Item 2. Management’s Discussion and Analysis
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, including, without limitation, the impact of inflation; 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, 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 an outbreak of disease or similar public health threat, such as 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, increased focus on sustainability issues as a result of global climate change; regulatory or market responses to global climate change; the Company’s ability to protect patents, trademarks and other intellectual property rights; any breaches of, or interruptions in, our information systems; 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; ongoing disruptions and delays in the shipping and transportation of our products due to port congestion, container ship availability and/or other logistical challenges; the impact of political unrest, natural disasters or other crises, terrorist acts, acts of war and/or military operations; our ability to utilize our net operating loss carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; the Company’s ability to maintain a quarterly dividend; and any material differences in the actual financial results of the Company’s past and future acquisitions, including the impact of acquisitions and any recognition of impairment or other charges relating to any such acquisitions on the Company’s future earnings per share. 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.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Overview
Headquartered in Salt Lake City, Utah, Clarus Corporation (which may be referred to as the “Company,” “Clarus,” “we,” “our” or “us”) is a global leading designer, developer, manufacturer and distributor of best-in-class outdoor equipment and lifestyle products focused on the outdoor and consumer enthusiast markets. Our mission is to identify, acquire and grow outdoor “super fan” brands through our unique “innovate and accelerate” strategy. We define a “super fan” brand as a brand that creates the world’s pre-eminent, performance-defining product that the best-in-class user cannot live without. Each of our brands has a long history of continuous product innovation for core and everyday users alike. The Company’s products are principally sold globally under the Black Diamond®, Sierra®, Barnes®, Rhino-Rack® and MAXTRAX® brand names through outdoor specialty and online retailers, our own websites, distributors and original equipment manufacturers. Our portfolio of iconic brands is well-positioned for sustainable, long-term growth underpinned by powerful industry trends across the outdoor and adventure sport end markets.
One of the key elements of our sustained financial performance is our persistent focus on brand building through product initiatives. Our iconic brands are rooted in performance-defining technologies that enable our customers to have their best days outdoors. We have a long history of technical innovation and product development, backed by an extensive patent portfolio that continues to evolve and advance our markets. We currently employ approximately 120 engineers across the portfolio, focusing on enhancing our customers’ performance in the most critical moments. Our commitment to quality, rigorous safety, and ultimately best-in-class design is evidenced by outstanding industry recognition, as we have received numerous product awards across our portfolio of super fan brands.
Each of our brands represents a unique customer value proposition. Supported by six decades of proven innovation, Black Diamond is an established global leader in high-performance, activity-based climbing, skiing, and technical mountain sports equipment. The brand is synonymous with premium performance, safety and reliability. Our Sierra and Barnes brands have been leading specialty manufacturers of bullets and ammunition for over 50 years. Since 1947, Sierra has been dedicated to manufacturing the highest-quality, most accurate bullets in the world for hunting and sport shooting enthusiasts. Barnes traces its history back to 1932, and since 1989 has manufactured technologically-advanced, lead-free bullets and premium ammunition for hunters, range shooters, military and law enforcement professionals. Founded in 1992, our Rhino-Rack brand is a globally-recognized designer and distributor of highly-engineered automotive roof racks and accessories to enhance the outdoor enthusiast’s overlanding experience. Founded in 2005, our MAXTRAX brand offers high-quality overlanding and off-road vehicle recovery and extraction tracks for the overland and off-road market.
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 constituting the Barnes business (“Barnes”). On July 1, 2021, the Company completed the acquisition of Australia-based Rhino-Rack Holdings Pty Ltd (“Rhino-Rack”). On December 1, 2021, the Company completed the acquisition of Australia-based MaxTrax Australia Pty Ltd (“MAXTRAX”).
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 August 3, 2023, the Company announced that its Board of Directors approved the payment on August 25, 2023 of the Quarterly Cash Dividend of $0.025 to the record holders of shares of the Company’s common stock as of the close of business on August 14, 2023.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Impact of COVID-19
The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by each of the U.S., European, and Australian governments in March 2020, with governments worldwide implementing safety measures restricting travel and requiring citizen lockdowns and self-confinements for quarantining purposes. During the years ended December 31, 2020, 2021, and 2022, this had negatively affected the U.S., European, Australian and global economies, disrupted global supply chains, and resulted in significant transport restrictions and disruption of global financial markets.
An outbreak of disease or similar public health threat, such as the COVID-19 pandemic, could have, and in the case of the COVID-19 pandemic has had and may continue to have, a significant impact on the global supply chain, with restrictions and limitations on related activities causing disruption and delay, along with increased raw material, storage, and shipping costs. Any of these disruptions and delays may strain domestic and international supply chains, which could negatively affect the flow or availability of certain critical raw materials and finished good products that the Company relies upon. Furthermore, the foregoing impacts may significantly increase demand from online sales channels, including our website, and could impact our logistical operations, including our fulfillment and shipping functions, which may result in periodic delays in the delivery of our products.
We expect that an outbreak of disease or similar public health threat, such as the COVID-19 pandemic, could have, and in the case of the COVID-19 pandemic may continue to have, 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 Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022.
Critical Accounting Policies and Use of Estimates
Management’s discussion of our financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in our Annual Report on Form 10-K for the year ended December 31, 2022. 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, 2022.
Accounting Pronouncements Issued Not Yet Adopted
None
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Results of Operations
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
The following presents a discussion of operations for the three months ended June 30, 2023, compared with the three months ended June 30, 2022.
Three Months Ended
June 30, 2023
June 30, 2022
Sales
Domestic sales
$
46,656
$
64,073
International sales
37,072
50,860
Total sales
83,728
114,933
Cost of goods sold
52,974
71,251
Gross profit
30,754
43,682
Operating expenses
Selling, general and administrative
30,200
35,444
Restructuring charges
736
—
Transaction costs
59
821
Contingent consideration benefit
—
(374)
Total operating expenses
30,995
35,891
Operating (loss) income
(241)
7,791
Other income (expense)
Interest expense, net
(2,857)
(1,728)
Other, net
224
(1,343)
Total other expense, net
(2,633)
(3,071)
(Loss) income before income tax
(2,874)
4,720
Income tax (benefit) expense
(783)
956
Net (loss) income
$
(2,091)
$
3,764
Sales
Total sales decreased $31,205, or 27.2%, to $83,728 during the three months ended June 30, 2023, compared to total sales of $114,933 during the three months ended June 30, 2022. The decrease in sales was primarily attributable to a decrease in sales at the Outdoor, Precision Sport, and Adventure segments of $12,537, $9,396, and $9,272, respectively.
Sales in the Adventure and Outdoor segments were reduced by $955 and $541, respectively, due to foreign exchange impact from the strengthening of the U.S. dollar against foreign currencies during the three months ended June 30, 2023, compared to the prior period. Sales in the Outdoor segment decreased due to continued weakness at key North American retail accounts, compounded by weakness in the European and international markets. This weakness was partially offset by growth in the direct-to-consumer channel. Sales in the Precision Sport segment decreased due to challenging market conditions, including lower consumer demand for ammunition and bullets. Sales in the Adventure segment decreased due
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
to lower consumer demand given the challenging market conditions and the difficult macro-environment in both Australia and North America.
Domestic sales decreased $17,417, or 27.2%, to $46,656 during the three months ended June 30, 2023, compared to domestic sales of $64,073 during the three months ended June 30, 2022. The decrease in sales was primarily attributable to a decrease in sales at the Precision Sport, Adventure, and Outdoor segments of $6,462, $5,531, and $5,424, respectively.
International sales decreased $13,788, or 27.1%, to $37,072 during the three months ended June 30, 2023, compared to international sales of $50,860 during the three months ended June 30, 2022. The decrease in sales was primarily attributable to a decrease in sales at the Outdoor, Precision Sport, and Adventure segments of $6,572, $2,934, and $2,786, respectively.
Cost of Goods Sold
Cost of goods sold decreased $18,277, or 25.7%, to $52,974 during the three months ended June 30, 2023, compared to cost of goods sold of $71,251 during the three months ended June 30, 2022. The decrease in cost of goods sold was primarily attributable to a decrease in the number of units sold.
Gross Profit
Gross profit decreased $12,928, or 29.6%, to $30,754 during the three months ended June 30, 2023, compared to gross profit of $43,682 during the three months ended June 30, 2022. Gross margin was 36.7% during the three months ended June 30, 2023, compared to a gross margin of 38.0% during the three months ended June 30, 2022. Gross margin during the three months ended June 30, 2023, decreased compared to the prior year due to changes in channel and product mix of 1.6% and unfavorable foreign currency exchange movement of 1.1%. Channel and product mix were primarily impacted by discounting of ammunition in the Precision Sport segment given the more promotional environment which negatively impacted gross margin. These decreases were partially offset by easing freight costs in the Outdoor and Adventure segments which positively impacted gross margin by 1.4%.
Selling, General and Administrative
Selling, general, and administrative expenses decreased $5,244, or 14.8%, to $30,200 during the three months ended June 30, 2023, compared to selling, general and administrative expenses of $35,444 during the three months ended June 30, 2022. The decrease is primarily due to a decrease in stock compensation of $2,020 during the three months ended June 30, 2023, compared to the prior year. The decrease was also driven by expense reduction initiatives and lower sales commissions due to decreased revenue.
Restructuring Charges
Restructuring charges increased to $736 during the three months ended June 30, 2023, compared to restructuring charges of $0 during the three months ended June 30, 2022, which consisted of severance costs, exit costs, and inventory write-offs related to the Company’s restructuring initiatives.
Transaction Costs
Transaction expense decreased to $59 during the three months ended June 30, 2023, compared to transaction costs of $821 during the three months ended June 30, 2022, which consisted of expenses related to the Company’s various acquisition efforts.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Contingent Consideration Benefit
Contingent consideration benefit decreased to $0 during the three months ended June 30, 2023, compared to a contingent consideration benefit of $374 during the three months ended June 30, 2022, which consisted of changes in the estimated fair value of contingent consideration liabilities associated with our acquisition of MAXTRAX in 2021.
Interest Expense, net
Interest expense, net increased to $2,857 during the three months ended June 30, 2023, compared to interest expense, net of $1,728 during the three months ended June 30, 2022. The increase in interest expense recognized during the three months ended June 30, 2023 was primarily associated with the increase in interest rates during the period compared to the prior year.
Other, net
Other, net, increased by $1,567, or 116.7%, to income of $224 during the three months ended June 30, 2023, compared to other, net loss of $(1,343) during the three months ended June 30, 2022. The change in other, net, was primarily attributable to a decrease in remeasurement losses recognized on the Company’s foreign denominated accounts receivable and accounts payable and changes in mark-to-market adjustments on non-hedged foreign currency contracts during the three months ended June 30, 2023.
Income Taxes
Income tax expense changed by $1,739, or 181.9%, to a benefit of $783 during the three months ended June 30, 2023, compared to income tax expense of $956 during the same period in 2022. Our effective income tax rate was a benefit of 27.2% for the three months ended June 30, 2023, and differed compared to the statutory tax rates primarily due to the impact of stock compensation, research and experimentation expenditures and credits, and discrete stock option windfall benefits. For the three months ended June 30, 2022, our effective income tax rate was 20.3% and differed compared to the statutory tax rates due to the impact of foreign tax credits.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
The following presents a discussion of operations for the six months ended June 30, 2023, compared with the six months ended June 30, 2022.
Six Months Ended
June 30, 2023
June 30, 2022
Sales
Domestic sales
$
91,572
$
126,380
International sales
89,540
101,829
Total sales
181,112
228,209
Cost of goods sold
114,337
140,275
Gross profit
66,775
87,934
Operating expenses
Selling, general and administrative
63,019
69,619
Restructuring charges
736
—
Transaction costs
133
2,022
Contingent consideration (benefit) expense
(1,565)
389
Total operating expenses
62,323
72,030
Operating income
4,452
15,904
Other income (expense)
Interest expense, net
(5,603)
(2,844)
Other, net
309
(1,410)
Total other expense, net
(5,294)
(4,254)
(Loss) income before income tax
(842)
11,650
Income tax (benefit) expense
(349)
2,577
Net (loss) income
$
(493)
$
9,073
Sales
Total sales decreased $47,097, or 20.6%, to $181,112 during the six months ended June 30, 2023, compared to total sales of $228,209 during the six months ended June 30, 2022. The decrease in sales was primarily attributable to a decrease in sales at the Adventure, Precision Sport, and Outdoor segments of $20,405, $15,408, and $11,284, respectively.
Sales in the Outdoor and Adventure segments were reduced by $1,932 and $1,923, respectively, due to foreign exchange impact from the strengthening of the U.S. dollar against foreign currencies during the six months ended June 30, 2023, compared to the prior period. Sales in the Outdoor segment decreased due to continued weakness at key North American retail accounts, compounded by weakness in the European market. This weakness was partially offset by growth in the direct-to-consumer channel. Sales in the Precision Sport segment decreased due to challenging market conditions, including lower consumer demand for ammunition and bullets. Sales in the Adventure segment decreased due to lower consumer demand given the challenging market conditions and the difficult macro-environment in both Australia and North America.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Domestic sales decreased $34,808, or 27.5%, to $91,572 during the six months ended June 30, 2023, compared to domestic sales of $126,380 during the six months ended June 30, 2022. The decrease in sales was primarily attributable to a decrease in sales at the Precision Sport, Adventure, and Outdoor segments of $13,186, $12,134, and $9,488, respectively.
International sales decreased $12,289, or 12.1%, to $89,540 during the six months ended June 30, 2023, compared to international sales of $101,829 during the six months ended June 30, 2022. The decrease in sales was primarily attributable to a decrease in sales at the Adventure and Precision Sport segments of $6,348 and $2,222, respectively, partially offset by an increase in sales at the Outdoor segment of $136.
Cost of Goods Sold
Cost of goods sold decreased $25,938, or 18.5%, to $114,337 during the six months ended June 30, 2023, compared to cost of goods sold of $140,275 during the six months ended June 30, 2022. The decrease in cost of goods sold was primarily attributable to a decrease in the number of units sold.
Gross Profit
Gross profit decreased $21,159, or 24.1%, to $66,775 during the six months ended June 30, 2023, compared to gross profit of $87,934 during the six months ended June 30, 2022. Gross margin was 36.9% during the six months ended June 30, 2023, compared to a gross margin of 38.5% during the six months ended June 30, 2022. Gross margin during the six months ended June 30, 2023, decreased compared to the prior year due to changes in channel and product mix of 1.9% and unfavorable foreign currency exchange movement of 1.3%. Channel and product mix were primarily impacted by discounting of ammunition in the Precision Sport segment given the more promotional environment which negatively impacted gross margin. These decreases were partially offset by easing freight costs in the Outdoor and Adventure segments which positively impacted gross margin by 1.6%.
Selling, General and Administrative
Selling, general, and administrative expenses decreased $6,600, or 9.5%, to $63,019 during the six months ended June 30, 2023, compared to selling, general and administrative expenses of $69,619 during the six months ended June 30, 2022. The decrease is primarily due to a decrease in stock compensation of $4,054 during the six months ended June 30, 2023, compared to the prior year. The decrease was also driven by expense reduction initiatives and lower sales commissions due to decreased revenue.
Restructuring Charges
Restructuring charges increased to $736 during the six months ended June 30, 2023, compared to restructuring charges of $0 during the six months ended June 30, 2022, which consisted of severance costs, exit costs, and inventory write-offs related to the Company’s restructuring initiatives.
Transaction Costs
Transaction expense decreased to $133 during the six months ended June 30, 2023, compared to transaction costs of $2,022 during the six months ended June 30, 2022, which consisted of expenses related to the Company’s various acquisition efforts.
Contingent Consideration (Benefit) Expense
Contingent consideration changed to a benefit of $1,565 during the six months ended June 30, 2023, compared to $389 contingent consideration expense during the six months ended June 30, 2022, which consisted of changes in the estimated fair value of contingent consideration liabilities associated with our acquisition of MAXTRAX in 2021.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Interest Expense, net
Interest expense, net increased to $5,603 during the six months ended June 30, 2023, compared to interest expense, net of $2,844 during the six months ended June 30, 2022. The increase in interest expense recognized during the six months ended June 30, 2023 was primarily associated with the increase in interest rates during the period compared to the prior year.
Other, net
Other, net, increased by $1,719, or 121.9%, to income of $309 during the six months ended June 30, 2023, compared to other, net loss of $(1,410) during the six months ended June 30, 2022. The change in other, net, was primarily attributable to a decrease in remeasurement losses recognized on the Company’s foreign denominated accounts receivable and accounts payable and changes in mark-to-market adjustments on non-hedged foreign currency contracts during the six months ended June 30, 2023.
Income Taxes
Income tax expense changed by $2,926, or 113.5%, to a benefit of $349 during the six months ended June 30, 2023, compared to income tax expense of $2,577 during the same period in 2022. Our effective income tax rate was a benefit of 41.4% for the six months ended June 30, 2023, and differed compared to the statutory tax rates primarily due to the impact of stock compensation, research and experimentation expenditures and credits, and discrete stock option windfall benefits. For the six months ended June 30, 2022, our effective income tax rate was 22.1% and differed compared to the statutory tax rates due to the impact of foreign earnings taxed at applicable statutory rates and permanent book to tax differences related to incentive stock options and officer compensation limitations.
Liquidity and Capital Resources
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
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 various brands. We plan to fund these activities through a combination of our future operating cash flows and borrowings on our revolving credit facility which had approximately $32,000 available to borrow at June 30, 2023, while currently maintaining compliance with the consolidated total leverage ratio per the Restated Credit Agreement of 3.75 to 1. We believe that our liquidity requirements and contractual obligations for at least the next 12 months will be adequately covered by cash provided by operations and our existing revolving credit facility. Additionally, long-term contractual obligations are also currently expected to be funded from cash from operations and availability under our existing credit facilities. For additional information regarding the Company’s existing credit facilities, see the section titled “Credit Agreement” below.
At June 30, 2023, we had total cash of $11,315, compared to a cash balance of $12,061 at December 31, 2022. At June 30, 2023, the Company had $5,097 of the $11,315 in cash held by foreign entities, of which $3,583 is considered permanently reinvested.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
The following presents a discussion of cash flows for the condensed consolidated six months ended June 30, 2023 compared with the condensed consolidated six months ended June 30, 2022.
Six Months Ended
June 30, 2023
June 30, 2022
Net cash provided by (used in) operating activities
$
17,286
$
(6,276)
Net cash used in investing activities
(3,083)
(3,774)
Net cash (used in) provided by financing activities
(13,962)
4,930
Effect of foreign exchange rates on cash
(987)
(457)
Change in cash
(746)
(5,577)
Cash, beginning of year
12,061
19,465
Cash, end of period
$
11,315
$
13,888
Net Cash From Operating Activities
Net cash provided by operating activities was $17,286 during the six months ended June 30, 2023, compared to net cash used in operating activities of $6,276 during the six months ended June 30, 2022. The change in net cash provided by (used in) operating activities during 2023 is primarily due to a decrease in cash outflows related to working capital of $42,627, partially offset by an increase in contingent consideration benefit, and a decrease in stock compensation during the six months ended June 30, 2023, compared to the same period in 2022.
Free cash flow, defined as net cash provided by (used in) operating activities less capital expenditures, of $14,034 was generated during the six months ended June 30, 2023 compared to ($10,348) used during the same period in 2022. 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 the nearest comparable GAAP financial measure is set forth below:
Six Months Ended
June 30, 2023
June 30, 2022
Net cash provided by (used in) operating activities
$
17,286
$
(6,276)
Purchase of property and equipment
(3,252)
(4,072)
Free cash flow
$
14,034
$
(10,348)
Net Cash From Investing Activities
Net cash used in investing activities was $3,083 during the six months ended June 30, 2023, compared to $3,774 during the six months ended June 30, 2022. The decrease in cash used during the six months ended June 30, 2023 is primarily due to a decrease in purchases of property and equipment, compared to the same period in 2022.
Net Cash From Financing Activities
Net cash used in financing activities was $13,962 during the six months ended June 30, 2023, compared to net cash provided by financing activities of $4,930 during the six months ended June 30, 2022. The change in net cash (used in) provided by financing activities during the six months ended June 30, 2023, compared to the same period in 2022 was primarily due to a decrease in net proceeds from the revolving line of credit and term loan.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Net Operating Loss
As of December 31, 2022, the Company had net operating loss carryforwards (“NOLs”) and research and experimentation credit for U.S. federal income tax purposes of $17,663 and $2,651, respectively. The Company believes its U.S. Federal NOLs will substantially offset its future U.S. Federal income taxes until expiration. 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 NOLs. The Company has $17,663 of NOLs, of which, $1,851 expire on December 31, 2023. These NOLs are subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended.
As of December 31, 2022, the Company’s gross deferred tax asset was $32,972. The Company has recorded a valuation allowance of $3,323, resulting in a net deferred tax asset of $29,649, before deferred tax liabilities of $30,243. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of December 31, 2022, 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
As of June 30, 2023, the Company had drawn $11,884 on the revolving loan and $115,625 was outstanding under the term loan. Approximately $32,000 in additional funds were available to borrow on the revolving loan at June 30, 2023, while maintaining compliance with the consolidated total leverage ratio per the Restated Credit Agreement (as defined below) of 3.75 to 1. As of June 30, 2023, the interest rates on the revolving loan and term loan commitments were approximately 7.5%. The Company was in compliance with the debt covenants set forth in the Restated Credit Agreement as of June 30, 2023.
On April 18, 2022 (the “Effective Date”), the Company, Black Diamond Retail, Inc., Black Diamond Retail – Alaska, LLC, Sierra Bullets, L.L.C., SKINourishment, LLC, Black Diamond Retail – Colorado, LLC, Black Diamond Retail – Montana, LLC, Black Diamond Retail – Wyoming, LLC, Barnes Bullets-Mona, LLC, Black Diamond Retail – Oregon, LLC, Black Diamond Retail – Vermont, LLC (collectively with the Company, the “Borrowers”) and the other loan parties party thereto (together with the Borrowers, each a “Loan Party”, and collectively, the “Loan Parties”) entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”) and the lenders party thereto (the “Restated Credit Agreement”) pursuant to which the existing Credit Agreement, dated as of May 3, 2019 (as amended prior to the Effective Date, the “Existing Credit Agreement”) by and among the Company, the lenders and loan parties from time to time party thereto and the Administrative Agent was amended and restated in its entirety. Each of the Loan Parties, other than the Company, is a direct or indirect subsidiary of the Company. Effective as of June 30, 2023, Maxtrax Australia Trading Pty Ltd., and effective as July 7, 2023, each of MAXTRAX USA, LLC, Clarus Real Estate LLC, and Black Diamond Retail – Colorado, LLC, were joined to the Restated Credit Agreement as Loan Parties thereto.
The Restated Credit Agreement provides for borrowings of up to $300,000 under a secured revolving credit facility (the “Revolving Loans”) (including up to $5,000 for letters of credit), and borrowings of up to $125,000 under a secured term loan facility (the “Term Loans”). The Restated Credit Agreement also permits the Borrowers, subject to certain requirements, to arrange with lenders for an aggregate of up to $175,000 of additional revolving and/or term loan commitments (both of which are currently uncommitted), for potential aggregate revolving and term loan commitments under the Restated Credit Agreement of up to $600,000. The proceeds of loans made under the Restated Credit Agreement may be used for working capital and general corporate purposes, including acquisitions permitted under the Restated Credit Agreement. The Restated Credit Agreement matures on April 18, 2027 (the “Maturity Date”), at which time the revolving commitments thereunder will terminate and all outstanding Revolving Loans and Term Loans, together with all accrued and unpaid interest thereon, must be repaid.
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(in thousands, except per share amounts)
The Term Loans were fully drawn on the Effective Date and cannot be reborrowed. The Restated Credit Agreement provides for quarterly amortization payments of the Term Loans on the last business day of each March, June, September and December, commencing on June 30, 2022. Through and including the payment due on June 30, 2023, the scheduled amortization payment is $1,563 per quarter, and each scheduled amortization payment due thereafter through the Maturity Date is $3,125 per quarter.
The Borrowers may elect to have the Revolving Loans and Term Loans under the Restated Credit Agreement bear interest at an applicable rate plus either:
(i) in the case of alternate base rate borrowings, a rate per annum generally equal to the greatest of:
(a)
the prime rate in effect on such day;
(b)
0.50% plus the greater of the Federal Reserve Bank of New York’s effective federal funds rate or the Federal Reserve Bank of New York’s overnight bank funding rate in effect on such day; and
(c)
1.00% plus the adjusted term SOFR rate for a 1-month interest period;
provided that, in certain circumstances where the alternate base rate is being used as an alternate rate of interest, the alternate base rate shall be determined only according to (a) and (b), and shall be subject to a 1.00% floor; or
(ii) in the case of term benchmark borrowings, a rate per annum as follows:
(a)
for borrowings denominated in U.S. Dollars, the term SOFR rate (based on one, three or six-month interest periods) plus 0.10%, subject to a 0.00% floor; or
(b)
for borrowings denominated in a Foreign Currency, the applicable rate for such Foreign Currency set forth in the Restated Credit Agreement.
The applicable rate for these borrowings will range from 0.50% to 1.625% per annum, in the case of alternate base rate borrowings, and 1.50% to 2.625% per annum, in the case of term benchmark 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 term benchmark borrowings, however, these initial applicable rates may be adjusted from time to time based upon the level of the Company’s consolidated total leverage ratio, which is more fully discussed in the Restated Credit Agreement. If one or more of the above interest rates are not determinable, or under certain other circumstances set forth in the Restated Credit Agreement, a substitute or alternative interest rate may apply under the Restated Credit Agreement.
The Restated Credit Agreement also requires the Borrowers to pay a commitment fee on the unused portion of the revolving loan commitments. Such commitment fee will range between 0.15% and 0.30% per annum, and is also based upon the level of the Company’s consolidated total leverage ratio, which is more fully discussed in the Restated Credit Agreement. The Company is also obligated to pay other customary closing fees, arrangement fees, administration fees and letter of credit fees for a credit facility of this size and type.
The Restated Credit Agreement contains customary affirmative and negative covenants, including limitations on the ability of the Company and its subsidiaries to perform the following, subject to certain customary exceptions, qualifications and “baskets”: (i) incur additional debt; (ii) create liens; (iii) engage in mergers, consolidations, certain divisions, liquidations or dissolutions other than in certain permitted instances as described in the Restated Credit Agreement; (iv) substantially change the business conducted by the Company and its subsidiaries; (v) make certain investments, loans, advances, guarantees and acquisitions other than in certain permitted instances as described in the Restated Credit Agreement; (vi) sell assets; (vii) pay dividends or make distributions or other restricted payments if certain conditions in the Restated
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Credit Agreement are not fulfilled; (viii) prepay other indebtedness; (ix) engage in certain transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries to grant liens upon their assets; (xi) amend certain charter documents and material agreements governing subordinated indebtedness; (xii) permit the consolidated total leverage ratio, which is to be determined for each quarter end on a trailing twelve month basis, from exceeding a limit of 3.75 to 1, provided, that, subject to certain terms and conditions set forth in the Restated Credit Agreement, so long as no Event of Default (as defined in the Restated Credit Agreement) exists at such time or would result therefrom, the Company may elect to increase the maximum consolidated total leverage ratio permitted under the Restated Credit Agreement to 4.25:1.00 for a period of four consecutive fiscal quarters in connection with any acquisition permitted under the Restated Credit Agreement for which the aggregate consideration is greater than or equal to $60,000; and (xiii) permit the consolidated fixed charge coverage ratio, which is to be determined for each quarter end on a trailing twelve month basis, to be less than 1.25 to 1.
The Restated Credit Agreement also contains customary events of default, including, but not limited to: (i) failure to pay amounts due under the Restated Credit Agreement; (ii) materially incorrect representations and warranties; (iii) failure to comply with covenants; (iv) change of control; and (v) default under other indebtedness aggregating at least $3,000.
The obligations of each Loan Party under the Restated Credit Agreement are guaranteed by each other Loan Party. All obligations under the Restated Credit Agreement, and the guarantees of those obligations (as well as banking services obligations and certain swap agreements), are secured by pledges and liens on 100% of the equity interests of domestic subsidiaries, either 100% or 65% of the equity interests of certain foreign subsidiaries, and the accounts receivable, inventory, intellectual property and certain real property or other assets of the Loan Parties pursuant to (i) a Pledge and Security Agreement, dated as of May 3, 2019, by and among certain of the Loan Parties and the Administrative Agent (as amended from time to time prior to the Effective Date, the “PSA”), (ii) a General Security Deed, dated as of August 30, 2021, by and among certain of the Loan Parties and the Administrative Agent (the “Oscar GSD”), (iii) a General Security Deed, dated as of January 31, 2022, by and among certain of the Loan Parties and the Administrative Agent (the “Simpson GSD”) or (iv) a mortgage or other applicable security agreement or instrument. Each of the PSA, the Oscar GSD and the Simpson GSD was reaffirmed by the Loan Parties on the Effective Date pursuant to a Reaffirmation Agreement dated as of the Effective Date by and among the Administrative Agent and the Loan Parties (the “Reaffirmation Agreement”) pursuant to which each Loan Party ratified and reaffirmed its obligations to the Lenders in connection with entering into the Restated Credit Agreement.
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, 2022.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.