American Outdoor Brands, Inc.: Form 10-Q for the period ended Oct 31, 2023

Overview

The following discussion and analysis of our financial condition and results of operations for the three and six months ended October 31, 2023 and 2022 should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year ended April 30, 2023. This discussion and analysis should also be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include those discussed above in “Statement Regarding Forward-Looking Information” in this Form 10-Q. In addition, this section sets forth key objectives and performance indicators used by us, as well as key industry data tracked by us.

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

Second Quarter Fiscal 2023 Highlights

Our operating results for the three months ended October 31, 2023 included the following:

• Net sales were $57.9 million, an increase of $3.5 million or 6.4%, from the comparable quarter last year.
• Gross margin was 45.7%, a decrease of 200 basis points from the comparable quarter last year.
• Net income was $77,000, or $0.01 per diluted share, compared with a net income of $370,000, or $0.03 per diluted share, for the comparable quarter last year.
• Non-GAAP Adjusted EBITDAS was $5.2 million for the three months ended October 31, 2023 compared with $6.4 million for the three months ended October 31, 2022. See non-GAAP financial measure disclosures below for our reconciliation of non-GAAP Adjusted EBITDAS.

Our operating results for the six months ended October 31, 2023 included the following:

• Net sales were $101.4 million, an increase of $3.3 million, or 3.3%, from the prior year comparable period.
• Gross margin was 45.6%, a decrease of 30 basis points from the prior year comparable period.
• Net loss was $3.9 million, or $0.29 per diluted share, compared with a net loss of $5.3 million, or $0.40 per diluted share, for the prior year comparable period.
• Non-GAAP Adjusted EBITDAS was $6.4 million for the six months ended October 31, 2023 compared with $7.8 million for the six months ended October 31, 2022. See non-GAAP financial measure disclosures below for our reconciliation of non-GAAP Adjusted EBITDAS.

Results of Operations

Net Sales and Gross Profit

The following table sets forth certain information regarding consolidated net sales and gross profit for the three months ended October 31, 2023 and 2022 (dollars in thousands):

The following table sets forth certain information regarding trade channel net sales for the three months ended October 31, 2023 and 2022 (dollars in thousands):

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

The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the three months ended October 31, 2023 and 2022 (dollars in thousands):

The following table sets forth certain information regarding net sales categories for the three months ended October 31, 2023 and 2022 (dollars in thousands):

For the three months ended October 31, 2023, total net sales increased $3.5 million, or 6.4%, from the comparable quarter last year because of an increase in net sales of our outdoor lifestyle products.

Net sales in our e-commerce channel increased $749,000, or 3.3%, from the comparable quarter last year, primarily because of an increase in net sales to the world's largest e-commerce retailer as a result of promotional activity, which primarily related to our hunting and shooting sports products. Our increase in net sales in our e-commerce channel was partially offset by lower net sales of personal protection products in our shooting sports product category and outdoor cooking products in our outdoor lifestyle product category.

Net sales in our traditional channels increased $2.7 million, or 8.7%, from the comparable quarter last year, primarily because of increased net sales in our outdoor lifestyle category for our hunting and rugged outdoor products from additional demand and because we began selling one of our direct-to-consumer only brands at retail during the three months ended October 31, 2023.

New products, which we define as any SKU introduced over the prior two fiscal years, represented 25.3% of net sales for the three months ended October 31, 2023.

Gross margin for the three months ended October 31, 2023 decreased 200 basis points from the comparable quarter last year, primarily because of promotional product discounts.

The following table sets forth certain information regarding consolidated net sales and gross profit for the six months ended October 31, 2023 and 2022 (dollars in thousands):

21

The following table sets forth certain information regarding trade channel net sales for the six months ended October 31, 2023 and 2022 (dollars in thousands):

The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the six months ended October 31, 2023 and 2022 (dollars in thousands):

The following table sets forth certain information regarding net sales categories for the six months ended October 31, 2023 and 2022 (dollars in thousands):

For the six months ended October 31, 2023, total net sales increased $3.3 million, or 3.3%, from the prior year comparable period because of an increase in net sales of our outdoor lifestyle products.

Net sales in our e-commerce channel decreased $1.4 million, or 3.3%, from the prior year comparable period, primarily because of lower net sales to the world's largest e-commerce retailer as a result of reduced demand. In addition, our e-commerce channel decreased because of lower net sales for certain personal protection products in our shooting sports product category and certain outdoor cooking products in our outdoor lifestyle product category. Our decline in net sales in our e-commerce channel was partially offset by higher net sales for certain hunting and shooting products in our outdoor lifestyle product category as a result of additional promotional activity mentioned above.

Net sales in our traditional channels increased $4.7 million, or 8.5%, from the prior year comparable period, primarily because of increased net sales in our outdoor lifestyle category as a result of new hunting and rugged outdoor product introductions. In addition, our traditional channel net sales increased because we began selling one of our direct-to-consumer only brands at retail as mentioned above.

New products, which we define as any SKU introduced over the prior two fiscal years, represented 23.5% of net sales for the six months ended October 31, 2023.

Gross margin for the six months ended October 31, 2023 remained relatively flat from the prior year comparable period.

Operating Expenses

The following table sets forth certain information regarding operating expenses for the three months ended October 31, 2023 and 2022 (dollars in thousands):

22

Research and development expenses increased $118,000 over the comparable quarter last year, primarily from increased depreciation. Selling, marketing, and distribution expenses increased $1.5 million over the comparable quarter last year, primarily because of increased outbound freight costs and higher sales volume related expenses. General and administrative expenses decreased $1.2 million from the comparable quarter last year, primarily because of lower insurance premiums, reduced enterprise resource planning system implementation-related expenses, and lower rent expense as result of the facility consolidations we completed in the prior fiscal year.

The following table sets forth certain information regarding operating expenses for the six months ended October 31, 2023 and 2022 (dollars in thousands):

Research and development expenses were relatively flat with the prior year comparable period. Selling, marketing, and distribution expenses increased $1.8 million over the prior year comparable period, primarily because of increased outbound freight costs and higher sales volume related expenses. General and administrative expenses decreased $2.1 from the prior year comparable period, primarily because of lower legal and advisory fees associated with the completed cooperation agreement with a stockholder that was completed in the prior fiscal year, reduced enterprise resource planning system implementation-related expenses, and lower rent expense as result of the facility consolidations we completed in the prior fiscal year.

Operating Loss

The following table sets forth certain information regarding operating income/(loss) for the three months ended October 31, 2023 and 2022 (dollars in thousands):

Operating loss for the three months ended October 31, 2023 was $22,000, a $112,000 increase from an operating loss of $134,000 for the three months ended October 31, 2022, primarily because of lower operating expenses.

The following table sets forth certain information regarding operating loss for the six months ended October 31, 2023 and 2022 (dollars in thousands):

Operating loss for the six months ended October 31, 2023 was $4.1 million, a $1.6 million decrease from an operating loss of $5.7 million for the six months ended October 31, 2022, primarily because of higher gross profit and lower operating expenses.

Income Taxes

The following table sets forth certain information regarding income tax benefit for the three months ended October 31, 2023 and 2022 (dollars in thousands):

23

We recorded income tax benefit of $40,000 for the three months ended October 31, 2023 compared with income tax benefit of $161,000 for the prior year comparable period because of a higher estimated effective tax rate. The income tax expense recorded for the three months ended October 31, 2023 and 2022 was primarily due to a full valuation allowance recorded against our deferred tax assets.

The following table sets forth certain information regarding income tax expense for the six months ended October 31, 2023 and 2022 (dollars in thousands):

We recorded income tax expense of $15,000 for the six months ended October 31, 2023, compared with income tax expense of $28,000 for the prior year comparable period. The income tax expense recorded during the six months ended October 31, 2023 and 2022 was primarily due to a full valuation allowance recorded against our deferred tax assets.

Net Income/(loss)

The following table sets forth certain information regarding net income and the related per share data for the three months ended October 31, 2023 and 2022 (dollars in thousands, except per share data):

Net income was $77,000, or $0.01 per diluted share, for the three months ended October 31, 2023 compared with net income of $370,000, or $0.03 per share, for the comparable quarter last year, primarily because of higher gross profit.

The following table sets forth certain information regarding net loss and the related per share data for the six months ended October 31, 2023 and 2022 (dollars in thousands, except per share data):

Net loss was $4.0 million, or $0.31 per diluted share, for the six months ended October 31, 2023 compared with net loss of $5.3 million, or $0.40 per share, for the prior year comparable period, primarily because of lower operating expenses and higher gross profit.

Non-GAAP Financial Measure

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

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

The following table sets forth our calculation of non-GAAP Adjusted EBITDAS for the three and six months ended October 31, 2023 and 2022, respectively (dollars in thousands):

(Unaudited)

Liquidity and Capital Resources

We expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; to hire additional employees; to fund growth strategies, including any potential acquisitions; to make payments on any indebtedness we may incur over time; and to repurchase shares of our common stock if we are authorized to do so.

The following table sets forth certain cash flow information for the six months ended October 31, 2023 and 2022 (dollars in thousands):

Operating Activities

On an annual basis, operating activities generally represent the principal source of our cash flow.

Cash used in operating activities was $3.2 million for the six months ended October 31, 2023 compared with cash generated by operating activities of $6.2 million for the six months ended October 31, 2022. Cash used in operating activities for the six months ended October 31, 2023 was primarily impacted by $13.6 million of higher accounts receivable due to timing of customer shipments and $9.4 million of higher inventory as a result of a planned inventory build during the period to prepare for the fall hunting and winter holiday seasons as well as additional purchases for new product introductions that will launch later in the year. We expect that our overall inventory balance will decline by the end of our fiscal year ending April 30, 2024, as compared to our overall inventory balance as of October 31, 2023. Cash used in operations was partially offset by $6.3 million of increased accounts payable due to timing of supplier payments from increased inventory purchases; $3.5 million of increased accrued expenses from higher freight, tariff, and duty expenses for the import of inventory products; and $1.8 million of lower prepaid expenses from lower deposits on inventory and insurance premium costs.

Investing Activities

Cash used in investing activities was $1.6 million lower during the six months ended October 31, 2023 compared with the prior year comparable period, primarily from reduced spending on the development and implementation of our independent information technology infrastructure and enterprise resource planning system that was completed in the prior fiscal year. We expect to spend approximately $6.0 million to $7.0 million of capital expenditures in fiscal 2024, an increase of $1.1 million to $2.1 million over fiscal 2023.

Financing Activities

Cash used in financing activities was $8.8 million for the six months ended October 31, 2023, primarily from $5.0 million to payoff all our borrowings on our revolving line of credit and $3.8 million used to repurchase 425,527 shares of our common stock.

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

We had $8.4 million of cash equivalents on hand as of October 31, 2023 and had $22.0 million in cash and cash equivalents on hand as of April 30, 2023.

Other Matters

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Significant accounting policies are summarized in Note 2 of the Notes to the consolidated and combined financial statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023. The most significant areas involving our judgments and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023, to which there have been no material changes. Actual results could differ from our estimates.

Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements, if any, is discussed in Note 2—Basis of Presentation to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

There were no material changes from the information provided in Quantitative and Qualitative Disclosures about Market Risk in the Form 10-K.

Disclosure Controls and Procedures

As of October 31, 2023, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter ended October 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on June 28, 2023, risk factors that materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed.