American Outdoor Brands(AOUT) - 2023 Q4 - Annual Report

PART I ITEM 1. BUSINESS American Outdoor Brands, Inc, a leading provider of outdoor lifestyle and shooting sports accessories, operates through four brand lanes and focuses on innovation, direct-to-consumer growth, and strategic acquisitions - The company designs, sources, and sells outdoor lifestyle products (knives, tools, cooking, camping) and shooting sports accessories (rests, optics, reloading supplies)[18] - Manufacturing of some electro-optics occurs in Columbia, Missouri, with most products manufactured/assembled by third parties in Asia[18] - The company organizes its brands into four consumer verticals: Adventurer (fishing, outdoor cooking, camping), Harvester (hunting, meat processing), Marksman (shooting range, firearm maintenance), and Defender (self-defense, security/storage)[19] - Key strategies include introducing innovative new products, expanding addressable markets, cultivating direct-to-consumer relationships, enhancing the supply chain, and pursuing strategic acquisitions[21] Financial Performance (FY2021-2023) | Metric | FY2023 ($M) | FY2022 ($M) | FY2021 ($M) | | :--- | :--- | :--- | :--- | | Net Sales | 191.2 | 247.5 | 276.7 | | Gross Profit | 88.1 | 114.2 | 126.8 | | Total Assets | 243.6 | 277.8 | N/A | - Outdoor recreation participation grew by 2.3% in calendar 2022 to 168.1 million participants (55% of US population aged 6+)[27] - The acquisition of Grilla Grills in March 2022 provided entry into the estimated $7 billion outdoor cooking industry[27] - The company has approximately 30 product designers, engineers, and software developers, delivering over 200 new products annually and holding over 380 patents and patents pending[30] - Direct-to-consumer sales increased 76.0% over fiscal 2022, with DTC-exclusive brands representing $24.4 million (28.0%) of total e-commerce channel net sales in fiscal 2023[37][60] R&D Spending | Year | Gross Spending on R&D ($M) | | :--- | :--- | | FY2023 | 6.4 | | FY2022 | 5.5 | | FY2021 | 5.4 | Advertising & Promotion Expenses | Year | Expenses ($M) | | :--- | :--- | | FY2023 | 11.9 | | FY2022 | 13.3 | | FY2021 | 14.4 | - The world's largest e-commerce retailer accounted for 25.4% of net sales in FY2023 and 27.8% in FY2022[60] - Order backlog was $7.0 million as of April 30, 2023, up from $3.7 million in FY2022[92] ITEM 1A. RISK FACTORS The company faces risks from supply chain dependence, product innovation needs, outsourcing, cost volatility, brand maintenance, demand forecasting, e-commerce challenges, competition, and customer concentration - The company is vulnerable to disruptions in supplier capabilities, raw material availability, and distribution networks, especially from Asia, with most operations concentrated in one Missouri facility[109][110][112] - Success hinges on the timely introduction of innovative products that achieve market acceptance[113] - A significant portion of production is outsourced to third-party manufacturers, primarily in Asia, posing risks of disruption from financial, natural, or political instability[114] - Costs and availability of finished products, components, and raw materials are volatile due to economic conditions, labor costs, tariffs, and exchange rates, impacting margins[120][121][122] - Inaccurate forecasting of customer demand can lead to excess inventory or product shortages, resulting in financial losses and reputational damage[131][132] - Challenges in e-commerce include intense promotional pressure, potential impact on gross margins, and risks associated with technology, data security, and competition with retailers[134][136] - A substantial portion of revenue depends on a small number of large customers, with the largest e-commerce retailer accounting for 25.4% of FY2023 net sales[140][142] - Performance is influenced by general economic conditions, consumer spending patterns, and political factors, including potential increased regulation of firearms and related products[153][155][157] - Future acquisitions involve significant risks, including integration difficulties, unforeseen expenses, and failure to achieve expected synergies[164][166][171] - Inability to protect intellectual property or claims of infringement by third parties could impair competitive advantage and increase costs[187][191] - The company is subject to Section 301 tariffs on goods from China, which can increase costs and reduce margins[199][200] - Reliance on IT systems creates vulnerability to interruptions, failures, or cyber security breaches that could disrupt operations and damage reputation[202][205][206] - Exposure to product recalls, product liability claims, and class-action lawsuits could lead to substantial monetary judgments and reputational damage[210][213] - The market price and trading volume of common stock may be volatile due to earnings fluctuations, analyst estimates, and economic conditions[220] - Provisions in corporate documents and Delaware law may discourage or delay acquisitions, potentially decreasing stock price[224][225] - Future equity issuances could dilute current investors' ownership and negatively impact EPS[228][229] - Failure to maintain effective internal controls could lead to inaccurate financial reporting and adverse effects on business and stock price[237] ITEM 1B. UNRESOLVED STAFF COMMENTS The company has no unresolved staff comments from the SEC - The company has no unresolved staff comments from the SEC[238] ITEM 2. PROPERTIES The company's principal operating properties are leased and include facilities in Missouri, Michigan, Massachusetts, and China Principal Properties (as of April 30, 2023) | Location | Facility Type | | :--- | :--- | | Columbia, Missouri | Corporate Office and Warehouse | | Holland, Michigan | Storefront | | Chicopee, Massachusetts | Administrative Office | | Shenzhen, Peoples Republic of China | Office | - The company will assume the lease for the entire 632,000 sq ft Columbia, Missouri facility effective January 1, 2024, with an option to expand by up to 491,000 additional sq ft[69][70][512][514] ITEM 3. LEGAL PROCEEDINGS The company is occasionally involved in various lawsuits and claims, which it actively monitors and vigorously defends - The company is subject to lawsuits, claims, investigations, and proceedings related to product liability, intellectual property, commercial relationships, employment, and governmental matters[75] - The company actively monitors litigation and intends to vigorously defend claims and assert all appropriate defenses[75] - No material expenses were incurred for product liability litigation defense or settlements in FY2021-2023[508] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - The company has no mine safety disclosures[240] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on Nasdaq under "AOUT," with an active share repurchase program and no history of paying cash dividends - Common stock trades on the Nasdaq Global Select Market under the symbol "AOUT"[242] - As of June 21, 2023, there were 228 record holders of common stock[243] - The company has never declared or paid cash dividends and plans to retain all available funds and future earnings to fund business development and expansion[244] Share Repurchase Program (FY2023) | Metric | Value | | :--- | :--- | | Total Shares Purchased | 377,034 | | Average Price Paid Per Share | $9.34 | | Total Value of Shares Purchased | $3.5 million | | Maximum Dollar Value Remaining | $6.5 million | - On September 30, 2022, the Board authorized repurchases of up to $10.0 million of common stock through September 29, 2023[250] ITEM 6. RESERVED This item is reserved and not applicable - This item is intentionally left blank[251] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fiscal 2023 saw a 22.8% net sales decrease to $191.2 million, a net loss of $12.0 million, and significantly improved operating cash flow of $30.7 million driven by inventory reduction Fiscal 2023 Highlights | Metric | FY2023 | FY2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $191.2M | $247.5M | ($56.3M) | -22.8% | | Gross Margin | 46.1% | 46.2% | -0.1% | | | Net Loss | ($12.0M) | ($64.9M) | $52.9M | -81.5% | | Diluted EPS | ($0.90) | ($4.66) | $3.76 | -80.7% | | Non-GAAP Adjusted EBITDAS | $12.8M | $35.0M | ($22.2M) | -63.4% | | Shares Repurchased | 377,034 | N/A | N/A | N/A | | Value Repurchased | $3.5M | N/A | N/A | N/A | Net Sales Breakdown (FY2023 vs. FY2022) | Channel/Category | FY2023 ($M) | FY2022 ($M) | Change ($M) | % Change | | :--- | :--- | :--- | :--- | :--- | | E-commerce Channels | 87.2 | 97.4 | (10.2) | -10.5% | | Traditional Channels | 104.0 | 150.1 | (46.1) | -30.7% | | Domestic Net Sales | 182.3 | 234.8 | (52.5) | -22.4% | | International Net Sales | 8.9 | 12.7 | (3.8) | -30.0% | | Shooting Sports | 88.9 | 128.2 | (39.3) | -30.7% | | Outdoor Lifestyle | 102.3 | 119.3 | (17.0) | -14.3% | - E-commerce decline was due to reduced demand in shooting sports and retailer inventory reduction, partially offset by a 76.0% increase in direct-to-consumer sales[265][266] - Gross margin decreased by 10 basis points due to lower sales volumes, product/customer mix, increased promotional discounts, and higher inventory provisions[269] Operating Expenses (FY2023 vs. FY2022) | Expense Category | FY2023 ($M) | FY2022 ($M) | Change ($M) | % Change | | :--- | :--- | :--- | :--- | :--- | | Research and Development | 6.4 | 5.5 | 0.9 | 15.6% | | Selling, Marketing, & Distribution | 51.8 | 56.2 | (4.4) | -7.8% | | General and Administrative | 42.6 | 41.2 | 1.4 | 3.3% | | Impairment of Long-Lived Assets | 0.0 | 67.8 | (67.8) | -100.0% | | Total Operating Expenses | 100.8 | 170.8 | (70.0) | -41.0% | - Operating loss was ($12.7 million) in FY2023, an improvement from ($56.5 million) in FY2022, primarily due to the absence of the $67.8 million goodwill impairment charge from the prior year[274][275] - 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, primarily impacted by $21.9 million of reduced inventory[294] - 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, primarily because of the $27.0 million used to acquire Grilla Grills during fiscal 2022[296] - Cash used in financing activities was $23.5 million in fiscal 2023, due to $20.2 million of payments on the revolving line of credit and $3.5 million of payments to repurchase common stock[297] Contractual Obligations (as of April 30, 2023, in thousands) | Obligation Type | Total ($K) | Less Than 1 Year ($K) | 1-3 Years ($K) | 3-5 Years ($K) | More Than 5 Years ($K) | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | 5,000 | 0 | 0 | 5,000 | 0 | | Interest on debt | 1,563 | 399 | 798 | 366 | 0 | | Operating lease | 37,541 | 2,251 | 4,419 | 4,445 | 26,426 | | Purchase obligations | 35,691 | 35,691 | 0 | 0 | 0 | | Total Obligations | 79,795 | 38,341 | 5,217 | 9,811 | 26,426 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk relates to the variable interest rate on its $75.0 million revolving line of credit - The company's primary market risk is the variable interest rate associated with its $75.0 million revolving line of credit[316] - As of April 30, 2023, $5.0 million was outstanding on the revolving line of credit, bearing interest at 6.05% (SOFR plus applicable margin)[300][316] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item incorporates the consolidated and combined financial statements and related notes by reference from page F-1 - Financial statements, notes, and audit report are incorporated by reference from page F-1[317] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This item is not applicable to the company - No changes in or disagreements with accountants on accounting and financial disclosure[317] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective as of April 30, 2023, following the implementation of a new ERP system during the fiscal year - Management concluded that disclosure controls and procedures were effective as of April 30, 2023[319] - Management believes internal control over financial reporting was effective as of April 30, 2023, based on the COSO Framework[320] - A new ERP system, Microsoft D365, was implemented for all subsidiaries during fiscal 2023, which is expected to enhance transactional processing, management tools, and internal controls[322] - As an "emerging growth company," the independent registered public accounting firm is not required to formally attest to the effectiveness of internal controls over financial reporting[320] ITEM 9B. OTHER INFORMATION This item is not applicable to the company - No other information to disclose[324] ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to the company - No disclosure regarding foreign jurisdictions that prevent inspections[324] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement and Item 1 of this report - Information regarding directors and corporate governance is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[326] - Information relating to executive officers is included in Item 1, "Business"[326] ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - Executive compensation information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[327] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership is incorporated by reference from the 2023 Proxy Statement - Security ownership information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[328] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[329] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[330] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This item lists the financial statements and various exhibits filed with the Form 10-K - Consolidated and Combined Financial Statements are listed in the Index to Consolidated and Combined Financial Statements on page F-1[332] - Exhibits include agreements related to the spin-off, corporate governance, compensation plans, loan agreements, and various XBRL documents[333][334][335] ITEM 16. FORM 10-K SUMMARY This item states that there is no Form 10-K summary - No Form 10-K Summary is provided[335] SIGNATURES Signatures Detail The report is signed by the CEO, CFO, and Board of Directors on June 28, 2023 - The report is signed by Brian D Murphy (President and CEO), H Andrew Fulmer (EVP, CFO, Treasurer), and members of the Board of Directors[337][338] - The signing date is June 28, 2023[337] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS This section provides an index to the detailed financial statements and accompanying notes - The index includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Statements of Equity, Statements of Cash Flows, and Notes[340] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Grant Thornton LLP issued an unqualified opinion on the company's consolidated financial statements for fiscal years 2021-2023 - The auditor is Grant Thornton LLP (PCAOB ID Number 248)[341][345] - An unqualified opinion was issued on the consolidated financial statements for the fiscal years ended April 30, 2023, 2022, and 2021, confirming fair presentation in conformity with GAAP[342] - Audits were conducted in accordance with PCAOB standards, providing reasonable assurance that financial statements are free of material misstatement[344][345] - As an emerging growth company, the auditor was not engaged to perform an audit of internal control over financial reporting and expresses no opinion on its effectiveness[344] CONSOLIDATED BALANCE SHEETS Total assets decreased to $243.6 million in FY2023 from $277.8 million in FY2022, driven by a reduction in inventories Consolidated Balance Sheet Data (as of April 30, in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $21,950 | $19,521 | | Accounts receivable, net | 26,846 | 28,879 | | Inventories | 99,734 | 121,683 | | Prepaid expenses and other current assets | 7,839 | 8,491 | | Income tax receivable | 1,251 | 1,231 | | Total current assets | 157,620 | 179,805 | | Property, plant, and equipment, net | 9,488 | 10,621 | | Intangible assets, net | 52,021 | 63,194 | | Right-of-use assets | 24,198 | 23,884 | | Other assets | 260 | 336 | | Total assets | $243,587 | $277,840 | | LIABILITIES AND EQUITY | | | | Accounts payable | $11,544 | $13,563 | | Accrued expenses | 8,741 | 7,853 | | Accrued payroll, incentives, and profit sharing | 1,813 | 3,786 | | Lease liabilities, current | 904 | 1,803 | | Total current liabilities | 23,002 | 27,005 | | Notes and loans payable | 4,623 | 24,697 | | Lease liabilities, net of current portion | 24,064 | 23,076 | | Other non-current liabilities | 34 | 31 | | Total liabilities | 51,723 | 74,809 | | Total equity | 191,864 | 203,031 | CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME The company reported a net loss of $12.0 million in FY2023, a significant improvement from a $64.9 million net loss in FY2022, which included a large goodwill impairment Consolidated and Combined Statements of Operations (for the years ended April 30, in thousands, except per share data) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $191,209 | $247,526 | $276,687 | | Cost of sales | 103,145 | 133,287 | 149,859 | | Gross profit | 88,064 | 114,239 | 126,828 | | Research and development | 6,361 | 5,501 | 5,378 | | Selling, marketing, and distribution | 51,791 | 56,168 | 56,773 | | General and administrative | 42,612 | 41,244 | 41,182 | | Goodwill impairment | — | 67,849 | — | | Total operating expenses | 100,764 | 170,762 | 103,333 | | Operating (loss)/income | (12,700) | (56,523) | 23,495 | | Other income, net | 1,188 | 1,311 | 497 | | Interest (expense)/income, net | (761) | (324) | 300 | | Total other income, net | 427 | 987 | 797 | | (Loss)/income from operations before income taxes | (12,273) | (55,536) | 24,292 | | Income tax (benefit)/expense | (249) | 9,344 | 5,887 | | Net (loss)/income/comprehensive (loss)/income | ($12,024) | ($64,880) | $18,405 | | Net (loss)/income per share: | | | | | Basic | ($0.90) | ($4.66) | $1.31 | | Diluted | ($0.90) | ($4.66) | $1.29 | | Weighted average number of common shares outstanding: | | | | | Basic | 13,372 | 13,930 | 13,997 | | Diluted | 13,372 | 13,930 | 14,225 | CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY Total equity decreased to $191.9 million in FY2023 from $203.0 million in FY2022, driven by the net loss and treasury stock repurchases Consolidated and Combined Statements of Equity (as of April 30, in thousands) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Common Stock | $14 | $14 | $14 | | Additional Paid-In Capital | 272,784 | 268,393 | 265,362 | | Retained Deficit/(Earnings) | (62,375) | (50,351) | 14,529 | | Treasury Stock | (18,559) | (15,025) | 0 | | Total Equity | $191,864 | $203,031 | $279,905 | - Key changes in FY2023 include a net loss of ($12,024) thousand, stock-based compensation of $4,050 thousand, and repurchase of treasury stock of ($3,534) thousand[354] CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS The company generated $30.7 million in cash from operations in FY2023, a significant improvement driven by reduced inventory Consolidated and Combined Statements of Cash Flows (for the years ended April 30, in thousands) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $30,706 | ($17,953) | $33,320 | | Net cash used in investing activities | (4,826) | (33,588) | (4,181) | | Net cash (used in)/provided by financing activities | (23,451) | 10,261 | 31,428 | | Net increase/(decrease) in cash and cash equivalents | 2,429 | (41,280) | 60,567 | | Cash and cash equivalents, end of period | $21,950 | $19,521 | $60,801 | - Cash generated in operating activities for fiscal 2023 was primarily impacted by $21.9 million of reduced inventory and a decrease in accounts receivable of $2.0 million[294] - Cash used in investing activities decreased primarily because of the $27.0 million used to acquire Grilla Grills during fiscal 2022[296] - Cash used in financing activities in fiscal 2023 was because of $20.2 million of payments on the revolving line of credit and $3.5 million of payments to repurchase common stock[297] Supplemental Disclosure of Cash Flow Information (Cash Paid For, in thousands) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Interest | $761 | $125 | $111 | | Income taxes (net of refunds) | ($73) | $3,819 | $7,951 | NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Note 1. Background, Description of Business, and Basis of Presentation This note details the company's spin-off from Smith & Wesson Brands, Inc and the "carve-out" basis of presentation for financial statements prior to the Separation - The company completed its spin-off from Smith & Wesson Brands, Inc on August 24, 2020[362] - The business is a leading provider of outdoor lifestyle products and shooting sports accessories, organized into Adventurer, Harvester, Marksman, and Defender brand lanes[363] - Financial statements for periods prior to the Separation were prepared on a "carve-out" basis, including allocated corporate expenses[364][365][367] Note 2. Summary of Significant Accounting Policies This note outlines significant accounting policies, including the use of estimates, revenue recognition, goodwill valuation, and inventory costing - Significant estimates include provisions for excess/obsolete inventory, freight/duty/tariff accruals, goodwill/intangible asset valuation, and deferred tax asset realization[368] - Inventories are valued at the lower of cost (FIFO method) or net realizable value[376] - Goodwill is tested annually for impairment, with a full impairment of $67.8 million recorded in FY2022[379][381][382] - Revenue is recognized when control of ownership transfers to the customer, reflecting estimates for sales adjustments[390] Disaggregation of Revenue (FY2023, 2022, 2021 in thousands) | Channel/Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | E-commerce channels | $87,219 | $97,418 | $108,726 | | Traditional channels | 103,990 | 150,108 | 167,961 | | Domestic net sales | 182,299 | 234,803 | 267,573 | | International net sales | 8,910 | 12,723 | 9,114 | | Shooting sports | 88,885 | 128,180 | 165,341 | | Outdoor lifestyle | 102,324 | 119,346 | 111,346 | Advertising Expense | Year | Expense ($M) | | :--- | :--- | | FY2023 | 11.9 | | FY2022 | 13.3 | | FY2021 | 14.4 | - A full valuation allowance of $17.0 million was maintained against net deferred tax assets as of April 30, 2023, due to uncertainty of realization[416][417][503] - One customer accounted for 25.4% of net sales in FY2023 and 39.2% of accounts receivable in FY2023[424][425] Note 3. Acquisitions In fiscal 2022, the company acquired Grilla Grills for $27 million, which generated $15.0 million in net sales in FY2023 - The company acquired substantially all assets of Grilla Grills in fiscal 2022 for $27 million, financed by existing cash and a $25 million credit line draw[430] Grilla Grills Acquisition Purchase Price Allocation (in thousands) | Item | Amount | | :--- | :--- | | Inventories | $5,956 | | Property, plant, and equipment | 105 | | Intangibles | 18,495 | | Goodwill | 3,534 | | Total assets acquired | 28,090 | | Accounts payable | 894 | | Accrued expenses | 46 | | Accrued warranty | 150 | | Total liabilities assumed | 1,090 | | Net Purchase Price | $27,000 | - The $3.5 million goodwill from Grilla Grills was subsequently written off as part of the full goodwill impairment on April 30, 2022[431] - Grilla Grills generated $15.0 million in net sales in FY2023 and $2.6 million in FY2022[434] Note 4. Leases The company's operating lease liabilities totaled $25.0 million as of April 30, 2023, primarily related to its Columbia, Missouri facility Operating Lease Assets & Liabilities (as of April 30, in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Right-of-use assets, net | $24,198 | $23,884 | | Lease liabilities, current portion | 904 | 1,803 | | Lease liabilities, net of current portion | 24,064 | 23,076 | | Total operating lease liabilities | $24,968 | $24,879 | - Operating lease costs were $4.0 million in FY2023 and $3.9 million in FY2022[440] - As of April 30, 2023, the weighted average lease term was 15.6 years and the weighted average discount rate was 5.4%[440] - Effective January 1, 2024, the company will assume the direct lease for the entire 632,000 sq ft Columbia, Missouri facility, expecting an incremental annual expense of $1.3 million[441][512][514] Future Lease Payments (as of April 30, 2023, in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2024 | $2,251 | | 2025 | 2,241 | | 2026 | 2,178 | | 2027 | 2,207 | | 2028 | 2,238 | | Thereafter | 26,426 | | Total future lease payments | $37,541 | Note 5. Inventory Total inventories decreased to $99.7 million as of April 30, 2023, from $121.7 million in 2022 Inventory Summary (as of April 30, in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Finished goods | $90,906 | $110,650 | | Finished parts | 2,818 | 4,353 | | Work in process | 66 | 194 | | Raw material | 5,944 | 6,486 | | Total inventories | $99,734 | $121,683 | - The company recorded $4.3 million in FY2023 and $3.9 million in FY2022 for deposits on inventory from Asian suppliers[446] Note 6. Property, Plant, and Equipment Net property, plant, and equipment totaled $9.5 million as of April 30, 2023, with depreciation expense of $2.7 million for the fiscal year Property, Plant, and Equipment Summary (as of April 30, in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Machinery and equipment | $17,678 | $17,664 | | Computer and other equipment | 1,865 | 2,095 | | Leasehold improvements | 316 | 2,364 | | Less: Accumulated depreciation and amortization | (11,229) | (12,635) | | Construction in progress | 858 | 1,133 | | Total property, plant, and equipment, net | $9,488 | $10,621 | - Depreciation expense was $2.7 million for FY2023, $2.3 million for FY2022, and $3.0 million for FY2021[448] Total Depreciation and Amortization Expense (by line item, in thousands) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Cost of sales | $1,429 | $1,299 | $1,016 | | Research and development | 415 | 203 | 43 | | Selling, marketing, and distribution | 362 | 510 | 114 | | General and administrative | 14,305 | 14,955 | 18,653 | | Total depreciation and amortization | $16,511 | $16,967 | $19,826 | Note 7. Intangible Assets Net intangible assets were $52.0 million as of April 30, 2023, with an amortization expense of $13.7 million for the fiscal year Intangible Assets Summary (as of April 30, in thousands) | Item | 2023 Net Carrying Amount | 2022 Net Carrying Amount | | :--- | :--- | :--- | | Customer relationships | $15,945 | $22,025 | | Developed software and technology | 9,044 | 6,417 | | Patents, trademarks, and trade names | 24,901 | 29,633 | | Patents and software in development | 1,701 | 4,689 | | Indefinite-lived intangible assets | 430 | 430 | | Total intangible assets | $52,021 | $63,194 | - Amortization expense amounted to $13.7 million for FY2023, $14.5 million for FY2022, and $16.8 million for FY2021[454] Future Expected Amortization Expense (as of April 30, 2023, in thousands) | Fiscal Year | Amount | | :--- | :--- | | 2024 | $13,614 | | 2025 | 9,312 | | 2026 | 8,097 | | 2027 | 5,753 | | 2028 | 4,463 | | Thereafter | 8,651 | | Total | $49,890 | Note 8. Goodwill The company had no goodwill on its balance sheet as of April 30, 2023, following a full impairment charge of $67.8 million in FY2022 - The goodwill balance was $0 as of April 30, 2023 and 2022[457] - A non-cash impairment charge of $67.8 million was recorded in FY2022, reducing the goodwill balance to zero, triggered by a decline in stock price and market capitalization[382][457] - Total accumulated goodwill impairment charges since fiscal 2015 amount to $177.2 million[457] Note 9. Accrued Expenses Total accrued expenses increased to $8.7 million as of April 30, 2023, with accrued sales allowances and freight being the largest components Accrued Expenses Summary (as of April 30, in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Accrued sales allowances | $2,453 | $2,392 | | Accrued freight | 1,962 | 1,253 | | Accrued professional fees | 1,106 | 951 | | Accrued commissions | 1,072 | 1,175 | | Accrued warranty | 966 | 786 | | Accrued employee benefits | 568 | 312 | | Accrued taxes other than income | 346 | 718 | | Accrued other | 268 | 266 | | Total accrued expenses | $8,741 | $7,853 | Note 10. Debt The company has a $75.0 million revolving line of credit maturing in March 2027, with $5.0 million outstanding as of April 30, 2023 - The company has a $75.0 million revolving line of credit, amended in March 2022 and maturing in March 2027[463] - As of April 30, 2023, $5.0 million was outstanding on the revolving line of credit, bearing interest at 6.05% (SOFR plus applicable margin)[464] - Proceeds from borrowings on the revolving line of credit were used to purchase the Grilla Grills branded products in fiscal 2022[464] - In fiscal 2023, an irrevocable standby letter of credit for $1.7 million was executed to collateralize duty drawback bonds, with no amounts drawn[464] Note 11. Fair Value Measurement The company's cash and cash equivalents of $22.0 million are classified as Level 1 fair value measurements, with no Level 3 assets or liabilities - Financial assets and liabilities are categorized into a three-level fair value hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[465][466][467][468] - Cash and cash equivalents ($22.0 million as of April 30, 2023) are classified as Level 1[466] - The carrying value of the revolving line of credit approximated fair value using Level 2 inputs[468] - The company currently has no Level 3 financial assets or liabilities[468] Note 12. Self-Insurance Reserves In FY2023, the company transitioned to a self-insured group health insurance program, with an ending reserve balance of $396,000 - The company transitioned to a self-insured group health insurance program in FY2023, with stop-loss insurance for medical claims exceeding certain limits[469] Self-Insurance Reserves Activity (in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Beginning balance | $29 | $33 | | Additional provisions charged to expense | 2,094 | — | | Payments | (1,727) | (4) | | Ending balance | $396 | $29 | Note 13. Equity The company repurchased $3.5 million of common stock in FY2023 and recorded $4.1 million in stock-based compensation expense - In FY2023, the company repurchased 377,034 shares of common stock for $3.5 million under a $10.0 million authorization[471] - In FY2022, the company completed a $15.0 million stock repurchase program, purchasing 836,964 shares[471] - Stock-based compensation expense was $4.1 million in FY2023, $2.8 million in FY2022, and $2.9 million in FY2021[478] - As of April 30, 2023, there was $2.3 million of unrecognized compensation expense related to unvested RSUs and PSUs[489] RSUs and PSUs Outstanding Activity (in thousands of units) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Beginning of period | 349.8 | 427.5 | | Awarded | 371.2 | 114.9 | | Vested | (146.0) | (127.1) | | Forfeited | (14.4) | (65.5) | | End of period | 560.6 | 349.8 | - Under the Employee Stock Purchase Plan (ESPP), employees purchased 89,860 shares in FY2023 and 76,098 shares in FY2022[490] Note 14. Employer Sponsored Benefit Plans The company offers a 401k plan and a profit-sharing plan, contributing $500,000 to the 401k in FY2023 Contributory Defined Investment Plan (401k) Contributions (in thousands) | Year | Company Contributions | | :--- | :--- | | FY2023 | $500 | | FY2022 | $592 | | FY2021 | $461 | Non-Contributory Profit-Sharing Plan Contributions (in thousands) | Year | Company Contributions | | :--- | :--- | | FY2023 | $0 | | FY2022 | $984 | | FY2021 | $1,900 | Note 15. Income Taxes The company recorded an income tax benefit of $249,000 in FY2023 and maintained a full valuation allowance of $17.0 million against net deferred tax assets Income Tax (Benefit)/Expense (in thousands) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total current | ($249) | $2,661 | $9,445 | | Total deferred | — | 6,683 | (3,558) | | Total income tax expense/(benefit) | ($249) | $9,344 | $5,887 | - Effective tax rates were 2.0% (FY2023), (16.8%) (FY2022), and 24.2% (FY2021)[504] Deferred Tax Assets (Liabilities) (as of April 30, in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Inventories | $1,574 | $1,594 | | Accrued expenses, including compensation | 1,446 | 1,805 | | Stock-based compensation | 1,172 | 801 | | Intangible assets | 11,877 | 11,817 | | Property, plant, and equipment | (2,577) | (1,949) | | Right-of Use assets | (5,640) | (5,570) | | Right-of Use lease liabilities | 5,820 | 5,803 | | Capitalized R&D | 1,340 | — | | Loss and credit carryforwards | 1,636 | — | | Less valuation allowance | (17,041) | (14,441) | | Net deferred tax asset/(liability) | $— | $— | - A full valuation allowance of $17.0 million (FY2023) and $14.4 million (FY2022) was maintained against net deferred tax assets due to uncertainty of realization[503] - The IRS initiated an examination of the FY2021 federal income tax return on March 7, 2023[507] Note 16. Commitments and Contingencies This note covers legal proceedings, lease commitments, and the use of duty drawback mechanisms to offset tariffs - The company is involved in various lawsuits but did not incur any material expenses in defense and administrative costs relative to product liability litigation for FY2021-2023[508] Operating Lease Expiration Dates | Location | Expiration Date | | :--- | :--- | | Holland, Michigan | July 31, 2023 | | Shenzhen, China | August 31, 2023 | | Phoenix, Arizona | April 30, 2024 | | Chicopee, Massachusetts | May 31, 2025 | | Columbia, Missouri | December 31, 2038 | - Effective January 1, 2024, the company will assume the direct lease for the entire 632,000 sq ft Columbia, Missouri facility, expecting an incremental annual expense of $1.3 million[512][514] - The company is utilizing the duty drawback mechanism to offset Section 301 tariffs on certain goods imported from China and sold internationally[515] Note 17. Segment Reporting The company operates as one reporting segment as the CEO reviews only consolidated financial information for resource allocation - The company operates as one reporting segment because the Chief Executive Officer reviews only consolidated financial information and allocates resources based on those statements[516] - The four brand lanes do not qualify as separate reporting units due to integrated operating and administrative activities[516] Note 18. Related Party Transactions This note summarizes transactions with the former parent company, Smith & Wesson Brands, Inc, prior to the Separation in August 2020 - Prior to the Separation, the combined financial statements included allocated general corporate expenses and sales to the former parent company[519] - For the period prior to the Separation in fiscal year 2021, sales to the former parent totaled $2.4 million[522] - All notes to and from the former parent were settled in connection with the Separation[523] - Interest income on activity with the former parent was $424,000 during the first four months of fiscal year 2021, prior to the Separation[523]