integration strategy, we will rely solely on General Motors for the supply of Malibu and Axis engines, which we will then integrate for marine use.

The availability and cost of engines used in the manufacture of our boats are critical.

As noted above, we purchase engines from General Motors LLC that we then prepare for marine use for our Malibu and Axis boats.

Our current agreement with General Motors LLC provides us with engines through model year 2023.

If we are required to replace General Motors as our

engine supplier for any reason, it could cause a decrease in products available for sale or an increase in our cost of sales, either of which could adversely affect our business, financial condition and results of operations.

We have agreed to purchase substantially all of our outboard motors from Yamaha, which makes us reliant on Yamaha for our supply of outboard engines.

In August 2018, we entered into an agreement with Yamaha Motor Corporation, U.S.A., or Yamaha, that became effective upon completion of our acquisition of Pursuit.

Under our agreement with Yamaha, we have agreed to purchase Yamaha outboard engines for use in at least 90% of all Pursuit and Cobalt branded boats that are pre-equipped with outboard motors when sold by us.

While we believe that this agreement with Yamaha will provide the engines we need for our Cobalt boats and Pursuit boats, Yamaha could potentially exert significant bargaining power over price, quality, warranty claims, or other terms relating to the outboard engines we use.

We also must pay damages to Yamaha if we do not achieve pre-approved purchase volume targets for each year of the agreement and for the entire term of the agreement, which is scheduled to expire on June 30, 2023, unless extended by both parties.

We may not be able to meet the purchase volume targets, which would require us to pay damages to Yamaha.

We have not paid any damages to Yamaha through June 30, 2019.

We rely on third-party suppliers and may be unable to obtain adequate raw materials and components.

We depend on third-party suppliers to provide components and raw materials essential to the construction of our boats.

Historically, we have not entered into long-term agreements with our suppliers, but have developed 90-day forecast models with our major suppliers to minimize disruptions in our supply chain.

While we believe that our relationships with our current suppliers are sufficient to provide the materials necessary to meet present production demand, we cannot assure you that these relationships will continue or that the quantity or quality of materials available from these suppliers will be sufficient to meet our future needs.

Further, our suppliers could face increased costs or an inability to meet required production levels due to the tariffs the U.S.

has imposed on certain foreign goods, including raw materials and components used in our manufacturing process.

This could negatively impact our cost of sales, by increasing the price of raw materials and components used in our supply chain.

If we are required to replace one or more suppliers of any key components or raw materials, it could cause a decrease in products available for sale or an increase in the cost of sales, either of which could adversely affect our business, financial condition and results of operations.

Termination or interruption of informal supply arrangements could have a material adverse effect on our business or results of operations.

We have informal supply arrangements with many of our suppliers.

In the event of a termination of the supply arrangement, there can be no assurance that alternate supply arrangements will be made on satisfactory terms.

If we need to enter into supply arrangements on unsatisfactory terms, or if there are any delays to our supply arrangements, it could adversely affect our business and operating results.

Our ability to meet our manufacturing workforce needs is crucial to our results of operations and future sales and profitability.

We rely on the existence of an available hourly workforce to manufacture our boats.

We cannot assure you that we will be able to attract and retain qualified employees to meet current or future manufacturing needs at a reasonable cost, or at all.

For instance, the demand for skilled employees has increased recently with the low unemployment rates in the regions where we have manufacturing facilities.

Also, although none of our employees are currently covered by collective bargaining agreements, we cannot assure you that our employees will not elect to be represented by labor unions in the future.

Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees.

Significant increases in manufacturing workforce costs could materially adversely affect our business, financial condition or results of operations.

Product liability, warranty, personal injury, property damage and recall claims may materially affect our financial condition and damage our reputation.

We are engaged in a business that exposes us to claims for product liability and warranty claims in the event our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in property damage, personal injury or death.

Our Malibu and Axis brands have a limited warranty for a period up to five years.

Our Malibu and Axis brand boats have a limited warranty for a period up to five years.

Prior to fiscal year 2016, we provided a limited warranty for a period of up to three years for our Malibu brand boats and two years for our Axis boats.

We expect the extension of our warranty coverage period to increase our obligations to cover warranty claims over time resulting in an increase in our reserve to cover these warranty claims.

For our Cobalt brand boats, we provide a structural warranty of up to ten years which covers hull/deck joints, bulkheads, floor, transom, stringers, and motor mount.

In addition, we provide a five year bow-to-stern warranty on all components manufactured or purchased (excluding hull and deck structural components), including canvas and upholstery.

Our Cobalt brand boats have (1) a structural warranty of up to ten years which covers the hull, deck joints, bulkheads, floor, transom, stringers, and motor mount, and (2) a five year bow-to-stern warranty on all components manufactured or purchased (excluding hull and deck structural components), including canvas and upholstery.

Gelcoat is covered up to three years for Cobalt and one year for Malibu and Axis.

For Pursuit boats, we provide a limited warranty for a period of up to five years on structural components such as the hull, deck and defects in the gelcoat surface of the hull bottom.

Some materials, components or parts of the boat that are not covered by our limited product warranties are separately warranted by their manufacturers or suppliers.

These other warranties include warranties covering engines purchased from suppliers and other components.

We provide for a limited warranty of up to five years or five-hundred hours on engines that we manufacture for our Malibu and Axis models.

Pursuit brand boats have (1) a limited warranty for a period of up to five years on structural components such as the hull, deck and defects in the gelcoat surface of the hull bottom, and (2) a bow-to-stern warranty of two year (excluding hull and deck structural components).

For each boat brand, there are certain materials, components or parts of the boat that are not covered by our warranty and certain components or parts that are separately warranted by the manufacturer or supplier (such as the engine).

Engines that we manufacture for Malibu and Axis models have a limited warranty of up to five years or five-hundred hours.

Our standard warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumer.

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In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or alleged defect relates to safety.

For example, we recently had to announce a recall on fuel pumps supplied to us by a third- party vendor and used in certain Malibu and Axis boats.

While we do not currently expect this recall to have a material impact on our business, financial condition or results of operations, this recall and other claims we face could be costly to us and require substantial management attention.

For example, in fiscal year 2019 we had to announce a recall on fuel pumps supplied to us by a third-party vendor and used in certain Malibu and Axis boats.

While this recall has not had a material impact on our business, financial condition or results of operations, future recalls or other claims we face could be costly to us and require substantial management attention.

We depend on key personnel and we may not be able to retain them or to attract, assimilate, and retain highly qualified employees in the future.

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Our reliance upon patents, trademark laws and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products and may lead to costly litigation.

We are currently, and may be in the future, party to lawsuits and other intellectual property rights claims that are expensive and time-consuming.

currently, and may be in the future, party to lawsuits and other intellectual property rights claims that are expensive and time-consuming.

We hold patents and trademarks relating to various aspects of our products and believe that proprietary technical know-how is important to our business.

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Accordingly, we may need to engage in future litigation to enforce intellectual property rights, to protect trade secrets or to determine the validity and scope of proprietary rights of others.

For example, in May 2017 we settled two Tennessee lawsuits in which we were previously a plaintiff alleging infringement by a competitor of our patent rights in certain wake surfing technology.

For more information, see Note 17 to our audited consolidated financial statements included elsewhere in this Annual Report.

We also rely on unpatented proprietary technology.

It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology.

To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements.

To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confiden tiality agreements.

We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information.

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In addition, others may initiate litigation or other proceedings to challenge the validity of our patents, or allege that we infringe their patents, or they may use their resources to design comparable products that do not infringe our patents.

We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents, or allege that we infringe

their patents, or if we initiate any proceedings to protect our proprietary rights.

We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights.

If the outcome of any litigation challenging our patents is unfavorable to us, our business, financial condition and results of operations could be adversely affected.

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The occurrence of any of such network or information systems-related events or security breaches could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to successfully develop and manage the implementation of our new enterprise resource planning (ERP) system, which could adversely affect our business or results of operations.

We are beginning the process of designing and implementing a new ERP system.

This project requires significant capital and human resources, the re-engineering of many processes of our business, and the attention of our management and other personnel who would otherwise be focused on other aspects of our business.

The implementation may be more expensive and take longer to fully implement than originally planned, resulting in increased capital investment, higher fees and expenses of third parties, delayed deployment scheduling, and more on-going maintenance expense once implemented, and, as such, we do not yet know the ultimate costs and schedules.

Additionally, there is an increased risk that we may experience cybersecurity-related events such as COVID-19 themed phishing attacks and other security challenges as a result of most of our employees and our service providers working remotely from non-corporate managed networks during the ongoing COVID-19 pandemic and potentially continuing working remotely even after the COVID-19 pandemic has subsided.

We are also subject to laws and regulations in the United States and other countries concerning the handling of personal information, including laws that require us to notify governmental authorities and/or affected individuals of data breaches involving certain personal information.

These laws and regulations include, for example, the European General Data Protection Regulation (GDPR), effective May 25, 2018, and the California Consumer Privacy Act (CCPA), effective January 1, 2020.

Regulatory actions or litigation seeking to impose significant penalties could be brought against us in the event of a data breach or alleged non-compliance with such laws and regulations.

We are planning to begin the implementation of a new enterprise resource planning (ERP) system and if we are not able to successfully develop and manage that implementation, it could adversely affect our business or results of operations.

We are planning to begin the process of designing and implementing a new ERP system.

This project will require significant capital and human resources, the re-engineering of many processes of our business, and the attention of our management and other personnel who would otherwise be focused on other aspects of our business.

The implementation may be more expensive and take longer to fully implement than we originally plan, resulting in increased capital investment, higher fees and expenses of third parties, delayed deployment scheduling, and more on-going maintenance expense once implemented, and, as such, it will be difficult for us to estimate the ultimate costs and schedules.

If for any reason portions of the implementation are not successful, we could be required to expense rather than capitalize related amounts.

Beyond cost and scheduling, potential flaws in the implementation of an ERP system may pose risks to our ability to operate successfully and efficiently.

These risks include, without limitation, inefficient use of employees, distractions to our core businesses, adverse customer reactions, loss of key information, delays in decision making, and unforeseen additional costs due to the inability to integrate vital information processes.

There can be no assurance that our ERP system will be beneficial to the extent anticipated.

If our ERP system is not implemented successfully, or if it does not perform in a satisfactory manner once implementation is complete, our business and operations could be disrupted and our results of operations negatively affected, including our ability to report accurate and timely financial results.

Any business disruption could adversely affect our ability to process orders, deliver products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business and as a result, cause significant damage to our reputation, affect our relationships with our customers, suppliers and employees and ultimately harm our business.

The nature of our business exposes us to workers' compensation claims and other workplace liabilities.

Certain materials we use require our employees to handle potentially hazardous or toxic substances.

Exposure to these substances could result in significant injury to our employees and damage to our property or the property of others, including natural resource damage.

Our personnel are also at risk for other workplace-related injuries, including slips and falls.

We have in the past been, and may in the future be, subject to fines, penalties, and other liabilities in connection with any such injury or damage.

Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, we may be unable to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities.

Our international markets require significant management attention, expose us to difficulties presented by international economic, political, legal and business factors, and may not be successful or produce desired levels of sales and profitability.

We currently sell our products throughout the world.

Our total sales outside North America were less than 10% of our total revenue for fiscal years 2019, 2018 and 2017.

Our total sales outside North America were less than 10% o f our total revenue for fiscal years 2020, 2019 and 2018.

International markets have been, and will continue to be, a focus for sales growth.

We believe many opportunities exist in the international markets, and over time we intend for international sales to comprise a larger percentage of our total revenue.

Several factors, including weakened international economic conditions, could adversely affect such growth.

Several factors, including weakened international economic conditions and the strength of the U.S.

dollar, could adversely affect such growth.

The expansion of our existing international operations and entry into additional international markets require significant management attention.

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These risks include, but are not limited to:

• the strength of the U.S.

dollar could make our products more expensive in international markets and thereby reduce consumer demand;

• increased costs of customizing products for foreign countries;

• economic and social instability, and public health crises, including the outbreak of pandemic or contagious disease such as COVID-19;

• unfamiliarity with local demographics, consumer preferences and discretionary spending patterns;

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Demand for our products in these markets may also be adversely affected by a strengthening U.S.

For example, we have experienced decreased demand in Canada due to the weakening Canadian dollar and demand is weak in other areas of the world, notably South America, South Africa and Europe.

We do not currently use hedging or other derivative instruments to mitigate our foreign currency risks.

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We are subject to extensive regulation, including product safety, environmental and health and safety requirements under various federal, state, local and foreign statutes, ordinances and regulations.

While we believe that we are in material compliance with all applicable federal, state, local and foreign regulatory requirements, we cannot assure you that we will be able to continue to comply with applicable regulatory requirements.

Compliance with regulatory requirements could increase the cost of our products, which in turn, may reduce consumer demand, or could materially increase the cost of operations.

The failure to comply with applicable regulatory requirements could cause us to incur significant fines or penalties, obligations to conduct remedial or corrective actions, or, in extreme circumstances, revocation of our permits or injunctions preventing some or all of our operations.

We believe that we are in material compliance with all such requirements.

Continued compliance with regulatory requirements could increase the cost of our products, which in turn, may reduce consumer demand, or could materially increase the cost of operations.

The failure to comply with applicable regulatory requirements could cause us to incur significant fines or penalties, impose obligations to conduct remedial or corrective actions, or, in extreme circumstances, result in revocation of our permits or injunctions preventing some or all of our operations.

In addition, the components of our boats must meet certain regulatory standards, including air emission standards for boat engines and fuel systems.

Failure to meet these standards could result in an inability to sell our boats in key markets, which would adversely affect our business.

In addition, legal requirements are constantly evolving, and changes in laws, regulations or policies, or changes in interpretations of the foregoing, could also increase our costs or create liabilities where none exists today.

In addition, legal requirements are constantly evolving, and changes in laws, regulations or policies, or changes in interpretations of the foregoing, could result in compliance shortfalls, increase our costs or create liabilities where none exists today.

As with boat construction in general, our manufacturing processes involve the use, handling, storage and contracting for recycling or disposal of hazardous substances and wastes.

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Under certain environmental laws, we may be liable for remediation of contamination at sites where our hazardous wastes have been disposed or at our current or former facilities, regardless of whether such facilities are owned or leased or whether we caused the condition of contamination.

We have not been notified of and are otherwise currently not aware of any contamination at our current or former facilities, or at any other location, for which we could have any material liability under environmental laws or regulations, and we currently are not undertaking any remediation or investigation activities in connection with any contamination.

Also, the components in our boats may become subject to more stringent environmental regulations.

For example, boat engines and other emission producing components may be subject to more

stringent emissions standards, which could increase the cost of our engines, components and our products, which, in turn, may reduce consumer demand for our products.

A natural disaster or other disruption at our facilities could adversely affect our business, financial condition and results of operations.

For example, boat engines and other emission producing components may be subject to more stringent emissions standards, which could increase the cost of our engines, components and our products, which, in turn, may reduce consumer demand for our products.

The Occupational Safety and Health Administration (OSHA) imposes standards of conduct for and regulates workplace safety, including physical safety and limits on the amount of emissions to which an employee may be exposed without the need for respiratory protection or upgraded plant ventilation.

Our facilities are regularly inspected by OSHA and by state and local inspection agencies and departments.

We believe that our facilities comply in all material aspects with these regulations.

A natural disaster, global pandemic or other disruption at our facilities could adversely affect our business, financial condition and results of operations.

We rely on the continuous operation of our facilities in Tennessee, Kansas, California, Florida and Australia.

Any natural disaster or other serious disruption to our facilities due to fire, flood, earthquake or any other unforeseen circumstances could adversely affect our business, financial condition and results of operations.

Changes in climate could adversely affect our operations by limiting or increasing the costs associated with equipment or fuel supplies.

Any natural disaster, global pandemic or other serious disruption to our facilities due to fire, flood, earthquake or any other unforeseen circumstances could adversely affect our business, financial condition and results of operations.

The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States.

As a result of the pandemic, we suspended operations at all of our facilities on March 24, 2020.

We have since resumed operations at all our facilities.

The disruption we experienced during our temporary closure resulted in a reduction in our production of boats that we were not able to fully recover during fiscal year 2020.

The temporary shutdown of our facilities also resulted in delays for delivery of our boats to dealers and inability to receive supplies from our vendors.

We cannot assure you that we will not have to suspend our operations again, whether voluntarily or as a result of federal, state or local mandates, and such closures could extend for a longer term than the prior shutdown of our facilities.

Changes in climate could also adversely affect our operations by limiting or increasing the costs associated with equipment or fuel supplies.

In addition, adverse weather conditions, such as increased frequency and/or severity of storms, or floods could impair our ability to operate by damaging our facilities and equipment or restricting product delivery to customers.

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Although we monitor changes in tax laws and work to mitigate the impact of proposed changes, such changes may negatively impact our financial results.

In addition, any increase in individual income tax rates, such as those implemented in the United States at the beginning of 2013, would negatively affect our potential consumers’ discretionary income and could decrease the demand for our products.

In addition, any increase in individual income tax

rates, such as those implemented in the United States at the beginning of 2013, would negatively affect our potential consumers’ discretionary income and could decrease the demand for our products.

The credit agreement governing our revolving credit facility and term loan contains restrictive covenants which may limit our operating flexibility and may impair our ability to access sufficient capital to operate our business.

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If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.

We manage our exposure to interest rate movements on our term loan through the use of an interest rate swap agreement on a notional amount of $39.3 million.

We have elected not to designate our interest rate swap as a hedge;

therefore, changes in the fair value of the derivative instrument may cause volatility in our interest expense based on fluctuations in interest rates.

In the future, we may enter into similar interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce future interest rate volatility on the remaining unhedged portion of our term loan;

We previously managed our exposure to interest rate movements on our term loan through the use of an interest rate swap agreement on a notional amount of $39.3 million, which matured on March 31, 2020.

however, there is no guarantee we may take such action and we may not fully mitigate our interest rate risk.

A hypothetical 1% increase in LIBOR over the 1.52% floor could increase our

annual interest expense and related cash flows by approximately $0.8 million based on the unhedged portion of the amounts outstanding under our credit facility as of June 30, 2019.

A hypothetical 1% increase in the London Interbank Offered Rate, or LIBOR could increase our annual interest expense and related cash flows by approximately $0.8 million based on the amounts outstanding under our credit facility as of June 30, 2020.

The Chief Executive of the U.K.

Financial Conduct Authority (the “FCA”), which regulates LIBOR, has announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.

That announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

Moreover, it is possible that LIBOR will be discontinued or modified prior to 2021.

All of our $83.8 million of debt outstanding under our credit agreement as of June 30, 2020 bears interest at a floating rate that uses LIBOR as the applicable reference rate to calculate the interest.

Our credit agreement provides that, if the administrative agent has determined that adequate means do not exist for ascertaining LIBOR or that LIBOR does not adequately and fairly reflect the cost to lenders for making, funding or maintaining their loans, then all of our outstanding loans under the credit agreement will be converted into loans that accrue interest at the alternative base rate on the last day of such interest period that determination is made.

Further, the lenders under our credit agreement will no longer be obligated to make loans using LIBOR as the applicable reference rate.

In addition, our tax receivable agreement provides that, if for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient funds, interest would accrue on any unpaid amounts at LIBOR plus 500 basis points until they are paid.

Our tax receivable agreement, however, does not provide for an alternative reference rate to LIBOR and, while we do not currently anticipate failing to pay any amounts owed under our tax receivable agreement, it is unclear how we would determine interest on any such amounts should we fail to pay as required under our tax receivable agreement.

If the rate used to calculate interest on our outstanding floating rate debt under our credit agreement that currently uses LIBOR were to increase by 1.0% either as a result of an increase in LIBOR or the result of the use of the alternative base rate, we would expect to incur additional interest expense on such indebtedness as of June 30, 2020 of approximately $0.8 million on an annualized basis.

While we do not expect the potential impact of any LIBOR transition to have a material effect on our financial results based on our currently outstanding debt, uncertainty as to the nature of potential changes to LIBOR, fallback

provisions, alternative reference rates or other reforms could adversely impact our interest expense on our floating rate debt that currently uses LIBOR as the applicable reference rate.

In addition, any alternative reference rates to LIBOR may result in interest that does not correlate over time with the payments that would have been made on our indebtedness if LIBOR was available in its current form.

Further, the discontinuance or modification of LIBOR and uncertainty of an alternative reference rate may result in the increase in the cost of future indebtedness, which could have a material adverse effect on our financial condition, cash flow and results of operations.

We intend to closely monitor the financial markets and the use of fallback provisions and alternative reference rates in 2020 in anticipation of t he discontinuance or modification of LIBOR by the end of 2021.

Failure to maintain effective internal control over financial reporting or disclosure controls and procedures could have a material adverse effect on our business and stock price.

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Management is similarly required to review disclosure controls, which are controls established to ensure that information required to be disclosed in SEC reports is recorded, processed, summarized and reported in a timely manner.

If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting.

If we fail to maintain the adequacy of our internal controls, as su ch standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting.

The existence of any material weakness could require management to devote significant time and incur significant expense to remediate any such material weakness and management may not be able to remediate any such material weakness in a timely manner.

The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations, and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect our business and stock price.

In addition, if our independent registered public accounting firm is

unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and the price of our stock could decline.

We ceased to qualify as an emerging growth company on June 30, 2019.

As a result, we have incurred and expect to continue to incur increased costs to comply with additional rules and regulations that will now apply to us, including the requirement to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting.

We became a public company on January 30, 2014.

As a public company, we have incurred significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements, in order to comply with the rules and regulations imposed by the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq.

As of June 30, 2019, we ceased to qualify as an emerging growth company.

As a result, we expect these costs to increase to comply with additional rules and regulations that will now apply to us, including the requirement to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures.

Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.

If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause our stock price to decline.

In addition, our management and other personnel will need to continue to devote a substantial amount of time to these compliance initiatives, our legal and accounting compliance costs will likely increase and we may need to hire additional legal and accounting staff as we continue to operate as a public company.

In addition, if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and the price of our stock could decline.

Risks Related to Our Organizational Structure

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To the extent that we need funds, and the LLC is restricted from making such distributions under applicable law or regulation or under the terms of its financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.

For example, our credit agreement generally prohibits the LLC, Malibu Boats, LLC, Malibu Australian Acquisition Corp., Cobalt Boats, LLC and PB Holdco, LLC from

paying dividends or making distributions.

For example, our credit agreement generally prohibits the LLC, Malibu Boats, LLC, Malibu Australian Acquisition Corp., Cobalt Boats, LLC and PB Holdco, LLC from paying dividends or making distributions.

Our credit agreement permits, however, (i) distributions based on a member’s allocated taxable income, (ii) distributions to fund payments that are required under the LLC’s tax receivable agreement, (iii) purchase of stock or stock options of the LLC from former officers, directors or employees of loan parties or payments pursuant to stock option and other benefit plans up to $2.0 million in any fiscal year, and (iv) share repurchase payments up to $35.0 million in any fiscal year subject to one-year carry forward and compliance with other financial covenants.

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For purposes of the agreement, the benefit deemed realized by us will be computed by comparing our actual income tax liability (calculated with certain assumptions) to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the assets of the LLC as a result of the purchases or exchanges, and had we not entered into the tax receivable agreement.

Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors.

Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as

the calculation of amounts payable depends on a variety of factors.

The actual increase in tax basis, as well as the amount and timing of any payments under the agreement, will vary depending upon a number of factors, including:

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Further, there may be a material negative effect on our liquidity if distributions to us by the LLC are not sufficient to permit us to make payments under the tax receivable agreement after we have paid taxes.

For example, we may have an obligation to make tax receivable agreement payments for a certain amount while receiving distributions from the LLC in a

lesser amount, which would negatively affect our liquidity.

For example, we may have an obligation to make tax receivable agreement payments for a certain amount while receiving distributions from the LLC in a lesser amount, which would negatively affect our liquidity.

The payments under the tax receivable agreement are not conditioned upon the pre-IPO owners’ (or any permitted assignees’) continued ownership of us.

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The limited liability company agreement of the LLC requires the LLC to make “tax distributions” which, in the ordinary course, will be sufficient to pay our actual tax liability and to fund required payments under the tax receivable agreement.

If for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient funds, interest would accrue on any unpaid amounts at the London Interbank Offered Rate, or LIBOR, plus 500 basis points until they are paid.

In certain cases, payments under the tax receivable agreement to the pre-IPO owners (or any permitted assignees) of LLC Units may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.

The tax receivable agreement provides that, in the event that we exercise our right to early termination of the tax receivable agreement, or in the event of a change in control or a material breach by us of our obligations under the tax receivable agreement, the tax receivable agreement will terminate, and we will be required to make a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the tax receivable agreement, which lump-sum payment would be based on certain assumptions, including those relating to our future taxable income.

present value of all forecasted future payments that would have otherwise been made under the tax receivable agreement, which lump-sum payment would be based on certain assumptions, including those relating to our future taxable income.

The change in control payment and termination payments to the pre-IPO owners (or any permitted assignees) could be substantial and could exceed the actual tax benefits that we receive as a result of acquiring the LLC Units because the amounts of such payments would be calculated assuming that we would have been able to use the potential tax benefits each year for the remainder of the amortization periods applicable to the basis increases, and that tax rates applicable to us would be the same as they were in the year of the termination.

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The market price of our Class A Common Stock could be subject to wide fluctuations in response to the many risk factors listed in this section, and others beyond our control, including:

our ability to continue to integrate our acquisitions of Cobalt and Pursuit into our business;

• the impact of COVID-19 on our operations, consumer demand and general economic conditions;

• actual or anticipated fluctuations in our financial condition and results of operations;

41 unchanged sentences

payments up to $35.0 million in any fiscal year subject to one-year carry forward and compliance with other financial covenants.

In addition, the LLC may make dividends and distributions of up to $10.0 million in any fiscal year, subject to compliance with other financial covenants.

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Unresolved Staff Comments

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors