By Thomas J. Ryan
<span style="color: #999999;">Mad Dogg Athletics, one of the pioneers of the indoor cycling craze, has filed a Chapter 11 petition in order to restructure its operations and debt.
The filing comes after three years of steady revenue declines that culminated in a loss in 2018.
The biggest factor in the bankruptcy was a dispute over the termination of its Bodyblade license and distribution agreement in 2016 that led to a massive judgment against Mad Dogg and the company to fall out of compliance with its bank loan.
A number of secondary factors also led to Mad Dogg’s deteriorating financial condition, including a failed attempt to build a platform to compete with Peleton, a botched website upgrade, production delays faced by its Peak Pilates business, and a challenging transition of the commercial licensee for Spinning to Precor.
In an affidavit filed in bankruptcy court in Los Angeles, John Baudhuin, founder and CEO, wrote that the company’s core business remains viable absent the extraordinary issues faced over the last few years to reorganize successfully. A sale of the business is not contemplated.
“The Debtor believes that a successful overall reorganization will maximize the value of the Estate, provide for payment to unsecured creditors, and allow the Debtor to emerge from chapter 11 with a reorganized and viable ongoing business,” wrote Baudhuin. “However, a successful restructuring may likely require the cooperation of certain stakeholders in the Debtor, including the Debtor’s senior secured creditor (with whom the Debtor already discussed its general restructuring goals), certain suppliers, and potentially others. The Debtor already began exploring potential restructuring alternatives, which likely will require exit financing.”
Mad Dogg’s businesses span across five segments: Spinning, Peak Pilates, CrossCore, Resist-a-ball, and UGI.
<span style="color: #999999;">The company’s business started in 1992 when it began manufacturing and commercial distribution of the Spinner bike and the Spinning educational program. The Spinner segment includes products and accessories for the consumer and commercial indoor cycling market as well as education programs for fitness professionals. Peak Pilates has a similar focus of products and education materials on the Pilates market and CrossCore on fitness. The Resist-a-ball and UGI segments relate to smaller products and are sold as accessories.
In the affidavit, Baudhuin wrote that the company had never experienced a net annual operating loss until 2018 since officially being formed in 1994. Mad Dogg’s average net profit between 2015 and 2017 was approximately $252,000 per year.
But the company encountered a number of significant events over the past three years that have had “a material, negative impact on the company’s sales, expenses, and profitability.”
Baudhuin added, “While the company remains optimistic that it can return to profitability, a number of factors contributed to a particularly challenging year in 2018. Certain of these events have roots back to 2016 and have taken considerable time and resources to address.”
In July 2016, Bruce Hymanson, creator of Bodyblade, terminated Mad Dogg’s distribution agreement for Bodyblade. The two sides then became embroiled in a lawsuit, including over Hymanson’s continued alleged use of marketing collateral created by Mad Dogg post-termination.
Mad Dogg continues to insist that it has complied with all the terms of the license agreement. The company has also charged that Hymanson decided to move to terminate the license only after he solicited and received a detailed business plan from Mad Dogg’s former VP of global sales, John Kipper. In August 2016, Kipper assumed the role of COO at Hymanson’s company.
In March 2018, the arbitrator in the dispute adopted Hymanson’s arguments.
In the affidavit, Baudhuin wrote that the dispute consumed “significant management bandwidth” as well as legal costs and the impact of lost sales over the years. Bodyblade’s sales had averaged $4.4 million from 2013 and 2016 for Mad Dogg.
In total, the Hymanson dispute resulted in nearly $2 million in losses in 2018, including the $1.28 million judgment, loss of Bodyblade inventory valued at $200,000, and legal costs.
Mad Dogg is appealing the decision but doesn’t expect a reversal, if any, to occur within the next twelve months.
Baudhuin wrote, “MDA (Mad Dogg Athletics) believes that it met or exceeded every obligation under the Hymanson Distribution Agreement and simply fell prey to Hymanson’s contemporaneous reinterpretation of the Hymanson Distribution Agreement, unsupported claims, and a fill-in arbitrator that had little knowledge or background with respect to accounting matters.”
<span style="color: #999999;">Relatedly, losses in the third quarter of 2018 related to the Hymanson disputes caused Mad Dogg to violate its loan covenants with Union Bank. As a result, Union Bank was not willing to extend the March 1, 2019 maturity date under the loan. In late March 2019, Union Bank agreed to extend the loan’s maturity date until September 1, 2019, in exchange for MDA’s payment of five monthly installments of $100,000, each commencing April 1, 2019. To date, Mad Dogg has made all such payments, “but they have significantly impacted the company’s cash flows over the past 120 days,” wrote Baudhuin.
As of the petition date, Mad Dogg had secured debt in aggregate of $6,2 million held by Union Bank, entities own by Baudhuin or to Baudhuin directly. The unsecured debt was $12.7 million, excluding the disputed Hymanson judgment claim. Mad Dogg believes Hymanson asserts a claim in the sum of approximately $1.16 million in connection with the arbitration award currently under appeal.
Outside the Hymanson dispute, Mad Dogg has been impacted by the company’s initial failure to create an in-home subscription service to compete with Peloton. Beginning in 2016, Mad Dogg embarked on an aggressive program to develop a digital subscription platform, hardware and content directed to the in-home consumer indoor cycling market.
While Mad Dogg has historically sold bikes to the in-home exercise market, the addition of digital content and a subscription platform was a new endeavor for the company. Creating a digital platform was seen as “critical to maintaining a presence in the in-home indoor cycling market,” a segment of the business that has historically generated as much as $10 million in Mad Dogg’s annual revenues.
As part of its initiative, Mad Dogg collaborated with The Spinning Group, Inc., an entity owned by Baudhuin, to open “Industry,” a studio for the purpose of shooting content for the in-home indoor cycling market and, eventually, Pilates markets. Mad Dogg’s in-home content for over 15 years has largely focused on DVDs.
Mad Dogg shot over 100 classes at Industry for its SPINtv platform but after 18 months of operation decided to close Industry in July 2019 as the costs of the operation exceeded available funds. Advances of $578,000 to The Spinning Group were written off. Baudhuin said the company is “looking for a suitable alternative that will reduce the overall cost of production while at the same time allow the company to become increasingly prolific at creating new content for its growing subscription service.”
Another factor impairing the company’s results in recent years was a relaunch of its web platform in December 2016 that Baudhuin described as an “immediate disaster.” The relaunch impacted not only the site’s overall functionality but areas such as shipping, SEO (search engine optimization) and access to transaction information.
Another web development firm and a new chief technology officer were brought in to correct the website’s problems. Overall, the website challenges cost the company three-times the originally-budgeted amounts and resulted in an overall drop in e-commerce sales of over 50 percent. The rework of the company’s website is expected to be completed by October 2019.
Mad Dogg has also been impacted by supply chain issues and the mechanical failure of a computer numerical control (CNC) machine at Hart Wood, another affiliated company owned by Baudhuin. Hart Wood, located in Colorado, manufactures all of the wood equipment for the Peak Pilates business.
Those issues led to significant production delays which resulted in Mad Dogg needing to advance amounts to Hart Wood to keep the operation viable as a going concern. Hart Wood’s production has been sold to Mad Dogg below the overall cost of manufacturing the products. Mad Dogg has also decided to write off, for accounting purposes, advances to Hart Wood of approximately $795,000. Because Hart Wood solely produces for Mad Dogg, Hart Wood has minimal assets and would have to “drastically” increase prices charged to Mad Dogg to realistically repay the advances.
Finally, Mad Dogg faced challenges with the transition of the commercial licensee for Spinning from Star Trac to Precor, which is owned by Amer Sports. Star Trac filed for bankruptcy in 2010 and ultimately liquidated. Core Health and Fitness acquired Star Trac’s assets, including the Spinning license, but Mad Dogg terminated its relationship with Core Health and Fitness in 2015 and ultimately entered into a license agreement with Precor.
<span style="color: #999999;">As part of its transition to Precor, Mad Dogg took nearly three years to design, develop and manufacture a completely new line of bikes for the commercial market and also switched over to Precor’s representatives, dealers, distributors and direct operations to sell the Spinning line of equipment and instructor training. Transitioning away from the Star Trac’s team “meant discontinuing many relationships that had spanned from 10 to over 20 years,” said Baudhuin. The loss of that ”tribal knowledge” impacted Mad Dogg’s stream of royalties, which declined $600,000 between 2015 and 2016, according to Baudhuin.
Royalties from commercial sales have not returned to 2015 levels. Baudhuin noted that Precor “has increasingly stabilized the Spinning commercial business” and the company is “optimistic its new products will continue to gain market share in 2019 and 2020.”
As a result of all those factors, the company’s results have steadily declined for the last few years.
For the fiscal year 2015, the company generated $26.2 million in sales, resulting in net income of $432,000.
For the fiscal year 2016, Mad Dogg’s sales fell to $20.3 million, resulting in net income of $17,000. Bodyblade’s sales declined by $4 million due to license termination. The transition of the commercial bike line to Precor and the new e-commerce platform were also cited as factors in the revenue decline.
For the fiscal year 2017, Mad Dogg generated $305,000 in income but sales dropped again, to $17.4 million. The further revenue decline was primarily attributed to a drop in Peak Pilates sales, which were caused by supply chain issues with Hart Wood. Litigation over the Hymanson dispute over jointly-developed assets and accounting issues related to Bodyblade sales also impacted results.
For the fiscal year 2018, Mad Dogg’s revenues fell to $15.0 million, resulting in a net loss of $4.04 million. The majority of the loss was related to the Hymanson dispute. Weaker than expected sales due to online platform issues and increased competition from Peloton also dragged down results.
For the six-months ending June 30, 2019, Mad Dogg generated revenues of $6.8 million, down 8.8 percent year over year. The decline was largely attributable to a decrease in “marginally profitable consumer bike” sales to a large retail customer.
Baudhuin concluded that the company has a solid foundation to further stabilize and return to profitability as many of the issues faced over the last few years are resolved.
“MDA has operated profitably for 24 of its 25 years,” said Baudhuin. “A confluence of seemingly one-time events between 2016 and 2018 resulted in a disastrous year. The Debtor continues to face cash flow challenges and needs to bring certain key initiatives to completion (website, digital subscription platform, Spinning app, supply chain improvements and manufacturing improvements at Hart Wood), and resolve the current issues with Union Bank. A restructuring of MDA’s operations and debt should provide a solid foundation for rebuilding the company over time.”
Photo courtesy Mad Dogg Athletics
