Clarus Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Please note that in this Quarterly Report on Form 10-Q Clarus Corporation (which may be referred to as the “Company,” “Clarus,” “we,” “our” or “us”) may use words such as “appears,” “anticipates,” “believes,” “plans,” “expects,” “intends,” “future” and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, the overall level of consumer demand on our products; general economic conditions and other factors affecting consumer confidence, preferences, and behavior; disruption and volatility in the global currency, capital and credit markets; the financial strength of the Company’s customers; the Company’s ability to implement its business strategy; the ability of the Company to execute and integrate acquisitions; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition by our Sierra segment, and the possession and use of firearms and ammunition by our customers; the Company’s exposure to product liability or product warranty claims and other loss contingencies; disruptions and other impacts to the Company’s business, as a result of the COVID-19 global pandemic and government actions and restrictive measures implemented in response; stability of the Company’s manufacturing facilities and suppliers, as well as consumer demand for our products, in light of disease epidemics and health-related concerns such as the COVID-19 global pandemic; the impact that global climate change trends may have on the Company and its suppliers and customers; the Company’s ability to protect patents, trademarks and other intellectual property rights; the ability of our information technology systems or information security systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes; our ability to properly maintain, protect, repair or upgrade our information technology systems or information security systems, or problems with our transitioning to upgraded or replacement systems; the impact of adverse publicity about the Company and/or its brands, including without limitation, through social media or in connection with brand damaging events and/or public perception; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations; our ability to utilize our net operating loss carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; and the Company’s ability to maintain a quarterly dividend. More information on potential factors that could affect the Company’s financial results is included from time to time in the Company’s public reports filed with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to the Company as of the date of this Quarterly Report on Form 10-Q, and speak only as of the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. Overview Headquartered in Salt Lake City, Utah, Clarus, a company focused on the outdoor and consumer industries, is seeking opportunities to acquire and grow businesses that can generate attractive shareholder returns. The Company has net operating tax loss carryforwards which it is seeking to redeploy to maximize shareholder value. Clarus’ primary business is as a leading designer, developer, manufacturer and distributor of outdoor equipment and lifestyle products focused on the climb, ski, mountain, sport and skincare markets. The Company’s products are principally sold under the Black Diamond®, Sierra®, PIEPS® and SKINourishment® brand names through outdoor specialty and online retailers, distributors and original equipment manufacturers throughout the U.S. and internationally. Through our Black Diamond, PIEPS, and SKINourishment brands, we offer a broad range of products including: high-performance, activity-based apparel (such as shells, insulation, midlayers, pants and logowear); rock-climbing footwear and equipment (such as carabiners, protection devices, harnesses, belay devices, helmets, and ice-climbing gear); technical backpacks and high-end day packs; trekking poles; headlamps and lanterns; gloves and mittens; and skincare and other sport-enhancing products. We also offer advanced skis, ski poles, ski skins, and snow safety products, including avalanche airbag systems, avalanche transceivers, shovels, and probes. Through our Sierra brand, we manufacture a wide range of high-performance bullets and ammunition for both rifles and pistols that are used for precision target shooting, hunting and military and law enforcement purposes. 23 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) Clarus, incorporated in Delaware in 1991, acquired Black Diamond Equipment, Ltd. (“Black Diamond Equipment”) in May 2010 and changed its name to Black Diamond, Inc. in January 2011. In October 2012, we acquired PIEPS Holding GmbH and its subsidiaries (collectively, “PIEPS”). On August 14, 2017, the Company changed its name from Black Diamond, Inc. to Clarus Corporation and its stock ticker symbol from “BDE” to “CLAR” on the NASDAQ stock exchange. On August 21, 2017, the Company acquired Sierra Bullets, L.L.C. (“Sierra”). On November 6, 2018, the Company acquired the assets of SKINourishment, Inc. (“SKINourishment”). On October 2, 2020, the Company completed the acquisition of certain assets and liabilities relating to the Barnes brand of bullets (“Barnes”) for a purchase price of $30,500. See Note 15 of the unaudited condensed consolidated financial statements for a more detailed explanation of the acquisition. On August 6, 2018, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend program of $0.025 per share of the Company’s common stock (the “Quarterly Cash Dividend”) or $0.10 per share on an annualized basis. The declaration and payment of future Quarterly Cash Dividends is subject to the discretion of and approval of the Company’s Board of Directors. On May 1, 2020, the Company announced that, in light of the operational impact of the COVID-19 pandemic, its Board of Directors temporarily replaced its Quarterly Cash Dividend with a stock dividend (the “Quarterly Stock Dividend”). On October 19, 2020, the Company announced that its Board of Directors approved the reinstatement of its Quarterly Cash Dividend. The reinstated Quarterly Cash Dividend will be paid on November 20, 2020 to the shareholders of record of the Company’s common stock as of the close of business on November 9, 2020. Impact of COVID-19 The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020, with governments world-wide implementing safety measures restricting travel and requiring citizen lockdowns and self-confinements for quarantining purposes. This has negatively affected the U.S. and global economy, disrupted global supply chains, and resulted in significant transport restrictions and disruption of financial markets. The impact of this pandemic has created significant uncertainty in the global economy and has affected our business, employees, retail and distribution partners, suppliers, and customers. The decline in retail demand within our Black Diamond segment over the second half of March 2020 and during the three months ended June 30, 2020 and September 30, 2020, negatively impacted our sales and profitability for the first, second and third quarters of 2020. We also expect an impact on the Company’s sales and profitability in future periods. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (some of which are outside management’s control), including those presented in Item 1A. Risk Factors of our Quarterly Report for the quarterly period ended March 31, 2020. We generally expect the second quarter of 2020 to be the most significantly impacted with sequential improvement throughout the remainder of the fiscal year. We are mitigating some of the negative impacts to our operating results by taking significant actions to improve our current operating results and liquidity position, including drawing on the credit facility, suspending share repurchases and temporarily suspending cash dividends, postponing non-essential capital expenditures, reducing operating costs, modulating production in line with demand, initiating workforce reductions and furloughs, and substantially reducing discretionary spending. We will continue to adjust mitigation measures as needed related to health and safety. Those measures have and might continue to include temporarily suspending manufacturing or retail operations, modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue maintain a healthy and safe environment for our employees amidst the pandemic. These countermeasures are expected to partially mitigate the impacts of COVID-19 on our full year 2020 financial results. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess the impact on the Company and respond accordingly. Sustained adverse impacts to the Company, certain of its suppliers, dealers or customers may also affect the Company’s future cash flows, liquidity, and valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, indefinite and finite-lived intangible assets, property and equipment, inventories, accounts receivable, net deferred tax assets, and other assets. 24 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) Critical Accounting Policies and Use of Estimates Management’s discussion of our financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates. There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2019. Accounting Pronouncements Issued Not Yet Adopted See “Accounting Pronouncements Not Yet Adopted” in Note 1 of the unaudited condensed consolidated financial statements. ‎ 25 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) Results of Operations Condensed Consolidated Three Months Ended September 30, 2020 Compared to Condensed Consolidated Three Months Ended September 30, 2019 The following presents a discussion of condensed consolidated operations for the three months ended September 30, 2020, compared with the condensed consolidated three months ended September 30, 2019. Three Months Ended September 30, 2020 September 30, 2019 Sales Domestic sales $ 34,686 $ 28,794 International sales 29,805 31,409 Total sales 64,491 60,203 Cost of goods sold 42,822 39,646 Gross profit 21,669 20,557 Operating expenses Selling, general and administrative 18,674 16,443 Transaction costs 1,440 37 Total operating expenses 20,114 16,480 Operating income 1,555 4,077 Other income (expense) Interest expense, net (232) (353) Other, net 449 (420) Total other income (expense), net 217 (773) Income before income tax 1,772 3,304 Income tax expense (benefit) 589 (188) Net income $ 1,183 $ 3,492 Sales Consolidated sales increased $4,288, or 7.1%, to $64,491 during the three months ended September 30, 2020, compared to consolidated sales of $60,203 during the three months ended September 30, 2019. The increase in sales was attributable to the increase in the quantity of new and existing sport products sold of $8,676. We also experienced an increase in sales of $279 due to the weakening of the U.S. dollar against foreign currencies during the three months ended September 30, 2020 compared to the prior period. We believe these increases were partially offset by lower consumer demand related to the COVID-19 pandemic, which drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. Consolidated domestic sales increased $5,892, or 20.5%, to $34,686 during the three months ended September 30, 2020, compared to consolidated domestic sales of $28,794 during the three months ended September 30, 2019. The increase in sales was attributable to the increase in the quantity of new and existing sport products sold of $7,573. We believe the increase in domestic sales was partially offset by lower consumer demand related to the COVID-19 pandemic, which drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. Consolidated international sales decreased $1,604, or 5.1%, to $29,805 during the three months ended September 30, 2020, compared to consolidated international sales of $31,409 during the three months ended September 30, 2019. We believe the decrease in international sales was attributable to lower consumer demand related to the COVID-19 pandemic, which drove a decrease in the 26 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) quantity of new and existing climb, mountain, and ski products sold during the period. The decrease was partially offset by an increase in the quantity of new and existing sport products sold of $1,103 and an increase in sales of $279 due to the weakening of the U.S. dollar against foreign currencies during the three months ended September 30, 2020 compared to the prior period. Cost of Goods Sold Consolidated cost of goods sold increased $3,176, or 8.0%, to $42,822 during the three months ended September 30, 2020, compared to consolidated cost of goods sold of $39,646 during the three months ended September 30, 2019. The increase in cost of goods sold was primarily attributable to an increase in the number of units sold. Gross Profit Consolidated gross profit increased $1,112 or 5.4%, to $21,669 during the three months ended September 30, 2020, compared to consolidated gross profit of $20,557 during the three months ended September 30, 2019. Consolidated gross margin was 33.6% during the three months ended September 30, 2020, compared to a consolidated gross margin of 34.1% during the three months ended September 30, 2019. Consolidated gross margin during the three months ended September 30, 2020, decreased compared to the prior year due to unfavorable impacts on our supply chain and logistic activities due to the COVID-19 pandemic. Selling, General and Administrative Consolidated selling, general, and administrative expenses increased $2,231, or 13.6%, to $18,674 during the three months ended September 30, 2020, compared to consolidated selling, general and administrative expenses of $16,443 during the three months ended September 30, 2019. The increase in selling, general and administrative expenses reflect an increase of stock compensation of $3,526 during the three months ended September 30, 2020 compared to the prior year. The increase was partially offset by the cost-saving initiatives implemented in response to the COVID-19 pandemic, primarily related to reductions within sales, marketing, research and development, and brand supporting activities. Transaction Costs Consolidated transaction expense increased to $1,440 during the three months ended September 30, 2020, compared to consolidated transaction costs of $37 during the three months ended September 30, 2019, which consisted of expenses related to the Company’s various acquisition efforts, including acquiring the Barnes Purchased Assets. Interest Expense, net Consolidated interest expense, net during the three months ended September 30, 2020 remained relatively consistent with consolidated interest expense, net, during the three months ended September 30, 2019. Other, net Consolidated other, net, income increased $869, or 206.9%, to $449 during the three months ended September 30, 2020, compared to consolidated other, net expense of $420 during the three months ended September 30, 2019. The increase in other, net, was primarily attributable to an increase in remeasurement gains recognized on the Company’s foreign denominated accounts receivable and accounts payable. This decrease was partially offset by losses on mark-to-market adjustments on non-hedged foreign currency contracts. Income Taxes Consolidated income tax expense increased $777, or 413.3%, to $589 during the three months ended September 30, 2020, compared to a consolidated income tax benefit of $188 during the same period in 2019. Our effective income tax rate was 33.2% for the three months ended September 30, 2020, and was higher compared to the statutory tax rates due to permanent book to tax differences primarily related to incentive stock options. For the three months ended September 30, 2019, our effective income tax rate was 5.7% and was lower compared to the statutory tax rates due to a stock compensation windfall. 27 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) Results of Operations Condensed Consolidated Nine Months Ended September 30, 2020 Compared to Condensed Consolidated Nine Months Ended September 30, 2019 The following presents a discussion of condensed consolidated operations for the nine months ended September 30, 2020, compared with the condensed consolidated nine months ended September 30, 2019. Nine Months Ended September 30, 2020 September 30, 2019 Sales Domestic sales $ 83,493 $ 87,805 International sales 64,567 80,610 Total sales 148,060 168,415 Cost of goods sold 97,243 109,810 Gross profit 50,817 58,605 Operating expenses Selling, general and administrative 50,537 51,215 Restructuring charge - 13 Transaction costs 1,870 124 Total operating expenses 52,407 51,352 Operating (loss) income (1,590) 7,253 Other expense Interest expense, net (800) (978) Other, net 324 (260) Total other expense, net (476) (1,238) (Loss) income before income tax (2,066) 6,015 Income tax benefit (542) (570) Net (loss) income $ (1,524) $ 6,585 Sales Consolidated sales decreased $20,355, or 12.1%, to $148,060 during the nine months ended September 30, 2020, compared to consolidated sales of $168,415 during the nine months ended September 30, 2019. We believe lower consumer demand related to the COVID-19 pandemic drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. We also experienced a decrease in sales of $297 due to the strengthening of the U.S. dollar against foreign currencies during the nine months ended September 30, 2020 compared to the prior period. These decreases were partially offset by an increase in the quantity of new and existing sport products sold of $8,282. Consolidated domestic sales decreased $4,312, or 4.9%, to $83,493 during the nine months ended September 30, 2020, compared to consolidated domestic sales of $87,805 during the nine months ended September 30, 2019. We believe the decrease in domestic sales was attributable to lower consumer demand related to the COVID-19 pandemic, which drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. This decrease was partially offset by an increase in the quantity of new and existing sport products sold of $9,622. Consolidated international sales decreased $16,043, or 19.9%, to $64,567 during the nine months ended September 30, 2020, compared to consolidated international sales of $80,610 during the nine months ended September 30, 2019. We believe the decrease in 28 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) international sales was attributable to lower consumer demand related to the COVID-19 pandemic, which drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. We also experienced a decrease in the quantity of new and existing sport products sold of $1,340 and a decrease in sales of $297 due to the strengthening of the U.S. dollar against foreign currencies during the nine months ended September 30, 2020 compared to the prior period. Cost of Goods Sold Consolidated cost of goods sold decreased $12,567, or 11.4%, to $97,243 during the nine months ended September 30, 2020, compared to consolidated cost of goods sold of $109,810 during the nine months ended September 30, 2019. The decrease in cost of goods sold was primarily attributable to a decrease in the number of units sold due to lower consumer demand related to the COVID-19 pandemic. Gross Profit Consolidated gross profit decreased $7,788 or 13.3%, to $50,817 during the nine months ended September 30, 2020, compared to consolidated gross profit of $58,605 during the nine months ended September 30, 2019. Consolidated gross margin was 34.3% during the nine months ended September 30, 2020, compared to a consolidated gross margin of 34.8% during the nine months ended September 30, 2019. Consolidated gross margin during the nine months ended September 30, 2020, decreased compared to the prior year due to unfavorable impacts on our supply chain and logistic activities due to the COVID-19 pandemic, along with negative impacts from foreign currency and tariffs. Selling, General and Administrative Consolidated selling, general, and administrative expenses decreased $678, or 1.3%, to $50,537 during the nine months ended September 30, 2020, compared to consolidated selling, general and administrative expenses of $51,215 during the nine months ended September 30, 2019. The decrease in selling, general and administrative expenses reflect the cost-saving initiatives implemented in response to the COVID-19 pandemic, primarily related to reductions within sales, marketing, and logistics. The decrease was partially offset by an increase of stock compensation of $3,187 during the nine months ended September 30, 2020 compared to the prior year. Restructuring Charges Consolidated restructuring expense decreased to $0 during the nine months ended September 30, 2020, compared to consolidated restructuring expense of $13 during the nine months ended September 30, 2019. Restructuring expenses incurred during the nine months ended September 30, 2019, related to costs associated with the formal closure and liquidation of the Company’s Black Diamond Equipment manufacturing operations in Zhuhai, China. Transaction Costs Consolidated transaction expense increased to $1,870 during the nine months ended September 30, 2020, compared to consolidated transaction costs of $124 during the nine months ended September 30, 2019, which consisted of expenses related to the Company’s various acquisition efforts, including acquiring the Barnes Purchased Assets. Interest Expense, net Consolidated interest expense, net during the nine months ended September 30, 2020 remained relatively consistent with consolidated interest expense, net, during the nine months ended September 30, 2019. Other, net Consolidated other, net, increased $584, or 224.6%, to income of $324 during the nine months ended September 30, 2020, compared to consolidated other, net expense of $260 during the nine months ended September 30, 2019. The increase in other, net, was primarily attributable to an increase in remeasurement gains recognized on the Company’s foreign denominated accounts receivable and accounts payable. This increase was partially offset by losses on mark-to-market adjustments on non-hedged foreign currency contracts. Income Taxes Consolidated income tax benefit decreased $28, or 4.9%, to $542 during the nine months ended September 30, 2020, compared to a consolidated income tax benefit of $570 during the same period in 2019. Our effective income tax rate was 26.2% for the nine months 29 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ended September 30, 2020, and was higher compared to the statutory tax rates due to permanent book to tax differences primarily related to incentive stock options. For the nine months ended September 30, 2019, our effective income tax rate was 9.5% and is lower compared to the statutory tax rates due to a discrete benefit associated with a release of a tax reserve. Factors that could cause our annual effective tax rate to differ materially from our quarterly effective tax rates include changes in the geographic mix of taxable income and discrete events that may occur. Liquidity and Capital Resources Condensed Consolidated Nine Months Ended September 30, 2020 Compared to Condensed Consolidated Nine Months Ended September 30, 2019 Our primary ongoing funding requirements are for working capital, expansion of our operations (both organically and through acquisitions) and general corporate needs, as well as investing activities associated with the expansion into new product categories. We plan to fund these activities through a combination of our future operating cash flows and revolving credit facility which had approximately $38,900 available to borrow at September 30, 2020. We believe that our liquidity requirements for at least the next 12 months will be adequately covered by cash provided by operations and our existing revolving credit facility. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively affected the U.S. and global economies, disrupted global supply chains, and resulted in significant travel and transport restrictions and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including drawing on the credit facility, suspending share repurchases and cash dividends, postponing nonessential capital expenditures, reducing operating costs, modulating production in line with demand, initiating workforce reductions and furloughs, and substantially reducing discretionary spending. Further, we borrowed $20,000 under the term loan portion of the Credit Agreement to increase our overall liquidity. The Company is required to repay the term loan through quarterly payments of $1,000 each beginning with September 30, 2020, and any remaining obligations will be repaid in full on the maturity date of the Credit Agreement of May 3, 2024. Additionally, during the three months ended September 30, 2020, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with three existing stockholders of the Company. Pursuant to the Securities Purchase Agreement, the Company sold its common stock in a registered direct offering (the “Offering”). The net proceeds to the Company from the Offering were $11,151, after deducting estimated Offering expenses payable by the Company, and were used to pay down amounts outstanding on our revolving loan commitment. The Offering was made pursuant to the Company’s effective registration statement on Form S-3 (File No. 333-218751), previously filed with and declared effective by the Securities and Exchange Commission At September 30, 2020, we had total cash of $17,027, compared to a cash balance of $1,703 at December 31, 2019, which was substantially controlled by the Company’s U.S. entities. At September 30, 2020, the Company had $6,093 of the $17,027 in cash held by foreign entities, of which $762 is considered permanently reinvested. The following presents a discussion of cash flows for the condensed consolidated nine months ended September 30, 2020 compared with the condensed consolidated nine months ended September 30, 2019. Nine Months Ended September 30, 2020 September 30, 2019 Net cash provided by operating activities $ 21,048 $ 5,635 Net cash used in investing activities (33,779) (2,818) Net cash provided by (used in) financing activities 27,956 (3,379) Effect of foreign exchange rates on cash 99 (73) Change in cash 15,324 (635) Cash, beginning of period 1,703 2,486 Cash, end of period $ 17,027 $ 1,851 30 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) Net Cash From Operating Activities Consolidated net cash provided by operating activities was $21,048 during the nine months ended September 30, 2020, compared to $5,635 during the nine months ended September 30, 2019. The increase in net cash provided by operating activities during 2020 is primarily due to an increase in net operating assets, or non-cash working capital, of $20,915, and stock compensation of $3,187, partially offset by a decrease in net income during the nine months ended September 30, 2020, compared to the same period in 2019. Free cash flow, defined as net cash provided by operating activities less capital expenditures, of $17,442 was generated during the nine months ended September 30, 2020 compared to $2,797 generated during the same period in 2019. The Company believes that the non-GAAP measure, free cash flow, provides an understanding of the capital required by the Company to expand its asset base. A reconciliation of free cash flows to comparable GAAP financial measures is set forth below: Nine Months Ended September 30, 2020 September 30, 2019 Net cash provided by operating activities $ 21,048 $ 5,635 Purchase of property and equipment (3,606) (2,838) Free cash flow $ 17,442 $ 2,797 Net Cash From Investing Activities Consolidated net cash used in investing activities was $33,779 during the nine months ended September 30, 2020, compared to $2,818 during the nine months ended September 30, 2019. The increase in cash used during the nine months ended September 30, 2020 is due to a deposit the Company paid to be applied to the purchase of the assets of the Barnes brand as well as an increase in purchases of property and equipment, compared to the same period in 2019. Net Cash From Financing Activities Consolidated net cash provided by financing activities was $27,956 during the nine months ended September 30, 2020, compared to consolidated net cash used of $3,379 during the nine months ended September 30, 2019. The increase in cash provided during the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to the proceeds of $20,000 borrowed under the term loan and the net proceeds from the Offering of $11,151. These increases were partially offset by net repayments to the revolving line of credit and repayments of the term loan. Net Operating Loss As of December 31, 2019, the Company had net operating loss and research and experimentation credit for U.S. federal income tax purposes of $131,621 and $4,250, respectively. The Company believes its U.S. Federal NOL will offset some of its future U.S. Federal income taxes. The majority of the Company’s pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F income and will be offset with the NOL. $131,621 of net operating losses available to offset taxable income does not expire until 2022 or later, subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended. As of December 31, 2019, the Company’s gross deferred tax asset was $43,945. The Company has recorded a valuation allowance of $28,632, resulting in a net deferred tax asset of $15,313, before deferred tax liabilities of $8,633. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of September 30, 2020 and December 31, 2019, because the ultimate realization of those assets does not meet the more likely than not criteria. The majority of the Company’s deferred tax assets consist of net operating loss carryforwards for federal tax purposes. If a change in control were to occur, these could be limited under Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended. Credit Agreement On May 3, 2019, the Company together with certain of its direct and indirect domestic subsidiaries (the “Borrowers”) and the other loan parties party thereto entered into a Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto, for borrowings of up to $60,000 under a revolving credit facility (including up to $5,000 for letters of credit), and borrowings of up to $40,000 under a term loan facility that is available to be drawn until May 3, 2020. The Credit Agreement also 31 CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) permits the Borrowers, subject to certain requirements, to arrange with lenders for an aggregate of up to $50,000 of additional revolving and/or term loan commitments (both of which are currently uncommitted), for potential aggregate revolving and term loan commitments under the Credit Agreement of up to $150,000. The Credit Agreement matures on May 3, 2024. The Borrowers may elect to have the revolving and term loans under the Credit Agreement bear interest at an alternate base rate or a Eurodollar rate plus an applicable rate. The applicable rate for these borrowings will range from 0.50% to 1.25% per annum, in the case of alternate base rate borrowings, and 1.50% to 2.25% per annum, in the case of Eurodollar borrowings. The applicable rate was initially 0.875% per annum, in the case of alternate base rate borrowings, and 1.875% per annum, in the case of Eurodollar borrowings, however, it may be adjusted from time to time based upon the level of the Company’s consolidated total leverage ratio. The Credit Agreement also requires the Borrowers to pay a commitment fee on the unused portion of the revolving and term loan commitments. Such commitment fee will range between 0.15% and 0.25% per annum, and is also based upon the level of the Company’s consolidated total leverage ratio. As of September 30, 2020, the Company had drawn approximately $ 21,066 of the $60,000 revolving loan commitment that was available for borrowing under the Credit Agreement, and $19,000 outstanding under the term loan commitment. As of September 30, 2020, the interest rate for each loan was 1.6875% . On April 30, 2020, the Company borrowed $20,000 under the term loan facility and used the proceeds to pay down amounts outstanding under the revolving portion of the Credit Agreement. The Company is required to repay the term loan through quarterly payments of $1,000 each beginning with September 30, 2020, and any remaining obligations will be repaid in full on the maturity date of the Credit Agreement of May 3, 2024 . The Credit Agreement contains restrictions on the Company’s ability to pay dividends or make distributions or other restricted payments if certain conditions in the Credit Agreement are not fulfilled . The Credit Agreement also includes other customary affirmative and negative covenants, including financial covenants relating to the Company’s consolidated total leverage ratio and fixed charge coverage ratio. The Company was in compliance with the debt covenants set forth in the Credit Agreement as of September 30, 2020. Off-Balance Sheet Arrangements We do not engage in any transactions or have relationships or other arrangements with unconsolidated entities. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not engage in energy, weather or other commodity-based contracts. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has not been any material change in the market risk disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2019.