American Outdoor Brands, Inc. (AOUT)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report.

Set forth below is a comparison of the results of operations and changes in financial condition for the fiscal years ended April 30, 2025 and 2024. The comparison of, and changes between, the fiscal years ended April 30, 2024 and 2023 can be found within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended April 30, 2024 filed with the SEC on June 27, 2024.

Background

We operate as one reporting segment. We analyze revenue streams in various ways, including customer group, brands, categories, and customer channels. However, this information does not include a full set of discrete financial information.

The following discussion and analysis includes references to net sales of our products in shooting sports and outdoor lifestyle categories. Our shooting sports category includes net sales of shooting accessories and our products used for personal protection. Our outdoor lifestyle category includes net sales of our products used in hunting, fishing, camping, rugged outdoor activities, and outdoor cooking.

Fiscal 2025 Highlights

Our operating results for fiscal 2025 included the following:

•Net sales were $222.3 million, an increase of $21.2 million, or 10.6%, over the prior fiscal year, primarily because of an increase in net sales in our traditional channel.

•Gross margin was 44.6%, an increase of 60 basis points over the prior fiscal year.

•Net loss was $77,000, or ($0.01) per diluted share, compared with a net loss of $12.2 million, or ($0.94) per diluted share, for the prior fiscal year.

•Non-GAAP Adjusted EBITDA was $17.7 million, compared with $9.8 million for the prior fiscal year. See non-GAAP financial measure disclosures below for our reconciliation of Non-GAAP Adjusted EBITDA.

•We repurchased a total of 374,446 shares of our common stock, in the open market, for $3.8 million during fiscal 2025.

Results of Operations

Net Sales and Gross Profit

The following table sets forth certain information regarding consolidated net sales for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

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The following table sets forth certain information regarding trade channel net sales for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Our e-commerce channels include net sales from customers that do not traditionally operate physical brick-and-mortar stores, but generate the majority of their revenue from consumer purchases from their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick-and-mortar stores and generate the large majority of revenue from consumer purchases in their brick-and-mortar locations.

We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

The following table sets forth certain information regarding net sales categories for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Fiscal 2025 Net Sales Compared with Fiscal 2024

Total net sales increased $21.2 million, or 10.6%, over the prior fiscal year primarily because of an increase in hunting, shooting accessories, meat processing, and fishing product net sales in our domestic channel as well as an increase in shooting accessories product net sales to international retailers.

E-commerce channel net sales increased primarily because of higher hunting and fishing product net sales in our outdoor lifestyle category, partially offset by lower net sales in our shooting sports category.

Net sales in our traditional channels increased $21.1 million, or 18.1%, over the prior fiscal year. During our fourth fiscal quarter, we experienced increased orders resulting in higher shipments of our products to our traditional channel customers. Traditional channel net sales increased primarily because of higher net sales of shooting accessories in our shooting sports category and higher net sales of our hunting, fishing, and meat processing products in our outdoor lifestyle category. In addition, our international net sales increased $2.4 million, or 20.0%, over the prior fiscal year as a result of increased sales in Canada and European countries. We believe a portion of the traditional channel increase was a result of certain customers accelerating orders that we had originally planned to receive in our first fiscal quarter of 2026, which we believe was due to the anticipated increased costs associated with tariffs imposed by the U.S. administration in March and April of 2025.

New products, which we define as any SKU introduced over the prior two fiscal years, represented 21.5% of net sales for fiscal 2025 compared to 23.2% of net sales for fiscal 2024. We have a history of introducing over 200 new SKUs each year.

Our order backlog as of April 30, 2025 was $2.6 million, or $1.4 million lower than at the end of fiscal 2024. Although we generally fulfill the majority of our order backlog, we allow orders received that have not yet shipped to be cancelled, and therefore, our backlog may not be indicative of future sales.

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Fiscal 2025 Cost of Sales and Gross Profit Compared with Fiscal 2024

Gross margin for fiscal 2025 increased 60 basis points over the prior fiscal year, primarily from higher net sales volumes, partially offset by product and customer mix and higher tariff, freight, and duty expenses from increased inventory purchases earlier in fiscal 2025.

Operating Expenses

The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Fiscal 2025 Operating Expenses Compared with Fiscal 2024

Operating expenses in fiscal 2025 decreased $1.5 million from the prior fiscal year. Research and development expenses increased $859,000, primarily from increased depreciation for new product tooling compared to the prior fiscal year. Selling, marketing, and distribution expenses increased $513,000 over the prior fiscal year, primarily because of higher sales volume-related expenses, including higher freight costs and commissions, and higher rent expenses. General and administrative expenses decreased $2.9 million from the prior fiscal year primarily because of $3.4 million of lower acquired intangible amortization and $613,000 of lower legal and advisory fees, partially offset by higher compensation-related expenses.

Operating Loss

The following table sets forth certain information regarding operating loss for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Fiscal 2025 Operating Loss Compared with Fiscal 2024

We had a decrease of $12.2 million in operating loss from the prior fiscal year primarily because of increased net sales and lower operating expenses partially offset from an increase in cost of goods sold.

Interest Income/(Expense), Net

The following table sets forth certain information regarding interest income/(expense), net for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Fiscal 2025 Interest Income/(Expense) Compared with Fiscal 2024

Interest income was $60,000 compared to interest income of $39,000 in the prior fiscal year. We had no borrowings on our revolving line as of April 30, 2025.

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Income Taxes

The following table sets forth certain information regarding income tax expense for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Fiscal 2025 Income Tax Benefit Compared with Fiscal 2024

We recorded an income tax expense of $123,000 for fiscal 2025 as compared to income tax benefit of $70,000 for fiscal 2024. Fiscal 2024 income tax benefit was primarily because of the impact of refundable state tax credits. The effective tax rates were 267.4% and 0.6% for fiscal 2025 and 2024, respectively.

Net Loss

The following table sets forth certain information regarding net loss and the related per share data for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands, except per share data):

Fiscal 2025 Net Loss Compared with Fiscal 2024

We had a net loss of $77,000, or ($0.01) per diluted share in fiscal 2025 compared to $12.2 million, or ($0.94) per diluted share in fiscal 2024.

Non-GAAP Financial Measure

We use GAAP net income as our primary financial measure. We use Adjusted EBITDA, which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an improved understanding of underlying performance trends, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Adjusted EBITDA is defined as GAAP net income/(loss) before interest, taxes, depreciation, amortization, and stock compensation expense. Our Adjusted EBITDA calculation also excludes certain items we consider non-routine. We believe that Adjusted EBITDA is useful to understanding our operating results and the ongoing performance of our underlying business, as Adjusted EBITDA provides information on our ability to meet our capital expenditure and working capital requirements, and is also an indicator of profitability. We believe this reporting provides additional transparency and comparability to our operating results. We believe that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to neutralize our capitalization structure to compare our performance against that of other peer companies using similar measures, especially companies that are private. We also use Adjusted EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe it is useful to investors and analysts to evaluate this non-GAAP measure on the same basis as we use to evaluate our operating results.

Adjusted EBITDA is a non-GAAP measure and may not be comparable to similar measures reported by other companies. In addition, non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of non-GAAP measures through the use of various GAAP measures. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.

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The following table sets forth our calculation of non-GAAP Adjusted EBITDA for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

Liquidity and Capital Resources

Historically, we have generated strong annual cash flow from operating activities. Our ability to fund our operating needs depends on our future ability to continue to generate positive cash flow from operations and obtain financing on acceptable terms. Based upon our history of generating strong cash flows, we believe we will be able to meet our short-term liquidity needs. We also believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through our existing $75.0 million credit facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future.

Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, and any acquisitions or strategic investments that we may determine to make. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.

We had $23.4 million and $29.7 million of cash equivalents on hand as of April 30, 2025 and 2024, respectively.

We expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; hiring additional employees; funding growth strategies, including any potential acquisitions; and repurchasing our common stock under our existing authorized repurchase programs.

The following table sets forth certain cash flow information for the fiscal years ended April 30, 2025 and 2024 (dollars in thousands):

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Operating Activities

Operating activities represent the principal source of our cash flow.

Cash generated in operating activities was $1.4 million for fiscal 2025 compared to cash generation of $24.5 million for the prior fiscal year. Cash generated in operating activities for fiscal 2025 was primarily impacted from a $12.2 million lower net loss than the prior fiscal year, $4.2 million higher accrued expenses from increased tariff costs, lower prepaid and other current assets of $2.4 million as a result of lower deposits on inventory, and $1.7 million of increased accrued payroll and incentives because of higher compensation-related accruals, partially offset by an increase in accounts receivable of $13.6 million as a result of timing of customer shipments as we believe certain customers accelerated orders into our fourth fiscal quarter, which we believe was due to increased costs associated with tariffs imposed by the U.S. administration. In addition, we increased our inventory by $11.4 million to plan for new product introductions that will be released in our next fiscal year and increased inbound freight associated with heightened tariff costs.

We expect our inventory balance to increase in our first quarter of fiscal 2026 because of increased inventory purchases to support the fall hunting and winter holiday shopping seasons as well as inventory for new products that we expect to launch later in the year. In addition, we believe our inventory balances will increase as a result of the impact of additional tariffs imposed by the U.S. administration.

Investing Activities

Cash used in investing activities was $3.9 million for fiscal 2025 compared with cash usage of $6.0 million for the prior fiscal year. The decrease in cash used in investing activities is because of the lease assignment in the prior fiscal year, as mentioned below, that required additional racking and equipment in our warehouse in fiscal 2024.

Financing Activities

Cash used in financing activities was $3.7 million in fiscal 2025 compared with cash used in financing activities of $10.8 million in the prior fiscal year. Cash used in financing activities in fiscal 2025 was because of $3.8 million of payments to repurchase our common stock under our authorized stock repurchase program. Cash used in financing activities in fiscal 2024 was because of $5.0 million of payments on our revolving line of credit and $6.0 million of payments to repurchase our common stock under our authorized stock repurchase program.

On January 31, 2023, we entered an Assignment Agreement with our former parent company and RCS – S&W Facility, LLC to assign to us the rights of the tenant under the Lease Agreement, dated October 26, 2017, as amended by the First Amendment of Lease Agreement, dated October 25, 2018, and as further amended by the Second Amendment to Lease Agreement, dated January 31, 2019 (collectively, the “Lease”), which assignment was effective on January 1, 2024.

The Lease covers approximately 632,000 square feet of building and surrounding property located at 1800 North Route Z, Columbia, Missouri. We lease the entire building and the Lease provides us with an option to expand the Building by up to 491,000 additional square feet. The terms of the Lease are consistent with the sublease agreement that we formerly had with our former parent company. The Lease term ends on November 26, 2038 and, pursuant to the Assignment Agreement, does not provide for an extension of the term of the Lease. We will receive tax and other incentives from federal, state, and local governmental authorities previously received by our former parent. Our former parent will guarantee the Lease through the end of the term. During fiscal year ended April 30, 2024, we recorded a right-of-use asset and lease liability of $10.6 million for the additional space provided under the Assignment Agreement.

Inflation

We have been impacted by changes in prices of finished product inventory from our suppliers and logistics as well as other inflationary factors, such as increased interest rates, tariffs, and increased labor and overhead costs. We evaluate the need for price changes to offset these inflationary factors while taking into account the competitive landscape. Although we do not believe that inflation had a material impact on us during fiscal 2025, increased inflation in the future may have a negative effect on our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of inflation with increased prices, our future results from operations and cash flows would be materially impacted. Additionally, inflation may cause consumers to reduce discretionary spending, which could cause decreases in demand for our products.

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Critical Accounting Estimates

Revenue Recognition

We recognize revenue for the sale of our products at the point in time when the control of ownership has transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance. The revenue recognized for the sale of our products reflect various sales adjustments for discounts, returns, allowances, and other customer incentives. These sales adjustments can vary based on market conditions, customer preferences, timing of customer payments, volume of products sold, and timing of new product launches. These adjustments require us to make reasonable estimates of the amount we expect to receive from the customer. We estimate sales adjustments by customer or by product category on the basis of our historical experience with similar contracts with customers, adjusted as necessary to reflect current facts and circumstances and our expectations for the future.

Valuation of Long-lived Intangible Assets

We evaluate the recoverability of long-lived assets, or asset group, on an annual basis or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine the initial fair value of our long-lived assets, primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.

Inventories

We value inventories at the lower of cost, using the first-in, first-out, or FIFO, method, or net realizable value. We evaluate quantities that make up our current inventory against past and future demand and market conditions to determine excess or slow-moving inventory that may be sold below cost. For each product category, we estimate the market value of the inventory comprising that category based on current and projected selling prices. If the projected market value is less than cost, we will record a provision adjustment to reflect the lower value of the inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value of the inventory may decrease because of consumer preferences or loss of key contracts, among other events.

Income Tax Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. We establish valuation allowances if it is more likely than not that we will be unable to realize our deferred income tax assets.

In making this determination, we consider available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results, and tax planning strategies. Significant judgment is required in this analysis.

We determined in a prior fiscal period that it was more likely than not that the benefit from our net deferred tax assets will not be realized and accordingly we established a full valuation allowance recorded as an increase to income tax expense. In the current fiscal year, we continued to maintain a full valuation allowance based on the assessment that it is more likely than not that the benefit from our net deferred tax assets will not be realized. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates.

Estimates may change as new events occur, estimates of future taxable income may increase during the expected reversal period of our deferred tax assets, or additional information becomes available. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, a full or partial reversal of the valuation allowance could occur resulting in a decrease to the provision for income taxes in the period such a change in estimate is made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis.

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Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements is discussed in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements, which is incorporated herein by reference.

Contractual Obligations and Commercial Commitments

The following table sets forth a summary of our material contractual obligations and commercial commitments as of April 30, 2025 (in thousands):

As of April 30, 2025, we had no borrowings outstanding on our revolving line of credit. We are required to make interest payments for the unused portion of our revolving line of credit in accordance with the financing arrangement. Future unused loan fee obligations are not included above, which could accumulate up to approximately $185,000 per year, under certain circumstances, until the maturity date in fiscal 2027.

Interest on debt is based on outstanding debt as of April 30, 2025, and includes debt issuance costs to be amortized over the life of the financing arrangement.

Operating lease obligations represent required minimum lease payments during the noncancelable lease term. Most real estate leases also require payments of related operating expenses such as taxes, insurance, utilities, and maintenance, which are not included above. See Note 4, Leases, for additional information.

Purchase obligations represent binding commitments to purchase raw materials, contract production, and finished products that are payable upon delivery of the inventory. This obligation excludes the amount included in accounts payable at April 30, 2025 related to inventory purchases. Other obligations, included in our purchase obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as operating expenses, (ii) capital spending, and (iii) advertising.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report.

Set forth below is a comparison of the results of operations and changes in financial condition for the fiscal years ended April 30, 2024 and 2023. The comparison of, and changes between, the fiscal years ended April 30, 2023 and 2022 can be found within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended April 30, 2023 filed with the SEC on June 28, 2023.

Background

We operate as one reporting segment. We analyze revenue streams in various ways, including customer group, brands, categories, and customer channels. However, this information does not include a full set of discrete financial information.

The following discussion and analysis includes references to net sales of our products in shooting sports and outdoor lifestyle categories. Our shooting sports category includes net sales of shooting accessories and our products used for personal protection. Our outdoor lifestyle category includes net sales of our products used in hunting, fishing, camping, rugged outdoor activities, and outdoor cooking.

Fiscal 2024 Highlights

Our operating results for fiscal 2024 included the following:

•
Net sales were $201.1 million, an increase of $9.9 million, or 5.2%, over the prior fiscal year, reflecting an increase in net sales for our traditional channel partially offset by a decrease in net sales for our e-commerce channels.

•
Gross margin was 44.0%, a decrease of 210 basis points from the prior fiscal year.

•
Net loss was $12.2 million, or ($0.94) per diluted share, compared with a net loss of $12.0 million, or ($0.90) per diluted share, for the prior fiscal year.

•
Non-GAAP Adjusted EBITDAS was $9.8 million, compared with $12.8 million for the prior fiscal year. See non-GAAP financial measure disclosures below for our reconciliation of Non-GAAP Adjusted EBITDAS.

•
We repurchased a total of 689,417 shares of our common stock, in the open market, for $6.0 million during fiscal 2024.

Results of Operations

Net Sales and Gross Profit

The following table sets forth certain information regarding consolidated net sales for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

The following table sets forth certain information regarding trade channel net sales for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

Our e-commerce channels include net sales from customers that do not traditionally operate physical brick-and-mortar stores, but generate the majority of their revenue from consumer purchases from their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical

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brick-and-mortar stores and generate the large majority of revenue from consumer purchases in their brick-and-mortar locations.

We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

The following table sets forth certain information regarding net sales categories for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

Fiscal 2024 Net Sales Compared with Fiscal 2023

Total net sales increased $9.9 million, or 5.2%, from the prior fiscal year.

Net sales in our traditional channels increased $12.8 million, or 12.3%, over the prior fiscal year. Traditional channel net sales for our shooting sports category increased primarily because of higher net sales of certain shooting accessories and selling slow moving personal protection products at a discount. Traditional channel net sales for our outdoor lifestyle category increased primarily as a result of higher net sales for hunting and fishing products. In addition, our traditional channel net sales increased because we began selling one of our outdoor lifestyle direct-to-consumer only brands at retail. Our international net sales increased $3.2 million, or 35.5%, over the prior fiscal year as a result of increased sales in Canada because of increased orders in the region as we focus on introducing more outdoor lifestyle products in Canada.

Net sales in our e-commerce channel decreased $2.9 million, or 3.3%, from the prior fiscal year, primarily because of lower net sales to the world's largest e-commerce retailer as a result of reduced orders. E-commerce channel net sales for our shooting sports category decreased because of lower net sales for certain personal protection products. E-commerce channel net sales for our outdoor lifestyle category was relatively flat as compared to the prior fiscal year primarily from higher net sales for certain hunting and rugged outdoor products as a result of additional promotional activity, partially offset by lower net sales for our outdoor cooking products as a result of closing our retail location in Michigan in the first quarter of fiscal 2024 to consolidate operations into our Columbia, Missouri facility. Total direct-to-consumer net sales for the year ended April 30, 2024 were $29.1 million, or 34.6%, of total e-commerce net sales compared to $29.3 million, or 33.5%, of total e-commerce net sales for the year ended April 30, 2023.

New products, defined as any new SKU introduced over the prior two fiscal years, represented 23.2% of net sales for fiscal 2024 compared to 25.5% of net sales for fiscal 2023. We have a history of introducing over 200 new SKUs each year.

Our order backlog as of April 30, 2024 was $4.0 million, or $3.0 million lower than at the end of fiscal 2023. Although we generally fulfill the majority of our order backlog, we allow orders received that have not yet shipped to be cancelled, and therefore, our backlog may not be indicative of future sales.

Fiscal 2024 Cost of Sales and Gross Profit Compared with Fiscal 2023

Gross margin for fiscal 2024 decreased 210 basis points from the prior fiscal year, primarily from higher tariff, freight, and duty expenses from increased inventory purchases earlier in fiscal 2024, increased promotional product discounts, and a tariff drawback adjustment due to an audit of a claim submitted in fiscal 2022.

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Operating Expenses

The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

Fiscal 2024 Operating Expenses Compared with Fiscal 2023

Operating expenses in fiscal 2024 increased $159,000 compared with the prior fiscal year. Research and development expenses increased $490,000, primarily from increased depreciation for new product tooling compared to the prior fiscal year. Selling, marketing, and distribution expenses increased $3.3 million from the prior fiscal year, primarily because of higher sales volume-related expenses, including higher freight costs, labor, and commissions. General and administrative expenses decreased $3.6 million from the prior fiscal year primarily because of $1.2 million lower legal and advisory fees associated with a cooperation agreement with a stockholder that occurred in fiscal 2023, $1.7 million of reduced enterprise resource planning system-implementation-related expenses, and lower rent expense as result of the facility consolidations we completed in the prior fiscal year, partially offset by higher compensation-related expenses.

Operating Loss

The following table sets forth certain information regarding operating loss for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

Fiscal 2024 Operating Loss Compared with Fiscal 2023

We had a decrease of $203,000 in operating loss from the prior fiscal year primarily because of increased net sales and lower operating expenses partially offset from an increased in cost of goods sold.

Interest Income/(Expense), Net

The following table sets forth certain information regarding interest income/(expense), net for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

Fiscal 2024 Interest Income/(Expense) Compared with Fiscal 2023

Interest income was $39,000 compared to interest expense of $761,000 in the prior fiscal year because of lower interest on a reduced level of borrowings on our revolving line of credit during fiscal 2024. We had no borrowings on our revolving line as of April 30, 2024.

Income Taxes

The following table sets forth certain information regarding income tax expense for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

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Fiscal 2024 Income Tax Benefit Compared with Fiscal 2023

We recorded an income tax benefit of $70,000 for fiscal 2024 as compared to income tax benefit of $249,000 for fiscal 2023. Fiscal 2024 income tax benefit was primarily because of the impact of refundable state tax credits. Fiscal 2023 income tax benefit was primarily because of recording return to provision adjustments relating to the Federal and State tax returns filed for the prior fiscal year and the impact of refundable state tax credits. The effective tax rates were 0.6% and 2.0% for fiscal 2024 and 2023, respectively.

Net Loss

The following table sets forth certain information regarding net loss and the related per share data for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands, except per share data):

Fiscal 2024 Net Loss Compared with Fiscal 2023

We had a net loss of $12.2 million, or ($0.94) per diluted share in fiscal 2024 compared to $12.0 million, or ($0.90) per diluted share in fiscal 2023.

Non-GAAP Financial Measure

We use GAAP net income as our primary financial measure. We use Adjusted EBITDAS, which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an improved understanding of underlying performance trends, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Adjusted EBITDAS is defined as GAAP net income/(loss) before interest, taxes, depreciation, amortization, and stock compensation expense. Our Adjusted EBITDAS calculation also excludes certain items we consider non-routine. We believe that Adjusted EBITDAS is useful to understanding our operating results and the ongoing performance of our underlying business, as Adjusted EBITDAS provides information on our ability to meet our capital expenditure and working capital requirements, and is also an indicator of profitability. We believe this reporting provides additional transparency and comparability to our operating results. We believe that the presentation of Adjusted EBITDAS is useful to investors because it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. We use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to neutralize our capitalization structure to compare our performance against that of other peer companies using similar measures, especially companies that are private. We also use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe it is useful to investors and analysts to evaluate this non-GAAP measure on the same basis as we use to evaluate our operating results.

Adjusted EBITDAS is a non-GAAP measure and may not be comparable to similar measures reported by other companies. In addition, non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of non-GAAP measures through the use of various GAAP measures. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDAS. Our presentation of Adjusted EBITDAS should not be construed as an inference that our future results will be unaffected by these items.

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The following table sets forth our calculation of non-GAAP Adjusted EBITDAS for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

(a) During our fourth quarter of fiscal 2024, an incorrect submission was identified as a result of an audit of a tariff drawback claim that was submitted to US Customs Border Protection in fiscal 2022. We recorded an immaterial adjustment of $1.1 million resulting from this audit in fiscal 2024, when identified. We included this adjustment as a non-GAAP Adjusted EBITDAS adjustment because of the nonrecurring nature as well as the importance to promote comparability in our operating results.

Liquidity and Capital Resources

Historically, we have generated strong annual cash flow from operating activities. Our ability to fund our operating needs depends on our future ability to continue to generate positive cash flow from operations and obtain financing on acceptable terms. Based upon our history of generating strong cash flows, we believe we will be able to meet our short-term liquidity needs. We also believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through our existing $75.0 million credit facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future.

Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, and any acquisitions or strategic investments that we may determine to make. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.

We had $29.7 million and $22.0 million of cash equivalents on hand as of April 30, 2024 and 2023, respectively.

We expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; hiring additional employees; funding growth strategies, including any potential acquisitions; and repurchasing our common stock under our existing authorized repurchase programs.

The following table sets forth certain cash flow information for the fiscal years ended April 30, 2024 and 2023 (dollars in thousands):

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Operating Activities

Operating activities represent the principal source of our cash flow.

Cash generated in operating activities was $24.5 million for fiscal 2024 compared to cash generation of $30.7 million for the prior fiscal year. Cash generated in operating activities for fiscal 2024 was primarily impacted by $6.4 million of reduced inventory because of sales of slower moving inventory items during the year and increased orders, $2.9 million higher accounts payable due to timing of vendor payments and inventory purchases, a $2.4 million increase in accrued payroll and incentives from higher management incentive accruals, and a decrease in accounts receivable of $1.2 million as a result of timing of customer shipments and a mix between traditional term customers and direct to consumer sales during our fourth fiscal quarter.

We expect our inventory balance to increase in our first quarter of fiscal 2025 because of increased inventory purchases to support the fall hunting and winter holiday shopping seasons as well as inventory for new products that we expect to launch later in the year.

Investing Activities

Cash used in investing activities was $6.0 million for fiscal 2024 compared with cash usage of $4.8 million for the prior fiscal year. The increase in cash used in investing activities is because of the lease assignment mentioned below as we now lease the entire facility at our Columbia, Missouri location and required additional racking and equipment in our warehouse.

Financing Activities

Cash used in financing activities was $10.8 million in fiscal 2024 compared with cash usage by financing activities of $23.5 million in the prior fiscal year. Cash used in financing activities in fiscal 2024 was because of $5.0 million of payments on our revolving line of credit and $6.0 million of payments to repurchase our common stock under our authorized stock repurchase program. Cash used in financing activities in fiscal 2023 was because of $20.2 million of payments on our revolving line of credit and $3.5 million of payments to repurchase our common stock under our authorized stock repurchase program.

On January 31, 2023, we entered an Assignment Agreement with our former parent company and RCS – S&W Facility, LLC to assign to us the rights of the tenant under the Lease Agreement, dated October 26, 2017, as amended by the First Amendment of Lease Agreement, dated October 25, 2018, and as further amended by the Second Amendment to Lease Agreement, dated January 31, 2019 (collectively, the “Lease”), which assignment was effective on January 1, 2024.

The Lease covers approximately 632,000 square feet of building and surrounding property located at 1800 North Route Z, Columbia, Boone County, Missouri. We lease the entire building and the Lease provides us with an option to expand the Building by up to 491,000 additional square feet. The terms of the Lease are consistent with the sublease agreement that we formerly had with our former parent company. The Lease term ends on November 26, 2038 and, pursuant to the Assignment Agreement, does not provide for an extension of the term of the Lease. We will receive tax and other incentives from federal, state, and local governmental authorities previously received by our former parent. Our former parent will guarantee the Lease through the end of the term. During fiscal year ended April 30, 2024, we recorded a right-of-use asset and lease liability of $10.6 million for the additional space provided under the Assignment Agreement.

Inflation

We have been impacted by changes in prices of finished product inventory from our suppliers and logistics as well as other inflationary factors, such as increased interest rates and increased labor and overhead costs. We evaluate the need for price changes to offset these inflationary factors while taking into account the competitive landscape. Although we do not believe that inflation had a material impact on us during fiscal 2024, increased inflation in the future may have a negative effect on our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of inflation with increased prices, our future results from operations and cash flows would be materially impacted. Additionally, inflation may cause consumers to reduce discretionary spending, which could cause decreases in demand for our products.

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Critical Accounting Estimates

Revenue Recognition

We recognize revenue for the sale of our products at the point in time when the control of ownership has transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance. The revenue recognized for the sale of our products reflect various sales adjustments for discounts, returns, allowances, and other customer incentives. These sales adjustments can vary based on market conditions, customer preferences, timing of customer payments, volume of products sold, and timing of new product launches. These adjustments require us to make reasonable estimates of the amount we expect to receive from the customer. We estimate sales adjustments by customer or by product category on the basis of our historical experience with similar contracts with customers, adjusted as necessary to reflect current facts and circumstances and our expectations for the future.

Valuation of Long-lived Intangible Assets

We evaluate the recoverability of long-lived assets, or asset group, on an annual basis or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine the initial fair value of our long-lived assets, primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.

Inventories

We value inventories at the lower of cost, using the first-in, first-out, or FIFO, method, or net realizable value. We evaluate quantities that make up our current inventory against past and future demand and market conditions to determine excess or slow-moving inventory that may be sold below cost. For each product category, we estimate the market value of the inventory comprising that category based on current and projected selling prices. If the projected market value is less than cost, we will record a provision adjustment to reflect the lower value of the inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value of the inventory may decrease because of consumer preferences or loss of key contracts, among other events.

Income Tax Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. We establish valuation allowances if it is more likely than not that we will be unable to realize our deferred income tax assets.

In making this determination, we consider available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results, and tax planning strategies. Significant judgment is required in this analysis.

We determined in the prior fiscal period that it was more likely than not that the benefit from our net deferred tax assets will not be realized and accordingly we established a full valuation allowance recorded as an increase to income tax expense. In the current fiscal year, we continued to maintain a full valuation allowance based on the assessment that it is more likely than not that the benefit from our net deferred tax assets will not be realized. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates.

Estimates may change as new events occur, estimates of future taxable income may increase during the expected reversal period of our deferred tax assets, or additional information becomes available. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, a full or partial reversal of the valuation allowance could occur resulting in a decrease to the provision for income taxes in the period such a change in estimate is made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis.

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Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements is discussed in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements, which is incorporated herein by reference.

Contractual Obligations and Commercial Commitments

The following table sets forth a summary of our material contractual obligations and commercial commitments as of April 30, 2024 (in thousands):

As of April 30, 2024, we had no borrowings outstanding on our revolving line of credit. We are required to make interest payments for the unused portion of our revolving line of credit in accordance with the financing arrangement. Future unused loan fee obligations are not included above, which could accumulate up to approximately $185,000 per year, under certain circumstances, until the maturity date in fiscal 2026.

Interest on debt is based on outstanding debt as of April 30, 2024, and includes debt issuance costs to be amortized over the life of the financing arrangement.

Operating lease obligations represent required minimum lease payments during the noncancelable lease term. Most real estate leases also require payments of related operating expenses such as taxes, insurance, utilities, and maintenance, which are not included above. See Note 4, Leases, for additional information.

Purchase obligations represent binding commitments to purchase raw materials, contract production, and finished products that are payable upon delivery of the inventory. This obligation excludes the amount included in accounts payable at April 30, 2024 related to inventory purchases. Other obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as the noncancelable portion of service or maintenance agreements for management information systems, (ii) capital spending, and (iii) advertising.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our consolidated and combined financial statements and the related notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report.

Set forth below is a comparison of the results of operations and changes in financial condition for the fiscal years ended April 30, 2023 and 2022. The comparison of, and changes between, the fiscal years ended April 30, 2022 and 2021 can be found within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended April 30, 2022 filed with the SEC on July 14, 2022.

Background

We operate as one reporting segment. We analyze revenue streams in various ways, including customer group, brands, categories, and customer channels. However, this information does not include a full set of discrete financial information.

The following discussion and analysis includes references to net sales of our products in shooting sports and outdoor lifestyle categories. Our shooting sports category includes net sales of shooting accessories and our products used for personal protection. Our outdoor lifestyle category includes net sales of our products used in hunting, fishing, camping, rugged outdoor activities, and outdoor cooking.

In March 2022, we acquired substantially all of the assets of Grilla Grills, or Grilla, (including its branded products) from Fahrenheit Technologies, Inc., or FTI, for a purchase price of $27 million, subject to certain adjustments. Grilla is a provider of high-quality, barbecue grills; Wi-Fi-enabled wood pellet grills; smokers; accessories; and modular outdoor kitchens. We fully integrated Grilla into our business during fiscal 2023. Results of operations for the fiscal year ended April 30, 2022 include activity for the period subsequent to the acquisition date of Grilla.

Fiscal 2023 Highlights

Our operating results for fiscal 2023 included the following:

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Net sales were $191.2 million, a decrease of $56.3 million, or 22.8%, from the prior fiscal year, reflecting a decrease in net sales for both our e-commerce channels and our traditional channels, partially offset by an increase in our own direct-to-consumer business.

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Gross margin was 46.1%, a decrease of 10 basis points from the prior fiscal year.

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Net loss was $12.0 million, or ($0.90) per diluted share, compared with a net loss of $64.9 million, or ($4.66) per diluted share, for the prior fiscal year. The net loss in the prior fiscal year included a $67.8 million non-cash goodwill impairment charge.

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Non-GAAP Adjusted EBITDAS was $12.8 million, compared with $35.0 million for the prior fiscal year. See non-GAAP financial measure disclosures below for our reconciliation of non-GAAP Adjusted EBITDAS.

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We repurchased 377,034 shares of our common stock, in the open market, for a total of $3.5 million during fiscal 2023 leaving $6.5 million available to be purchased under our authorized repurchase program.

Results of Operations

Net Sales and Gross Profit

The following table sets forth certain information regarding consolidated and combined net sales for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

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The following table sets forth certain information regarding trade channel net sales for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

Our e-commerce channels include net sales from customers that do not traditionally operate physical brick-and-mortar stores, but generate the majority of their revenue from consumer purchases from their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick-and-mortar stores and generate the large majority of revenue from consumer purchases in their brick-and-mortar locations.

We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

The following table sets forth certain information regarding net sales categories for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

Fiscal 2023 Net Sales Compared with Fiscal 2022

Total net sales decreased $56.3 million, or 22.8%, from the prior fiscal year.

Net sales in our e-commerce channel decreased $10.2 million, or 10.5%, from the prior fiscal year, primarily as a result of lower net sales to the world’s largest e-commerce retailer because of reduced demand primarily in our shooting sports category as well as their efforts to reduce their overall inventory. The lower net sales to our online retailers were partially offset by a 76.0% increase in our direct-to-consumer net sales over the prior year, primarily in our outdoor lifestyle products, which also include sales resulting from the acquisition of Grilla Grills. We believe the increase in our direct-to-consumer net sales represents the demand for our products in the market that are not typically hindered by retailer inventory management. Our brands that are only sold on our direct-to-consumer websites represented $24.4 million, or 28.0%, of fiscal 2023 total e-commerce channel net sales, which includes net sales from a business acquisition completed in the prior fiscal year.

Net sales in our traditional channels decreased $46.1 million, or 30.7%, from the prior fiscal year, primarily because of lower net sales for most of our products as a result of decreased orders from retailers, which we believe was caused by a combination of lower foot traffic because of less discretionary consumer spending and retailers’ efforts to reduce their overall inventory levels. In addition, lower net sales of our shooting sports products to our OEM customers resulted in lower traditional channel net sales from the prior fiscal year. We also believe the decrease in traditional channel net sales was a result of a build in traditional channel inventories of our products during the first fiscal quarter last year as certain customers accelerated their purchases to offset the possibility of delays caused by global supply chain disruptions. Our international net sales declined primarily because of reduced demand for our shooting sports products and timing of customer shipments.

New products, defined as any new SKU introduced over the prior two fiscal years, represented 25.5% of net sales for fiscal 2023 compared to 25.8% of net sales for fiscal 2022. We have a history of introducing over 200 new SKUs each year, the majority of which are introduced late in our third fiscal quarter.

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Our order backlog as of April 30, 2023 was $7.0 million, or $3.3 million higher than at the end of fiscal 2022. Although we generally fulfill the majority of our order backlog, we allow orders received that have not yet shipped to be cancelled, and therefore, our backlog may not be indicative of future sales.

Fiscal 2023 Cost of Sales and Gross Profit Compared with Fiscal 2022

Gross margin for fiscal 2023 decreased 10 basis points from the prior fiscal year, primarily because of lower sales volumes, product and customer mix, increased promotional product discounts that are consistent with pre-pandemic promotional discount levels, and increased expense related to provisions on inventory, partially offset by lower freight and tariff expenses from the planned reduction in inventory purchases and new product introductions that typically have higher gross margins.

Operating Expenses

The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

Fiscal 2023 Operating Expenses Compared with Fiscal 2022

Excluding the impact of our non-cash goodwill impairment charge recorded during fiscal 2022, operating expenses in fiscal 2023 decreased $2.1 million compared with the prior fiscal year. Research and development expenses increased $860,000, primarily from increased consulting expenses; higher depreciation expense from new product tooling; and increased compensation-related expenses from additional headcount. Selling, marketing, and distribution expenses decreased $4.4 million, primarily because of lower sales volume-related expenses, lower advertising expenses, and reduced facility-related costs as a result of consolidating the Crimson Trace and Grilla operations into our headquarters in Columbia, Missouri. General and administrative expenses increased $1.4 million compared with the prior fiscal year primarily because of $1.2 million of legal and advisory fees associated with the completed cooperation agreement with a stockholder and $461,000 of increased standalone expenses, such as our information technology infrastructure costs, subscription and software costs, and insurance premium costs, partially offset by lower employee compensation-related expenses.

Operating Loss

The following table sets forth certain information regarding operating loss for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

Fiscal 2023 Operating Income Compared with Fiscal 2022

Excluding our non-cash goodwill impairment charge in fiscal 2022, we had a decrease of $24.0 million in operating income from the prior fiscal year. Operating income decreased primarily because of lower sales volumes and gross profit mentioned above.

Interest Expense, Net

The following table sets forth certain information regarding interest expense, net for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

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Interest expense, net increased $437,000 from the prior fiscal year because of interest to service our borrowings on our revolving line of credit during fiscal 2023. We borrowed $25.0 million in March 2022 to help fund the acquisition of Grilla Grills in the prior fiscal year. We had $5.0 million of borrowings on our revolving line as of April 30, 2023.

Income Taxes

The following table sets forth certain information regarding income tax expense for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

We recorded an income tax benefit of $249,000 for fiscal 2023 because of lower operating profit compared to income tax expense of $9.3 million for fiscal 2022. Fiscal 2023 income tax benefit was primarily because of recording return to provision adjustments relating to the Federal and State tax returns filed for the prior fiscal year and the impact of refundable state tax credits. Fiscal 2022 income tax expense was primarily due to recording a full valuation allowance against our deferred tax assets. The effective tax rates were 2.0% and (16.8%) for fiscal 2023 and 2022, respectively. Excluding the impact of the non-cash goodwill impairment charges and establishing the full valuation allowance against our deferred taxes, our effective tax rate for the fiscal year ended April 30, 2022 was 19.6%.

Net Loss

The following table sets forth certain information regarding net loss and the related per share data for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands, except per share data):

Fiscal 2023 Net Loss Compared with Fiscal 2022

We had a net loss of $12.0 million, or ($0.90) per diluted share in fiscal 2023. Excluding our non-cash goodwill impairment charge and related income tax effect in fiscal 2022, we had net income of $9.9 million, or $0.71 per diluted share. The decrease in net income from the prior fiscal year was primarily because of lower sales volumes and gross profit.

Non-GAAP Financial Measure

We use GAAP net income as our primary financial measure. We use Adjusted EBITDAS, which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an improved understanding of underlying performance trends, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Adjusted EBITDAS is defined as GAAP net income/(loss) before interest, taxes, depreciation, amortization, and stock compensation expense. Our Adjusted EBITDAS calculation also excludes certain items we consider non-routine. We believe that Adjusted EBITDAS is useful to understanding our operating results and the ongoing performance of our underlying business, as Adjusted EBITDAS provides information on our ability to meet our capital expenditure and working capital requirements, and is also an indicator of profitability. We believe this reporting provides additional transparency and comparability to our operating results. We believe that the presentation of Adjusted EBITDAS is useful to investors because it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. We use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to neutralize our capitalization structure to compare our performance against that of other peer companies using similar measures, especially companies that are private. We also use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe it is useful to investors and analysts to evaluate this non-GAAP measure on the same basis as we use to evaluate our operating results.

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Adjusted EBITDAS is a non-GAAP measure and may not be comparable to similar measures reported by other companies. In addition, non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of non-GAAP measures through the use of various GAAP measures. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDAS. Our presentation of Adjusted EBITDAS should not be construed as an inference that our future results will be unaffected by these items.

The following table sets forth our calculation of non-GAAP Adjusted EBITDAS for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

Liquidity and Capital Resources

Historically, we have generated strong annual cash flow from operating activities. We have generated $45.5 million of cash from operating activities since the Separation in fiscal 2021. Our ability to fund our operating needs depends on our future ability to continue to generate positive cash flow from operations and obtain financing on acceptable terms. Based upon our history of generating strong cash flows, we believe we will be able to meet our short-term liquidity needs. We also believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through our existing $75.0 million credit facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future.

Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the capital needed to operate as an independent publicly traded company, enhancements to our enterprise resource planning systems, and any acquisitions or strategic investments that we may determine to make. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.

We had $22.0 million and $19.5 million of cash equivalents on hand as of April 30, 2023 and 2022, respectively.

We expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; hiring additional employees; funding growth strategies, including any potential acquisitions; repaying our $5.0 million of borrowings under our revolving line of credit and any indebtedness we may incur over time; and repurchasing our common stock under our existing authorized repurchase programs.

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The following table sets forth certain cash flow information for the fiscal years ended April 30, 2023 and 2022 (dollars in thousands):

Operating Activities

Operating activities represent the principal source of our cash flow.

Cash generated in operating activities was $30.7 million for fiscal 2023 compared with cash usage of $18.0 million for the prior fiscal year. Cash generated in operating activities for fiscal 2023 was primarily impacted by $21.9 million of reduced inventory as a result of a planned reduction of inventory purchases during fiscal 2023 and a decrease in accounts receivable of $2.0 million as a result of lower sales volumes and timing of customer shipments. The cash generated in fiscal 2023 was partially offset by $1.3 million of reduced accounts payable due to timing of inventory shipments and $2.0 million of lower accrued payroll, incentives, and profit sharing primarily because of lower management incentive accruals.

We expect our inventory balance to increase in our first quarter of fiscal 2024 because of increased inventory purchases to support the fall hunting and winter holiday shopping seasons as well as inventory for new products that we expect to launch later in the year. Despite the expected increase in our first quarter of fiscal 2024, we expect our overall inventory balance to decline by the end of fiscal 2024 as compared to our inventory balance as of April 30, 2023.

Investing Activities

Cash used in investing activities was $4.8 million for fiscal 2023 compared with cash usage of $33.6 million for the prior fiscal year. This decrease was primarily because of the $27.0 million used to acquire Grilla Grills during fiscal 2022. We have incurred capital expenditures in fiscal 2023 and 2022 related to the development and implementation of our independent information technology infrastructure, including our new enterprise resource planning system, D365. We recorded spending of $2.0 million and $3.9 million of capital expenditures for fiscal 2023 and 2022, respectively, related to our development and implementation of our independent information technology infrastructure.

Financing Activities

Cash used in financing activities was $23.5 million in fiscal 2023 compared with cash provided by financing activities of $10.3 million in the prior fiscal year. Cash used in financing activities in fiscal 2023 was because of $20.2 million of payments on our revolving line of credit and $3.5 million of payments to repurchase our common stock under our authorized stock repurchase program. Cash provided by financing activity in fiscal 2022 was primarily from $25.2 million borrowings on our revolving line of credit used to acquire Grilla Grills, offset by $15.0 million to repurchase our common stock under an authorized stock repurchase program.

Credit Facility

On August 24, 2020, we entered into a five-year financing arrangement consisting of a $50.0 million revolving line of credit secured by substantially all our assets, maturing five years from the start date, with available borrowings determined by a borrowing base calculation. The revolving line included an option to increase the credit commitment for an additional $15.0 million. The revolving line bore interest at a fluctuating rate equal to the Base Rate or LIBOR, as applicable, plus the applicable margin.

On March 25, 2022, we amended our secured loan and security agreement, or the Amended Loan and Security Agreement, increasing the revolving line of credit to $75.0 million, secured by substantially all our assets, maturing in March 2027, with available borrowings determined by a borrowing base calculation. The amendment also includes an option to increase the credit commitment for an additional $15 million. The amended revolving line bears interest at a fluctuating rate equal to the Base Rate or the Secured Overnight Financing Rate, or SOFR, as applicable, plus the applicable margin. The applicable margin can range from a minimum of 0.25% to a maximum of 1.75% based on certain conditions as defined in the Amended Loan and Security Agreement. The financing arrangement contains covenants relating to minimum debt service

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coverage. During fiscal 2022, we recorded $192,000 of additional debt issuance costs associated with entering into the Amended Loan and Security Agreement.

As of April 30, 2023, we had $5.0 million of borrowings outstanding on the revolving line of credit, which bore interest at 6.05%, equal to SOFR plus the applicable margin.

Inflation

We have been impacted by changes in prices of finished product inventory from our suppliers and logistics as well as other inflationary factors, such as increased interest rates and increased labor and overhead costs. We evaluate the need for price changes to offset these inflationary factors while taking into account the competitive landscape. Although we do not believe that inflation had a material impact on us during fiscal 2023, increased inflation in the future may have a negative effect on our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of inflation with increased prices, our future results from operations and cash flows would be materially impacted. Additionally, inflation may cause consumers to reduce discretionary spending, which could cause decreases in demand for our products.

Critical Accounting Estimates

Revenue Recognition

We recognize revenue for the sale of our products at the point in time when the control of ownership has transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance. The revenue recognized for the sale of our products reflect various sales adjustments for discounts, returns, allowances, and other customer incentives. These sales adjustments can vary based on market conditions, customer preferences, timing of customer payments, volume of products sold, and timing of new product launches. These adjustments require us to make reasonable estimates of the amount we expect to receive from the customer. We estimate sales adjustments by customer or by product category on the basis of our historical experience with similar contracts with customers, adjusted as necessary to reflect current facts and circumstances and our expectations for the future.

Valuation of Goodwill and Long-lived Intangible Assets

As of April 30, 2023 and 2022, we had no goodwill recorded on our consolidated balance sheet. In the instance we have recorded goodwill, we test goodwill for impairment on an annual basis on each February 1 and between annual tests if indicators of potential impairment exist.

During the annual impairment review process, we have the option to first perform a qualitative assessment, commonly referred to as “step zero”, over relative events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value or to perform a quantitative assessment where we estimate the fair value of each reporting unit using both an income and market approach.

If the qualitative step zero analysis indicates that its more likely than not that the fair value is less than the carrying value, we will perform a step one analysis. When we perform a step one analysis to assess the recoverability of our goodwill, we determine the estimated fair value of our reporting unit and compare it to the carrying value of the reporting unit, including goodwill. The impairment test compares the fair value of our operating unit to its carrying amounts to assess whether impairment is present. We estimate the fair value of our operating unit using an equal weighting of the fair values derived from the income approach and the market approach because we believe a market participant would equally weight both approaches when valuing the operating unit. The income approach is based on the projected cash flows that are discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. Fair value is estimated using internally developed forecasts and assumptions. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Other significant assumptions include revenue growth rates, profitability projections, and terminal value growth rates. The market approach estimates fair values based on the determination of appropriate publicly traded market comparison companies and market multiples of revenue and earnings derived from those companies with similar operating and investment characteristics as the operating unit being valued. Finally, we compare and reconcile our overall fair value to our market capitalization in order to assess the reasonableness of the calculated fair values of our operating units. We recognize an impairment loss for goodwill if the implied fair value of goodwill is less than the carrying value.

We have reviewed the provisions of Accounting Standard Codification, or ASC, 350-20, with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of ASC 350-20, we have determined that we have one operating unit.

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We evaluate the recoverability of long-lived assets on an annual basis on February 1 or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine the initial fair value of our long-lived assets, primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.

Inventories

We value inventories at the lower of cost, using the first-in, first-out, or FIFO, method, or net realizable value. We evaluate quantities that make up our current inventory against past and future demand and market conditions to determine excess or slow-moving inventory that may be sold below cost. For each product category, we estimate the market value of the inventory comprising that category based on current and projected selling prices. If the projected market value is less than cost, we will record a provision adjustment to reflect the lower value of the inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value of the inventory may decrease because of consumer preferences or loss of key contracts, among other events.

Income Tax Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. We establish valuation allowances if it is more likely than not that we will be unable to realize our deferred income tax assets.

In making this determination, we consider available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results, and tax planning strategies. Significant judgment is required in this analysis.

We determined in the prior fiscal period that it was more likely than not that the benefit from our net deferred tax assets will not be realized and accordingly we established a full valuation allowance recorded as an increase to income tax expense. In the current fiscal year, we continued to maintain a full valuation allowance based on the assessment that it is more likely than not that the benefit from our net deferred tax assets will not be realized. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates.

Estimates may change as new events occur, estimates of future taxable income may increase during the expected reversal period of our deferred tax assets, or additional information becomes available. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, a full or partial reversal of the valuation allowance could occur resulting in a decrease to the provision for income taxes in the period such a change in estimate is made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis.

Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements is discussed in Note 2 — Summary of Significant Accounting Policies to our consolidated and combined financial statements, which is incorporated herein by reference.

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Contractual Obligations and Commercial Commitments

The following table sets forth a summary of our material contractual obligations and commercial commitments as of April 30, 2023 (in thousands):

As of April 30, 2023, we had $5.0 million of borrowings outstanding on our revolving line of credit. We are required to make interest payments for the unused portion of our revolving line of credit in accordance with the financing arrangement. Future unused loan fee obligations are not included above, which could accumulate up to approximately $185,000 per year, under certain circumstances, until the maturity date in fiscal 2026.

Interest on debt is based on outstanding debt as of April 30, 2023, and includes debt issue costs to be amortized over the life of the financing arrangement. The interest rate used to calculate was 6.1% as of April 30, 2023. See Note 10, Debt, for additional information.

Operating lease obligations represent required minimum lease payments during the noncancelable lease term. Most real estate leases also require payments of related operating expenses such as taxes, insurance, utilities, and maintenance, which are not included above. See Note 4, Leases, for additional information.

Purchase obligations represent binding commitments to purchase raw materials, contract production, and finished products that are payable upon delivery of the inventory. This obligation excludes the amount included in accounts payable at April 30, 2023 related to inventory purchases. Other obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as the noncancelable portion of service or maintenance agreements for management information systems, (ii) capital spending, and (iii) advertising.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our consolidated and combined financial statements and the related notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report.

Set forth below is a comparison of the results of operations and changes in financial condition for the fiscal years ended April 30, 2022 and 2021. The comparison of, and changes between, the fiscal years ended April 30, 2021 and 2020 can be found within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended April 30, 2021 filed with the SEC on July 15, 2021.

Background

On August 24, 2020, Smith & Wesson Brands, Inc., or our former parent company, completed the spin-off of its outdoor products and accessories business to us, or the Separation. The Separation was effected through the transfer of all of the assets and legal entities, subject to any related liabilities, associated with its outdoor products and accessories business to us, or the Transfer, and the distribution of all the outstanding shares of our common stock to the holders of the common stock of our former parent company, or the Distribution, as of the close of business on August 10, 2020, the record date for the Distribution, or the Record Date.

As a result of the Distribution, we became an independent public company and our common stock became listed under the symbol “AOUT” on the Nasdaq Global Select Market. Prior to the Separation, the combined financial statements reflected the financial position, results of operations, and cash flows for the periods presented as historically managed by our former parent. For those periods prior to the Separation, the combined financial statements were prepared on a “carve-out” basis as described below.

We operate as one reporting segment. We analyze revenue streams in various ways, including customer group, brands, and customer channels. However, this information does not include a full set of discrete financial information.

Basis of Presentation

Our financial statements for the periods through the Separation date of August 24, 2020 are combined financial statements prepared on a “carve-out” basis as discussed below. Our financial statements for the period from August 24, 2020 through April 30, 2022 are consolidated financial statements based on the reported results of our company as a standalone company. Accordingly, the period subsequent to the Separation in fiscal 2021 included consolidated and combined financial statements.

Prior to the Separation, we operated as part of our former parent and not as a standalone company. The accompanying combined financial statements, prior to the Separation, were prepared in connection with the Separation and were derived from the consolidated financial statements and accounting records of our former parent. The combined financial statements, prior to the Separation, reflect our historical financial position, results of operations, and cash flows as they were historically managed in accordance with accounting principles generally accepted in the United States, or GAAP.

In addition, for purposes of preparing the combined financial statements, prior to the Separation, on a “carve-out” basis, a portion of our former parent’s total corporate expenses were allocated to us. These expense allocations included the cost of corporate functions and resources provided by our former parent, including executive management, finance, accounting, legal, human resources, internal audit, and the related benefit costs associated with such functions, such as stock-based compensation and the cost of our former parent’s Springfield, Massachusetts corporate headquarters.

In fiscal 2020, our former parent began operating a new distribution facility in Columbia, Missouri, which involved shared distribution expenses between our former parent and us. In addition to the portion of our former parent’s corporate expenses allocated to us prior to the Separation, a portion of our former parent’s total distribution expenses was allocated to us. These expense allocations included selling, distribution, inventory management, warehouse, and fulfillment services provided by our former parent and the related benefit costs associated with such functions, such as stock-based compensation and the cost of our former parent’s Columbia, Missouri distribution facility. For the period prior to the Separation in fiscal 2021, we were allocated $2.7 million for such corporate expenses, which were included within general and administrative expenses in our consolidated and combined statements of operations and comprehensive income/(loss). We were also allocated $1.9 million of such distribution expenses, which were included within our cost of sales; selling, marketing, and distribution expenses; and general and administrative expenses in the consolidated and combined statements of operations and comprehensive income/(loss).

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Prior to the Separation, costs were allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net sales, employee headcount, delivery units, or square footage, as applicable. We consider the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, us during the periods presented. However, the allocations may not reflect the expenses we would have incurred if we had been a standalone company for the periods presented prior to the Separation. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure.

In March 2022, we acquired substantially all of the assets of Grilla Grills (including its branded products) from Fahrenheit Technologies, Inc., or FTI, for a purchase price of $27 million, subject to certain adjustments. Grilla Grills is a provider of high-quality, barbecue grills; Wi-Fi-enabled wood pellet grills; smokers; accessories; and modular outdoor kitchens. Because of the timing of the acquisition, we are in the process of integrating Grilla Grills into our business as we operate out of Holland, Michigan under a transition services agreement with FTI. We plan to fully integrate Grilla Grills into our business in fiscal 2023. Results of operations for the fiscal year ended April 30, 2022 include activity for the period subsequent to the acquisition date of Grilla Grills.

Fiscal 2022 Highlights

Our operating results for fiscal 2022 included the following:

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Net sales were $247.5 million, a decrease of $29.2 million, or 10.5%, from the prior fiscal year, reflecting a decrease in net sales for both our e-commerce channels and our traditional channels, partially offset by an increase in our own direct-to-consumer business.

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Gross margin was 46.2%, an increase of 40 basis points over the prior fiscal year.

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Net loss was $64.9 million, or ($4.66) per diluted share, compared with net income of $18.4 million, or $1.29 per diluted share, for the prior fiscal year. The net loss in fiscal 2022 included a $67.8 million non-cash goodwill impairment charge.

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Non-GAAP Adjusted EBITDAS was $35.0 million, compared with $47.3 million for the prior fiscal year. See non-GAAP financial measure disclosures below for our reconciliation of non-GAAP Adjusted EBITDAS.

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On March 25, 2022, we amended our credit facility to increase our revolving line of credit to $75.0 million secured by substantially all the assets of our company with available borrowings determined by a borrowing base calculation. The revolving line includes an option to increase the credit commitment for an additional $15.0 million.

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We repurchased 836,964 shares of our common stock, in the open market, for a total of $15.0 million during fiscal 2022.

Results of Operations

Net Sales and Gross Profit

The following table sets forth certain information regarding consolidated and combined net sales for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

The following table sets forth certain information regarding trade channel net sales for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

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Our e-commerce channels include net sales from customers that do not traditionally operate a physical brick-and-mortar store, but generate the majority of their revenue from consumer purchases from their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick-and-mortar stores and generate the large majority of revenue from consumer purchases in their brick-and-mortar locations.

We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

Fiscal 2022 Net Sales Compared with Fiscal 2021

Total net sales decreased $29.2 million, or 10.5%, from the prior year.

Net sales in our traditional channels decreased $17.9 million, or 10.6%, from the prior year, primarily because of lower net sales of our shooting sports products. We believe our shooting sports products demand is more directly associated with firearm demand, which declined 22.2% as indicated by adjusted background checks reported in National Instant Criminal Background Check System, or NICS, compared with the prior fiscal year, a period which we believe had heightened demand as a result of certain news and pandemic related events. The lower net sales in shooting sports was partially offset by increased net sales of our outdoor lifestyle products, specifically for our fishing, hunting, and rugged outdoor products. Net sales in our international channel increased 39.6%, primarily because of increased demand for products in our hunting and shooting sports categories, from customers in Canada as well as incremental new international customers.

Net sales in our e-commerce channel decreased $11.3 million, or 10.4%, from the prior year, a period that, we believe reflected heightened e-commerce net sales because of COVID-19 related restrictions. In addition, our prior year included replenishment of retailer inventory after non-essential product orders were halted in our fourth quarter of fiscal 2020, which had a positive impact on our net sales for the year ended April 30, 2021. During that period, we noted numerous retail store closures and stay at home orders that we believe resulted in a shift in consumer preferences to online retailers. Although our net sales in our e-commerce channel decreased from the prior year, direct-to-consumer sales from our own websites increased 73.0% over the prior year. In addition, net sales in fiscal 2022 were negatively impacted by lower demand of our shooting sports products partially offset by increased net sales of our outdoor lifestyle products.

New products, defined as any new SKU introduced over the prior two fiscal years, represented 25.8% of net sales for fiscal 2022. We have a history of introducing approximately 250 to 350 new SKUs each year, the majority of which are introduced late in our third fiscal quarter.

Our order backlog as of April 30, 2022 was $3.7 million, or $11.5 million lower than at the end of fiscal 2021. Although we generally fulfill the majority of our order backlog, we allow orders received which have not yet shipped to be cancelled, and therefore, our backlog may not be indicative of future sales.

Fiscal 2022 Cost of Sales and Gross Profit Compared with Fiscal 2021

Gross margin for fiscal 2022 increased 40 basis points over the prior fiscal year, primarily because of favorable impacts of price increases and recoveries from tariff drawbacks, partially offset by increased promotional product discounts and higher freight expense.

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Operating Expenses

The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

Fiscal 2022 Operating Expenses Compared with Fiscal 2021

Excluding the impact of our non-cash goodwill impairment charge recorded during fiscal 2022, operating expenses were relatively flat as compared to fiscal 2021. Research and development expenses increased $123,000, primarily from increased freight costs for new product development samples. Selling, marketing, and distribution expenses decreased $605,000, primarily because of lower sales volume related expenses offset by higher expenses related to trade shows and increased freight costs. General and administrative expenses was relatively flat as compared to the prior year with $3.7 million of increased standalone expenses, such as our information technology infrastructure costs, subscription and software costs, and insurance premium costs, partially offset by $2.5 million of lower acquired intangible asset amortization and $2.7 million of lower employee compensation-related expenses.

Operating Income/(Loss)

The following table sets forth certain information regarding operating income/(loss) for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

Fiscal 2022 Operating Income Compared with Fiscal 2021

Excluding our non-cash goodwill impairment charge, we had operating income of $11.3 million, a decrease of $12.2 million from the prior fiscal year. Operating income decreased primarily because of lower sales volumes and gross profit.

Interest (Expense)/Income, Net

The following table sets forth certain information regarding interest income/(expense), net for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

Interest (expense)/income, net decreased $624,000 from the prior fiscal year because of interest to service the $25.2 million of borrowings on our revolving line of credit and lower related party notes receivable balances. The related party notes were settled on the date of the Distribution.

Income Taxes

The following table sets forth certain information regarding income tax expense for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

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We recorded an income tax expense of $9.3 million for fiscal 2022 compared with income tax expense of $5.9 million for fiscal 2021, primarily because of recording a full valuation allowance against our deferred tax assets. The effective tax rates were (16.8%) and 24.2% for fiscal 2022 and 2021, respectively. Excluding the impact of the non-cash goodwill impairment charges, and establishing the full valuation allowance against our deferred taxes, our effective tax rate for the fiscal year ended April 30, 2022 was 19.6%.

Net Income

The following table sets forth certain information regarding net income and the related per share data for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands, except per share data):

Fiscal 2022 Net (Loss)/Income Compared with Fiscal 2021

Excluding our non-cash goodwill impairment charge and related income tax effect, we had net income of $9.9 million, or $0.71 per diluted share, a decrease of $8.6 million, or ($0.58) per diluted share, from the prior fiscal year, primarily because of lower sales volumes and gross profit.

Non-GAAP Financial Measure

We use GAAP net income as our primary financial measure. We use Adjusted EBITDAS, which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an improved understanding of underlying performance trends, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Adjusted EBITDAS is defined as GAAP net income/(loss) before interest, taxes, depreciation, amortization, and stock compensation expense. Our Adjusted EBITDAS calculation also excludes certain items we consider non-routine. We believe that Adjusted EBITDAS is useful to understanding our operating results and the ongoing performance of our underlying business, as Adjusted EBITDAS provides information on our ability to meet our capital expenditure and working capital requirements, and is also an indicator of profitability. We believe this reporting provides additional transparency and comparability to our operating results. We believe that the presentation of Adjusted EBITDAS is useful to investors because it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. We use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to neutralize our capitalization structure to compare our performance against that of other peer companies using similar measures, especially companies that are private. We also use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe it is useful to investors and analysts to evaluate this non-GAAP measure on the same basis as we use to evaluate our operating results.

Adjusted EBITDAS is a non-GAAP measure and may not be comparable to similar measures reported by other companies. In addition, non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of non-GAAP measures through the use of various GAAP measures. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDAS. Our presentation of Adjusted EBITDAS should not be construed as an inference that our future results will be unaffected by these items.

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The following table sets forth our calculation of non-GAAP Adjusted EBITDAS for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

Liquidity and Capital Resources

Historically, we have generated strong annual cash flow from operating activities. However, prior to the Separation, we operated within our former parent company’s cash management structure, which used a centralized approach to cash management and financing of operations. Accordingly, a substantial portion of our cash was regularly transferred to our former parent company. This arrangement was not reflective of the manner in which we would have been able to finance our operations had we been an independent, publicly traded company during the periods presented. On August 24, 2020, our former parent company capitalized our business with $25.0 million of cash as part of the Separation.

Our former parent company incurred debt and related debt issuance costs with respect to the acquisitions of the carved-out businesses. However, such debt was refinanced since the consummation of these acquisitions, with the proceeds of such refinancing utilized for the retirement of original debt obligations as well as the funding of other former parent company expenditures. As a result, the former parent company third-party long-term debt and the related interest expense was not allocated to us for any of the periods presented as we were not the legal obligor of such debt.

Following the Separation, our capital structure and sources of liquidity changed from the historical capital structure because we no longer participate in our former parent company’s centralized cash management program. Our ability to fund our operating needs depends on our future ability to continue to generate positive cash flow from operations and obtain financing on acceptable terms. Based upon our history of generating strong cash flows, we believe we will be able to meet our short-term liquidity needs. We also believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through our existing $75.0 million credit facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future.

Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the capital needed to operate as an independent publicly traded company, including the establishment of our enterprise resource planning systems, any acquisitions or strategic investments that we may determine to make, and our ability to navigate through the many negative business impacts from the COVID-19 pandemic. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.

We had $19.5 million of cash equivalents on hand as of April 30, 2022 and had $60.8 million in cash and cash equivalents on hand as of April 30. 2021.

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We expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; hire additional employees; fund growth strategies, including any potential acquisitions; repay our $25.2 million of borrowings under our revolving line of credit and any indebtedness we may incur over time; implement our enterprise resource planning systems; and repurchase our common stock if we are authorized to do so. We estimate that our information technology infrastructure will cost a total of approximately $9.0 million over a period that spans fiscal 2022 and fiscal 2023. In fiscal 2022, we recorded capital expenditures of $3.9 million and one-time operating expenses of $1.0 million. In addition, we recorded $948,000 of duplicative expenses in fiscal 2022, as we operate both our existing and our new information technology and enterprise resource planning platforms in parallel during the system changeover period. In fiscal 2023, we expect capital expenditures of approximately $2.3 million and one-time operating expenses of approximately $1.6 million. The one-time operating expenses and duplicative expenses will be recorded in general and administrative expenses on our consolidated and combined statement of operations and comprehensive income.

The following table sets forth certain cash flow information for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

Operating Activities

Operating activities represent the principal source of our cash flow.

Cash used in operating activities was $17.9 million for fiscal 2022 compared with cash generated of $33.3 million for the prior fiscal year. Cash used in operating activities for fiscal 2022 was impacted by $41.4 million of increased inventory as a result of a planned inventory build on high moving items due to the acceleration of planned purchases to help mitigate price increases on materials, future supply chain disruptions and additional new product introductions later in the year. In addition, our anticipated new products that have a higher average cost; increases in pricing from our suppliers; and increased freight costs increased our average finished goods per unit cost value during fiscal 2022, $4.5 million of reduced accounts payable due to timing of inventory shipments, $4.0 million of lower accrued payroll and incentives primarily because of lower management incentive accruals, and $2.1 million of lower sales volume variable expense accruals, partially offset by $8.6 million of lower accounts receivable due to lower net sales and timing of customer product shipments.

Our inventory increased during fiscal 2022 for the same reasons described above. It is possible that worsening of conditions or increased fears of the COVID-19 pandemic could have a renewed and prolonged effect on manufacturing or employment in Asia, travel to and from Asia, or other restrictions on imports, all of which could have a longer-term effect on our sales and profitability in future periods. In addition, increased demand for sourced products in various industries could cause further delays at various U.S. ports and as products move throughout the country, which could affect the timing of receipts of our products.

Investing Activities

Cash used in investing activities was $33.6 million in fiscal 2022 compared with a cash usage of $4.2 million in the prior fiscal year. This increase was primarily because of the $27.0 million used to acquire Grilla Grills during fiscal 2022 and the fact that we recorded capital expenditures for property and equipment, and patents and software of $6.6 million for fiscal 2022, which was $2.4 million higher than the prior fiscal year. The increase in capital expenditures was a result of the development and implementation of our independent information technology infrastructure noted above. We recorded spending of $3.9 million of capital expenditures during fiscal 2022 related to our development and implementation of our independent information technology infrastructure.

Financing Activities

Cash provided by financing activities was $10.3 million in fiscal 2022 compared with $31.4 million in the prior fiscal year. Cash provided by financing activity in fiscal 2022 was primarily from $25.2 million borrowings on our revolving line of credit, offset by $15.0 million to repurchase our common stock under our authorized stock repurchase program. Cash provided by financing activities in fiscal 2022 was a result of changes in net transfers from our former parent company and the $25.0 million cash capital contribution from our former parent company as part of the Separation.

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Credit Facility

On August 24, 2020, we entered into a five-year financing arrangement in anticipation of the Separation, consisting of a $50.0 million revolving line of credit secured by substantially all our assets, maturing five years from the start date, with available borrowings determined by a borrowing base calculation. The revolving line included an option to increase the credit commitment for an additional $15.0 million. The revolving line bore interest at a fluctuating rate equal to the Base Rate or LIBOR, as applicable, plus the applicable margin. During fiscal 2021, we recorded $410,000 of debt issuance costs associated with entering into this financing arrangement.

On March 25, 2022, we amended our secured loan and security agreement, or the Amended Loan and Security Agreement, increasing the revolving line of credit to $75.0 million, secured by substantially all our assets, maturing in March 2027, with available borrowings determined by a borrowing base calculation. The amendment also includes an option to increase the credit commitment for an additional $15 million. The amended revolving line bears interest at a fluctuating rate equal to the Base Rate or the Secured Overnight Financing Rate, or SOFR, as applicable, plus the applicable margin. The applicable margin can range from a minimum of 0.25% to a maximum of 1.75% based on certain conditions as defined in the Amended Loan and Security Agreement. The financing arrangement contains covenants relating to minimum debt service coverage. During fiscal 2022, we recorded $192,000 of additional debt issuance costs associated with entering into the Amended Loan and Security Agreement.

As of April 30, 2022, we had $25.2 million of borrowings outstanding on the revolving line of credit, which bore interest at 1.56%, equal to SOFR plus the applicable margin. The proceeds from the borrowings on our revolving line of credit were used to acquire Grilla Grills.

Inflation

We have been impacted by changes in prices of finished product inventory from our suppliers and logistics as well as other inflationary factors such as increased labor and overhead costs. We evaluate the need for price changes to offset these inflationary factors while taking into account the competitive landscape. Although we do not believe that inflation had a material impact on us during fiscal 2022, increased inflation in the future may have a negative effect on our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of inflation with increased prices, our future results from operations and cash flows would be materially impacted. Additionally, inflation may cause consumers to reduce discretionary spending, which could cause decreases in demand for our products.

Critical Accounting Estimates

Revenue Recognition

We recognize revenue for the sale of our products at the point in time when the control of ownership has transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance. The revenue recognized for the sale of our products reflect various sales adjustments for discounts, returns, allowances, and other customer incentives. These sales adjustments can vary based on market conditions, customer preferences, timing of customer payments, volume of products sold, and timing of new product launches. These adjustments require us to make reasonable estimates of the amount we expect to receive from the customer. We estimate sales adjustments by customer or by product category on the basis of our historical experience with similar contracts with customers, adjusted as necessary to reflect current facts and circumstances and our expectations for the future.

Valuation of Goodwill and Long-lived Intangible Assets

We test goodwill for impairment on an annual basis on February 1 and between annual tests if indicators of potential impairment exist.

As of our valuation date in fiscal 2022, we had $64.3 million of goodwill. During the annual impairment review process, we performed a step one analysis to assess the recoverability of our goodwill. The step one analysis estimates the fair value of our reporting unit and compares it to the carrying value of the reporting unit, including goodwill, to assess whether impairment is present. We estimate the fair value of our operating unit using an equal weighting of the fair values derived from the income approach and the market approach because we believe a market participant would equally weight both approaches when valuing the operating unit. The income approach is based on the projected cash flows that are discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. Fair value is estimated using internally developed forecasts and assumptions. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Other significant assumptions include revenue growth rates, profitability projections, and terminal value growth rates. The market approach estimates fair values based on the determination of

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appropriate publicly traded market comparison companies and market multiples of revenue and earnings derived from those companies with similar operating and investment characteristics as the operating unit being valued. Finally, we compare and reconcile our overall fair value to our market capitalization in order to assess the reasonableness of the calculated fair values of our operating units. We recognize an impairment loss for goodwill if the implied fair value of goodwill is less than the carrying value. We completed a step one analysis as of February 1, 2022, and concluded there were no indicators of impairment.

On April 30, 2022, the decline in our stock price and market capitalization indicated a reduction of the fair value of our reporting unit. We determined this decline to be a triggering event, which indicated it was more likely than not that the fair values of these reporting units were less than the respective book values and required us to complete an additional step one analysis. Given the volatility in the financial markets, we believe a market participant would determine that the income approach would be a more prominent metric for determining the fair value of our operating unit and thus we used a 75% weighting on the income approach and a 25% weighting on the market approach when valuing our operating unit. As of our interim valuation date, we had $67.8 million of goodwill. Based on the results of this evaluation, we recorded a non-cash impairment charge of our entire $67.8 million goodwill balance during our fourth quarter of fiscal 2022.

We have reviewed the provisions of ASC 350-20, with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of ASC 350-20, we have determined that we have one operating unit.

On March 23, 2020, we determined that our business was expected to be negatively impacted by several factors related to the COVID-19 pandemic, including a major online retail customer’s decision to halt or delay most non-essential product orders, COVID-19-related supply chain issues, as well as COVID-19-related “stay at home” orders and sporting goods store closures, which reduced retail foot traffic in many states. Given the extreme market volatility, we relied solely on the income approach to derive the current value of our business. Based on these factors, we expected reduced cash flows in our business, and we believed this constituted a triggering event under generally accepted accounting principles. Based on the results of this evaluation, we recorded a $98.9 million non-cash impairment of goodwill during our fourth quarter of fiscal 2020.

Our assumptions related to the development of fair value could deviate materially from actual results and forecasts used to support asset carrying values and may change in the future, which could result in non-cash charges that would adversely affect our results of operations. The re-measurement of goodwill is classified as a Level 3 fair value assessment as described in Note 11 - Fair Value Measurement of the consolidated and combined financial statements, due to the significance of unobservable inputs developed using company-specific information.

We evaluate the recoverability of long-lived assets on an annual basis on February 1 or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine the initial fair value of our long-lived assets, primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved. Based on the triggering event noted above, we evaluated the recoverability of our long-lived assets on April 30, 2022. Based on the results of this evaluation, on an undiscounted cash flow basis, there was no indications of impairment of our long-lived assets.

Inventories

We value inventories at the lower of cost, using the first-in, first-out, or FIFO, method, or net realizable value. We evaluate quantities that make up our current inventory against past and future demand and market conditions to determine excess or slow-moving inventory that may be sold below cost. For each product category, we estimate the market value of the inventory comprising that category based on current and projected selling prices. If the projected market value is less than cost, we will record a provision adjustment to reflect the lower value of the inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value of the inventory may decrease because of consumer preferences or loss of key contracts, among other events.

Income Tax Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. We establish valuation allowances if it is more likely than not that we will be unable to realize our deferred income tax assets.

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In making this determination, we consider available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results, and tax planning strategies. Significant judgment is required in this analysis.

We determined in the current period that is more likely than not that the benefit from the Company’s net deferred tax assets will not be realized and accordingly we established a full valuation allowance recorded as an increase to income tax expense. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates.

Estimates may change as new events occur, estimates of future taxable income may increase during the expected reversal period of our deferred tax assets, or additional information becomes available. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, a full or partial reversal of the valuation allowance could occur resulting in a decrease to the provision for income taxes in the period such a change in estimate is made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis.

Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements is discussed in Note 2 — Summary of Significant Accounting Policies to our consolidated and combined financial statements, which is incorporated herein by reference.

Contractual Obligations and Commercial Commitments

The following table sets forth a summary of our material contractual obligations and commercial commitments as of April 30, 2022 (in thousands):

As of April 30, 2022, we had $25.2 million of borrowings outstanding on our revolving line of credit, which included $170,000 of interest and other fees. We are required to make interest payments for the unused portion of our revolving line of credit in accordance with the financing arrangement. Future unused loan fee obligations are not included above, which could accumulate up to approximately $190,000 per year, under certain circumstances, until the maturity date in fiscal 2026.

Interest on debt is based on outstanding debt as of April 30, 2022, and includes debt issue costs to be amortized over the life of the financing arrangement. The interest rate used to calculate was 1.6% as of April 30, 2022. See Note 10, Debt, for additional information.

Operating lease obligations represent required minimum lease payments during the noncancelable lease term. Most real estate leases also require payments of related operating expenses such as taxes, insurance, utilities, and maintenance, which are not included above. Our operating lease obligations are net of $605,000 of expected future sublease income. See Note 4, Leases, for additional information.

Purchase obligations represent binding commitments to purchase raw materials, contract production, and finished products that are payable upon delivery of the inventory. This obligation excludes the amount included in accounts payable at April 30, 2022 related to inventory purchases. Other obligations represent other binding commitments for the expenditure of funds, including (i) amounts related to contracts not involving the purchase of inventories, such as the noncancelable portion of service or maintenance agreements for management information systems, (ii) capital spending, and (iii) advertising.

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