UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:June 30, 20182019

 

or

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________ to _________

 

Commission File Number:001-34767

 

CLARUS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware58-1972600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

2084 East 3900 South

Salt Lake City, Utah

 84124
(Address of principal executive offices) (Zip code)

 

(801) 278-5552
(Registrant’s telephone number, including area code)

(801) 278-5552

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨ Non-accelerated filer¨
     
Accelerated filerx Smaller reporting companyx
Emerging growth company¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ActAct.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨  Nox

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $.0001 per shareCLARNASDAQ Global Select Market

As of August 1, 2018,July 31, 2019, there were 29,634,02829,993,493 shares of common stock, par value $0.0001, outstanding.

 

 

 

 

 

INDEX

 

CLARUS CORPORATION

 

  Page
PART IFINANCIAL INFORMATION
   
Item 1.Financial Statements (Unaudited) 
   
 Condensed Consolidated Balance Sheets – June 30, 20182019 and December 31, 201720183
   
 Condensed Consolidated Statements of Comprehensive Loss – Three months ended June 30, 20182019 and 201720184
   
 Condensed Consolidated Statements of Comprehensive Income (Loss) – Six months ended June 30, 20182019 and 201720185
   
 Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 20182019 and 201720186
Condensed Consolidated Statements of Stockholders’ Equity – Six months ended June 30, 2019 and 20187
   
 Notes to Condensed Consolidated Financial Statements – June 30, 201878
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations2322
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk3230
   
Item 4.Controls and Procedures3330
   
PART IIOTHER INFORMATION 
   
Item 1.Legal Proceedings3431
   
Item 1A.Risk Factors3431
   
Item 6.Exhibits3632
   
Signature Page3733

 

2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CLARUS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

         

 June 30, 2018  December 31, 2017  June 30, 2019  December 31, 2018 
Assets                
Current assets                
Cash $2,571  $1,856  $1,969  $2,486 
Accounts receivable, less allowance for doubtful accounts of $451 and $382, respectively  32,461   35,817 
Accounts receivable, less allowance for doubtful accounts of $620 and $392, respectively  32,545   35,943 
Inventories  61,157   58,138   73,024   64,933 
Prepaid and other current assets  4,676   3,633   4,475   5,115 
Income tax receivable  43   -   400   24 
Total current assets  100,908   99,444   112,413   108,501 
                
Property and equipment, net  23,703   24,345   23,007   23,401 
Other intangible assets, net  21,232   23,238   17,623   19,416 
Indefinite lived intangible assets  41,751   41,843   41,674   41,694 
Goodwill  18,090   17,745   18,090   18,090 
Other long-term assets  1,572   834   3,897   2,026 
Total assets $207,256  $207,449  $216,704  $213,128 
                
Liabilities and Stockholders' Equity                
Current liabilities                
Accounts payable and accrued liabilities $22,908  $19,456  $28,373  $21,489 
Income tax payable  164   328   -   210 
Current portion of long-term debt  40   -   -   41 
Total current liabilities  23,112   19,784   28,373   21,740 
                
Long-term debt  16,064   20,842   16,650   22,105 
Deferred income taxes  4,011   3,666   2,729   2,919 
Other long-term liabilities  101   175   1,012   159 
Total liabilities  43,288   44,467   48,764   46,923 
                
Stockholders' Equity                
Preferred stock, $.0001 par value; 5,000 shares authorized; none issued  -   -   -   - 
Common stock, $.0001 par value; 100,000 shares authorized; 32,917 and 32,917 issued and 30,041 and 30,041 outstanding, respectively  3   3 
Common stock, $.0001 par value; 100,000 shares authorized; 33,595 and 33,244 issued and 29,983 and 29,748 outstanding, respectively  3   3 
Additional paid in capital  486,440   485,285   490,776   488,404 
Accumulated deficit  (310,764)  (310,390)  (302,978)  (304,577)
Treasury stock, at cost  (12,632)  (12,415)  (19,607)  (18,102)
Accumulated other comprehensive income  921   499 
Accumulated other comprehensive (loss) income  (254)  477 
Total stockholders' equity  163,968   162,982   167,940   166,205 
Total liabilities and stockholders' equity $207,256  $207,449  $216,704  $213,128 

 

See accompanying notes to condensed consolidated financial statements.                

3

CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

  Three Months Ended 
  June 30, 2019  June 30, 2018 
Sales        
Domestic sales $28,422  $27,845 
International sales  18,572   18,036 
Total sales  46,994   45,881 
         
Cost of goods sold  31,002   30,021 
Gross profit  15,992   15,860 
         
Operating expenses        
Selling, general and administrative  17,192   15,791 
Restructuring charge  -   24 
Transaction costs  41   168 
         
Total operating expenses  17,233   15,983 
         
Operating loss  (1,241)  (123)
         
Other (expense) income        
Interest expense  (315)  (463)
Other, net  183   (192)
         
Total other expense, net  (132)  (655)
         
Loss before income tax  (1,373)  (778)
Income tax benefit  (679)  (1)
Net loss  (694)  (777)
         
Other comprehensive (loss) income, net of tax:        
Foreign currency translation adjustment  230   (1,117)
Unrealized (loss) income on hedging activities  (499)  825 
Other comprehensive loss  (269)  (292)
Comprehensive loss $(963) $(1,069)
         
Net loss per share:        
Basic $(0.02) $(0.03)
Diluted  (0.02)  (0.03)
         
Weighted average shares outstanding:        
Basic  29,898   30,041 
Diluted  29,898   30,041 

See accompanying notes to condensed consolidated financial statements.                

4

CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

  Six Months Ended 
  June 30, 2019  June 30, 2018 
Sales        
Domestic sales $59,011  $53,499 
International sales  49,201   45,649 
Total sales  108,212   99,148 
         
Cost of goods sold  70,164   65,461 
Gross profit  38,048   33,687 
         
Operating expenses        
Selling, general and administrative  34,772   32,919 
Restructuring charge  13   64 
Transaction costs  87   333 
         
Total operating expenses  34,872   33,316 
         
Operating income  3,176   371 
         
Other (expense) income        
Interest expense  (625)  (717)
Other, net  160   (71)
         
Total other expense, net  (465)  (788)
         
Income (loss) before income tax  2,711   (417)
Income tax benefit  (382)  (43)
Net income (loss)  3,093   (374)
         
Other comprehensive (loss) income, net of tax:        
Foreign currency translation adjustment  (143)  (492)
Unrealized (loss) income on hedging activities  (588)  914 
Other comprehensive (loss) income  (731)  422 
Comprehensive income $2,362  $48 
         
Net income (loss) per share:        
Basic $0.10  $(0.01)
Diluted  0.10   (0.01)
         
Weighted average shares outstanding:        
Basic  29,824   30,041 
Diluted  30,961   30,041 

See accompanying notes to condensed consolidated financial statements.                

5

CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

  Six Months Ended 
  June 30, 2019  June 30, 2018 
Cash Flows From Operating Activities:        
Net income (loss) $3,093  $(374)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation of property and equipment  2,242   2,208 
Amortization of intangible assets  1,777   1,937 
Amortization of debt issuance costs  132   307 
Loss (gain) on disposition of property and equipment  49   (2)
Noncash lease expense  333   - 
Loss from removal of accumulated translation adjustment  -   41 
Stock-based compensation  1,568   1,155 
Deferred income taxes  50   (92)
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable  3,291   3,221 
Inventories  (8,150)  (3,468)
Prepaid and other assets  (105)  275 
Accounts payable and accrued liabilities  5,973   2,903 
Income taxes  (581)  (196)
Net cash provided by operating activities  9,672   7,915 
         
Cash Flows From Investing Activities:        
Purchase of business, net of cash received  -   (345)
Proceeds from disposition of property and equipment  1   2 
Purchase of property and equipment  (1,994)  (1,518)
Net cash used in investing activities  (1,993)  (1,861)
         
Cash Flows From Financing Activities:        
Proceeds from revolving credit facilities  75,854   54,392 
Repayments on revolving credit facilities  (81,266)  (59,234)
Repayments of capital leases  (31)  (19)
Payment of debt issuance costs  (557)  (494)
Purchase of treasury stock  (1,505)  (22)
Proceeds from exercise of stock options  804   - 
Cash dividends paid  (1,494)  - 
Net cash used in financing activities  (8,195)  (5,377)
         
Effect of foreign exchange rates on cash  (1)  38 
         
Change in cash  (517)  715 
Cash, beginning of period  2,486   1,856 
Cash, end of period $1,969  $2,571 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid for income taxes $103  $246 
Cash paid for interest $498  $526 
Supplemental Disclosures of Non-Cash Investing and Financing Activities:        
Property and equipment purchased with accounts payable $180  $98 
Property and equipment acquired through a capital lease $-  $123 
Lease liabilities arising from obtaining right of use assets $1,855  $- 
Unpaid debt issuance costs $-  $500 
Unpaid treasury stock acquisition costs $-  $195 

See accompanying notes to condensed consolidated financial statements.

 

36

 

CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSSTOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except per share amounts)thousands)

 

  Three Months Ended 
  June 30, 2018  June 30, 2017 
       
Sales        
Domestic sales $27,845  $16,996 
International sales  18,036   13,684 
Total sales  45,881   30,680 
         
Cost of goods sold  30,021   21,642 
Gross profit  15,860   9,038 
         
Operating expenses        
Selling, general and administrative  15,791   12,860 
Restructuring charge  24   42 
Transaction costs  168   - 
         
Total operating expenses  15,983   12,902 
         
Operating loss  (123)  (3,864)
         
Other (expense) income        
Interest (expense) income, net  (463)  106 
Other, net  (192)  208 
         
Total other (expense) income, net  (655)  314 
         
Loss before income tax  (778)  (3,550)
Income tax (benefit) expense  (1)  104 
Net loss  (777)  (3,654)
         
Other comprehensive (loss) income, net of tax:        
Foreign currency translation adjustment  (1,117)  1,357 
Unrealized income (loss) on hedging activities  825   (1,051)
Other comprehensive (loss) income  (292)  306 
Comprehensive loss $(1,069) $(3,348)
         
Net loss per share:        
Basic $(0.03) $(0.12)
Diluted  (0.03)  (0.12)
         
Weighted average shares outstanding:        
Basic  30,041   30,013 
Diluted  30,041   30,013 
                    Accumulated    
        Additional           Other  Total 
  Common Stock  Paid-In  Accumulated  Treasury Stock  Comprehensive  Stockholders' 
  Shares  Amount  Capital  Deficit  Shares  Amount  Income (Loss)  Equity 
Balance, December 31, 2017  32,917  $     3  $485,285  $(310,390)  (2,875) $(12,415) $ 499  $162,982 
Net income  -   -   -   403   -   -   -   403 
Other comprehensive income  -   -   -   -   -   -   714   714 
Stock-based compensation expense  -   -   499   -   -   -   -   499 
Balance, March 31, 2018  32,917  $3  $485,784  $(309,987)  (2,875) $(12,415) $1,213  $164,598 
Net loss  -   -   -   (777)  -   -   -   (777)
Other comprehensive loss  -   -   -   -   -   -   (292)  (292)
Purchase of treasury stock  -   -   -   -   -   (217)  -   (217)
Stock-based compensation expense  -   -   656   -   -   -   -   656 
Balance, June 30, 2018  32,917  $3  $486,440  $(310,764)  (2,875) $(12,632) $921  $163,968 

                    Accumulated    
        Additional           Other  Total 
  Common Stock  Paid-In  Accumulated  Treasury Stock  Comprehensive  Stockholders' 
  Shares  Amount  Capital  Deficit  Shares  Amount  Income (Loss)  Equity 
Balance, December 31, 2018  33,244  $     3  $488,404  $(304,577)  (3,496) $(18,102) $477  $166,205 
Net income  -   -   -   3,787   -   -   -   3,787 
Other comprehensive loss  -   -   -   -   -   -   (462)  (462)
Cash dividends ($0.025 per share)  -   -   -   (746)  -   -   -   (746)
Stock-based compensation expense  -   -   785   -   -   -   -   785 
Balance, March 31, 2019  33,244  $3  $489,189  $(301,536)  (3,496) $(18,102) $15  $169,569 
Net loss  -   -   -   (694)  -   -   -   (694)
Other comprehensive loss  -   -   -   -   -   -   (269)  (269)
Cash dividends ($0.025 per share)  -   -   -   (748)  -   -   -   (748)
Purchase of treasury stock  -   -   -   -   (116)  (1,505)  -   (1,505)
Stock-based compensation expense  -   -   783   -   -   -   -   783 
Proceeds from exercise of options  351   -   804   -   -   -   -   804 
Balance, June 30, 2019  33,595  $3  $490,776  $(302,978)  (3,612) $(19,607) $(254) $167,940 

 

See accompanying notes to condensed consolidated financial statements.

 

47

 

 

CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share amounts)

  Six Months Ended 
  June 30, 2018  June 30, 2017 
       
Sales        
Domestic sales $53,499  $38,333 
International sales  45,649   33,903 
Total sales  99,148   72,236 
         
Cost of goods sold  65,461   50,898 
Gross profit  33,687   21,338 
         
Operating expenses        
Selling, general and administrative  32,919   25,395 
Restructuring charge  64   83 
Transaction costs  333   - 
         
Total operating expenses  33,316   25,478 
         
Operating income (loss)  371   (4,140)
         
Other (expense) income        
Interest expense, net  (717)  (877)
Other, net  (71)  222 
         
Total other expense, net  (788)  (655)
         
Loss before income tax  (417)  (4,795)
Income tax (benefit) expense  (43)  314 
Net loss  (374)  (5,109)
         
Other comprehensive income (loss), net of tax:        
Foreign currency translation adjustment  (492)  1,621 
Unrealized income (loss) on hedging activities  914   (1,378)
Other comprehensive income  422   243 
Comprehensive income (loss) $48  $(4,866)
         
Net loss per share:        
Basic $(0.01) $(0.17)
Diluted  (0.01)  (0.17)
         
Weighted average shares outstanding:        
Basic  30,041   30,014 
Diluted  30,041   30,014 

See accompanying notes to condensed consolidated financial statements.

5

CLARUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

  Six Months Ended 
  June 30, 2018  June 30, 2017 
Cash Flows From Operating Activities:        
Net loss $(374) $(5,109)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation of property and equipment  2,208   1,105 
Amortization of intangible assets  1,937   535 
Accretion of notes payable  -   833 
Amortization of debt issuance costs  307   - 
(Gain) loss on disposition of assets  (2)  70 
Loss (gain) from removal of accumulated translation adjustment  41   (81)
Stock-based compensation  1,155   342 
Deferred income taxes  (92)  178 
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable  3,221   1,058 
Inventories  (3,468)  (8,143)
Prepaid and other assets  275   (30)
Accounts payable and accrued liabilities  2,903   2,754 
Income taxes  (196)  (758)
Other  -   (373)
Net cash provided by (used in) operating activities  7,915   (7,619)
         
Cash Flows From Investing Activities:        
Purchase of business, net of cash received  (345)  - 
Proceeds from disposition of property and equipment  2   52 
Purchase of property and equipment  (1,518)  (1,148)
Net cash used in investing activities  (1,861)  (1,096)
         
Cash Flows From Financing Activities:        
Proceeds from revolving credit facilities  54,392   - 
Repayments on revolving credit facilities  (59,234)  - 
Repayments of long-term debt and capital leases  (19)  (22,716)
Payment of debt issuance costs  (494)  - 
Purchase of treasury stock  (22)  (17)
Net cash used in financing activities  (5,377)  (22,733)
         
Effect of foreign exchange rates on cash  38   143 
         
Change in cash  715   (31,305)
Cash, beginning of period  1,856   94,738 
Cash, end of period $2,571  $63,433 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid for income taxes $246  $890 
Cash paid for interest $526  $229 
Supplemental Disclosures of Non-Cash Investing and Financing Activities:        
Property and equipment purchased with accounts payable $98  $84 
Property and equipment acquired through a capital lease $123  $- 
Unpaid debt issuance costs $500  $- 
Unpaid treasury stock acquisition costs $195  $- 

See accompanying notes to condensed consolidated financial statements.

6

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except per share amounts)

 

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated financial statements of Clarus Corporation and subsidiaries (which may be referred to as the “Company,” “Clarus,” “we,” “us” or “our”) as of June 30, 20182019 and December 31, 20172018 and for the three and six months ended June 30, 20182019 and 2017,2018, have been prepared in accordance with U.S.accounting principles generally accepted accounting principlesin the United States of America (“GAAP”), instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments, except otherwise disclosed) necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. The results of the three and six months ended June 30, 20182019 are not necessarily indicative of the results to be obtained for the year ending December 31, 2018.2019. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, filed with the Securities and Exchange Commission (the “SEC”).

 

Clarus, incorporated in Delaware in 1991, acquired Black Diamond Equipment, Ltd. (which may be referred to as “Black Diamond Equipment”) and Gregory Mountain Products, LLC (which may be referred to as “Gregory Mountain Products” or “Gregory”) in May 2010 and changed its name to Black Diamond, Inc. in January 2011. In July 2012, we acquired POC Sweden AB and its subsidiaries (collectively, “POC”) and in October 2012, we acquired PIEPS Holding GmbH and its subsidiaries (collectively, “PIEPS”).

 

On July 23, 2014, the Company completed the sale of certain assets to Samsonite LLC comprising Gregory Mountain Products’ business. On October 7, 2015, the Company sold its equity interests in POC.

 

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 May 8,August 6, 2018, the Company announced that its Board of Directors approved the initiation of a “modified Dutch auction” tender offer for Clarus’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 July 26, 2019, the Company announced that its Board of Directors approved the payment on August 16, 2019 of the Quarterly Cash Dividend to the record holders of shares of the Company’s common stock as well asof the preferred share purchase rights associated with such shares (collectively, the “Shares”). close of business on August 5, 2019.

On July 11,November 6, 2018, the tender offer expired, following whichCompany acquired the Company announced it would accept 417,237 Shares for purchase at a priceassets of $8.00 per Share, for an aggregate cost of approximately $3,338, excluding fees and expenses.SKINourishment, Inc. (“SKINourishment”).

 

Nature of Business

 

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 substantial net operating tax loss carryforwards thatwhich it is seeking to redeploy to maximize shareholder value in a diverse array of businesses.value. Clarus’ primary business is as a leading developer, manufacturer and distributor of outdoor equipment and lifestyle products focused on the climb, ski, mountain, sport and sport categories.skincare markets. The Company’s products are principally sold under the Black Diamond®, Sierra®, PIEPS® and PIEPS®SKINourishment® brand names through specialty and online retailers, distributors and original equipment manufacturers throughout the U.S. and internationally.

 

Through our Black Diamond, PIEPS, and PIEPSSKINourishment brands, we offer a broad range of products including: high performance activity-based apparel (such as jackets, shells, insulation, midlayers, pants and bibs)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; tents; trekking poles; headlamps and lanterns; and gloves and mittens.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 performancehigh-performance bullets and ammunition for both rifles and pistols that are used for precision target shooting, hunting and military and law enforcement purposes.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant estimates relate to purchase price allocation, excess or obsolete inventory, and valuation of deferred tax assets, and valuation of goodwill, long-lived assets and other intangible assets. 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.

 

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CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

Significant Accounting Policies

Revenue Recognition

On January 1, 2018, the Company adopted new guidance on revenue from customers using the modified retrospective method applied to revenues that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with Accounting Standards Codification (“ASC”) Topic 605,Revenue Recognition.

There was no cumulative effect adjustment recorded to opening retained earnings as of January 1, 2018, upon adoption of ASC Topic 606,Revenue from Contracts with Customers. However, the new revenue standard provides new guidance that resulted in immaterial reclassifications between Prepaid and other current assets, Sales, Cost of goods sold, and Accounts payable and accrued liabilities associated with accounting for revenue with a right of return. The impact of the reclassifications to revenues and expenses for the three and six months ended June 30, 2018, was also immaterial as a result of applying ASC Topic 606. We do not expect an impact to our net income on an ongoing basis as a result of the adoption of the new standard.

The Company recognizes revenue when a contract exists with a customer that specifies the goods and services to be provided at an agreed upon sales price and when the performance obligation is satisfied by transferring the goods or service to the customer. The performance obligation is considered complete when products are shipped or delivered to the customer depending on the terms of the contract. Sales are made on normal and customary short- term credit terms or upon delivery of point of sale transactions.

The Company enters into contractual arrangement with customers in the form of individual customer orders which specify the goods, quantity, pricing, and associated order terms. The Company does not have long-term contracts that are satisfied over time. Due to the nature of the contracts, no significant judgment exists in relation to the identification of the customer contract, satisfaction of the performance obligation, or transaction price. The Company expenses incremental costs of obtaining a contract due to the short term nature of the contracts.

The Company’s contract terms or historical business practices can give rise to variable consideration such as term discounts and customer cooperative payments. We estimate the expected term discounts based on an analysis of historical experience and record cash discounts as a reduction to revenue. Through cooperative advertising programs, the Company reimburses its wholesale customers for some of their costs of advertising the Company’s products. The Company records such costs as a reduction of revenue, where the fair value cannot be reasonably estimated or where costs exceed the fair value of the services.

At the time of revenue recognition, we also provide for estimated sales returns and miscellaneous claims from customers as reductions to revenues. The estimates are based on historical rates of product returns and claims. The Company accrues for such estimated returns and claims with an estimated accrual and associated reduction of revenue. Additionally, the Company records inventory that it expects to be returned as an other current asset, with a corresponding reduction of cost of goods sold. Such balances as of June 30, 2018 and January 1, 2018 are immaterial. The Company also offers assurance-type warranties relating to its products sold to end customers that are accounted for under ASC Topic 460,Guarantees.

Charges for shipping and handling fees billed to customers are included in net sales and the corresponding shipping and handling expenses are included in Cost of goods sold in the accompanying consolidated statements of comprehensive income (loss).

Sales commissions are expensed as incurred. These costs are recorded in Selling, general and administrative. Taxes collected from customers and remitted to government authorities are reported on the net basis and are excluded from sales.

The Company has a wide variety of technical outdoor equipment and lifestyle products focused on the climb, ski, mountain, and sport categories that are sold to a variety of customers in multiple end markets. While there are multiple products sold, the nature of products are similar in terms of the nature of the revenue recognition policies. See Note 15 -Segment Information, for disaggregated revenue by segment.

Contract liabilities are recorded as a component of accounts payable and accrued liabilities when customers remit contractual cash payments in advance of us satisfying performance obligations which are satisfied at a future point of time. Contract liabilities totaled $57 and $360 at June 30, 2018 and January 1, 2018, respectively. Contract liabilities are derecognized when the performance obligation is satisfied. Revenue recognized from satisfaction of performance obligations relating to the advanced payments during the three and six months ended June 30, 2018 totaled $85 and $376, respectively.

8

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

The accounts receivable trade balance related to customers totaled $32,823, less allowance of $451, and $35,940, less allowance of $382, as of June 30, 2018 and January 1, 2018, respectively.

Accounting Pronouncements adopted during 2018

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18,Statement of Cash Flows (Topic 230) Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years beginning January 1, 2018, and interim periods within those fiscal years. The amendments in this update are required to be applied using a retrospective transition method to each period presented. Accordingly, the Company adopted this ASU on January 1, 2018 and determined that the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15,Classification of Certain Cash Receipts and Cash Payments, which clarifies the treatment of several cash flow categories. In addition, ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 with early adoption permitted. Accordingly, the Company adopted this ASU on January 1, 2018 and determined that the adoption of this guidance did not impact the Company’s consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting, which clarifies that an entity should account for the effects of a modification unless the fair value, vesting terms and classification as liability or equity of the modified and original awards do not change on the modification date. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments in this update are applied using a prospective transition method. Accordingly, the Company adopted this ASU on January 1, 2018 and determined that the adoption of this guidance did not impact the Company’s consolidated financial statements and related disclosures.

In March 2018, the FASB issued ASU 2018-5Income Tax (Topic 740) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118which adds various paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118 (“SAB 118”). This guidance provides for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law and establishes a measurement period that should not extend beyond one year from the Tax Act enactment date (December 22, 2017) to obtain the appropriate documentation and complete the accounting under ASC Topic 740 for certain income tax effects of the Tax Act which were incomplete at December 31, 2017. This ASU became effective when issued in March 2018. The Company believes that all material adjustments have been identified and recorded relating to the Tax Act in 2017. Accordingly, the Company believes that adoption of this guidance will not have a material impact on the Company’s consolidated financial statements and related disclosures.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02,Leases, which revises the accounting related to lessor and lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset (“ROU”) for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The provisions of ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements with certain practical expedients available. Early adoption is permitted. Since the effective date will not be until January 1, 2019, there is no immediate impact on the financial statements. Leases previously defined as capital leases will continue to be defined as a capital lease with no material changes to the accounting methodology. The Company currently maintains two capital leases. The Company is performing an assessment of its leases and has begun preparations for implementation and restrospective application to the earliest reporting period. Under the new guidance, leases previously defined as operating leases will be defined as financing leases and capitalized if the term is greater than one year. As a result, financing leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (i.e. principal and interest). As such, the Company expects the new guidance will materially impact the asset and liability balances of the Company’s consolidated financial statements and related disclosures at the time of adoption. The majority of our current operating leases have been negotiated to expire after the adoption date. Consequently, for the leases with terms that go beyond the adoption date, the amounts we expect to recognize as additional liabilities and corresponding ROU assets based upon the present value of the remaining rental payments should approximate $2,400.

9

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

Significant Accounting Policies

 

Lease Accounting

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842,Leases,and elected the prospective method which was applied to all leases in effect as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be presented in accordance with ASC Topic 840,Leases.

Under the new guidance, lessees are required to recognize a lease liability and a right-of-use (“ROU”) asset for all leases with terms greater than 12 months. Leases are now classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Classification is based upon the underlying asset’s existence, nature and timing of ownership transfer in the related lease. Leases previously defined as operating leases record lease expense based upon the related ROU asset amortization and lease liability interest expense using the interest method over the life of the lease. Leases previously defined as capital leases are now classified as a finance lease with no material changes to the accounting methodology.

ASC 842 provides new guidance that resulted in recording the present value of ROU assets and related lease liabilities for the Company’s outstanding operating leases over the remaining lease term at January 1, 2019 totaling $1,516.

Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists.  Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease.  These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate.  Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Variable lease payments are generally expensed as incurred and include certain nonlease components, such as common area maintenance and other services provided by the lessor, and other charges such as utilities, insurance and property taxes included in the lease.  Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. Nonlease components are excluded from the ROU asset and lease liability present value computations. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Certain of the leases contain extension options of one to five years. At January 1, 2019, the Company is uncertain as to whether the extension options will be executed. Accordingly, no extension options were considered in the present value computations of the ROU assets or related lease liabilities.

The Company elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019, whereby these contracts were not reassessed or reclassified from their previous assessments as of December 31, 2018. We also elected certain other practical expedients in transition, including not reassessing existing land easements as lease contracts. The Company has also elected to not record the ROU assets and related liabilities for outstanding leases as of January 1, 2019 with a remaining term of 12 months or less. In these cases, the Company recognizes a lease payment as an expense on a straight-line basis. See Note 14. Leases for the financial position impact and additional disclosures.

Accounting Pronouncements adopted during 2019

On January 2017,1, 2019, the FASB issued ASUCompany early adopted Accounting Standards Update (“ASU”) 2017-04,Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. as permitted. The standard simplifies the accounting for goodwill impairment by requiring a goodwill impairment to be measured using a single step impairment model, whereby the impairment equals the difference between the carrying amount and the fair value of the specified reporting units in their entirety. This eliminates the second step of the current impairment model that requires companies to first estimate the fair value of all assets in a reporting unit and measure impairments based on those fair values and a residual measurement approach. It also specifies that any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We will adopt this standard no later than the effective date of January 1, 2020This ASU was adopted on a prospective basis. Thebasis with no impact ofto the new standard will be dependent on the specific facts and circumstances of future individual impairments, if any.Company’s consolidated financial statements.

 

In August 2017,

9

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

On January 1, 2019, the FASB issuedCompany adopted ASU 2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU was adopted on a prospective basis. This standard enables entities to better portray the economics of their risk management activities in the financial statements and enhances the transparency and understandability of hedge results through improved disclosures. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  Early application is permitted, and we intend to adopt the new guidance in the first quarter of 2019. The Company is still evaluating the impact of the adoption and implementation of this standard on itsguidance did not impact the Company’s consolidated financial statements.statements and related disclosures.

 

In February 2018,On January 1, 2019, the FASB issuedCompany adopted ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Incomewhich allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. We intend to adopt the new guidance in the first quarter of 2019. The Company does not believe the adoption and implementationAdoption of this standard will have a significantASU did not impact the beginning retained earnings on its consolidationJanuary 1, 2019.The adoption of this guidance did not impact the Company’s consolidated financial statements.statements and related disclosures.

 

NOTE 2. ACQUISITION

On August 21, 2017, the Company, through Everest/Sapphire Acquisition, LLC (“Everest/Sapphire”), a Delaware limited liability company and wholly owned subsidiary of Clarus, acquired 100% of the outstanding membership interests of Sierra, a manufacturer of a wide range of bullets primarily for both rifles and pistols, pursuant to the terms of the purchase and sale agreement dated August 21, 2017 (the “Purchase Agreement”), by and among Everest/Sapphire, Sierra, BHH Management, Inc., a California corporation (“BHH”), Lumber Management, Inc., a Delaware corporation (“LMI” and, together with BHH, the “Sellers”), and BHH, in its capacity as the representative of Sellers. Under the terms of the Purchase Agreement, Everest/Sapphire acquired Sierra for an aggregate purchase price of $79,000, plus or minus a working capital adjustment, in accordance with and subject to the terms and conditions set forth in the Purchase Agreement. During the three months ended June 30, 2018, the Company finalized the working capital adjustment and adjusted the recorded purchase consideration and goodwill by $345.

Pro Forma Results

The following unaudited pro forma results of operations for the three and six months ended June 30, 2017 give pro forma effect as if the acquisition and borrowings used to finance the acquisition had occurred on January 1, 2016, after giving effect to certain adjustments including the amortization of intangible assets, depreciation of fixed assets, the Sellers’ management fees, interest expense and taxes and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the date of purchase.

  Three Months Ended  Six Months Ended 
  June 30, 2017  June 30, 2017 
       
Sales $38,977  $90,014 
Net loss $(2,222) $(1,411)
Net loss per share - basic $(0.07) $(0.05)
Net loss per share - diluted $(0.07) $(0.05)

10

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2016. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.

NOTE 3. INVENTORIES

 

Inventories, as of June 30, 20182019 and December 31, 2017,2018, were as follows:

 

 June 30, 2018  December 31, 2017 
      June 30, 2019  December 31, 2018 
Finished goods $46,736  $46,729  $57,856  $51,626 
Work-in-process  6,245   5,194   7,696   6,221 
Raw materials and supplies  8,176   6,215   7,472   7,086 
 $61,157  $58,138  $73,024  $64,933 

 

NOTE 4.3. PROPERTY AND EQUIPMENT

 

Property and equipment, net as of June 30, 20182019 and December 31, 2017,2018, were as follows:

 

 June 30, 2018  December 31, 2017 
      June 30, 2019  December 31, 2018 
Land $3,160  $3,160  $3,160  $3,160 
Building and improvements  6,805   6,800   6,939   6,870 
Furniture and fixtures  4,284   3,822   4,736   4,376 
Computer hardware and software  5,095   4,897   4,996   4,863 
Machinery and equipment  20,610   19,764   21,301   21,004 
Construction in progress  731   721   1,626   1,761 
  40,685   39,164   42,758   42,034 
Less accumulated depreciation  (16,982)  (14,819)  (19,751)  (18,633)
 $23,703  $24,345  $23,007  $23,401 

10

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

NOTE 5.4. OTHER INTANGIBLE ASSETS

 

Goodwill

 

There was an increasewere no changes in the balances in goodwill duringfrom the six months ended June 30, 2018 from $17,745 to $18,090, due to the finalization of the working capital adjustment related to the Sierra purchase.prior period. The following table summarizes the changesbalances in goodwill by segment:

 

  Black Diamond  Sierra  Total 
          
Balance at December 31, 2017 $-  $17,745  $17,745 
             
Increase due to working capital adjustment  -   345   345 
             
Balance at June 30, 2018 $-  $18,090  $18,090 

11

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

  Black Diamond  Sierra  Total 
Balance at December 31, 2018 $     -  $18,090  $18,090 
             
Balance at June 30, 2019 $-  $18,090  $18,090 

 

Indefinite Lived Intangible Assets

 

The Company’s indefinite lived intangible assets consist of certain tradenames and trademarks that provide Black Diamond Equipment, PIEPS and Sierra with the exclusive and perpetual rights to manufacture and sell their respective products. Tradenames and trademarks are not amortized, but reviewed annually for impairment or upon the existence of a triggering event. There was a decrease in tradenames and trademarks during the six months ended June 30, 2018 due to the impact of foreign currency exchange rates. The following table summarizes the changes in indefinite lived intangible assets:

 

Balance at December 31, 2017 $41,843 
     
Impact of foreign currency exchange rates  (92)
     
Balance at June 30, 2018 $41,751 
Balance at December 31, 2018 $41,694 
     
Impact of foreign currency exchange rates  (20)
     
Balance at June 30, 2019 $41,674 

 

Other Intangible Assets, net

 

The Company’s other intangible assets, such as certain customer lists and relationships, product technologies, tradenames, trademarks and core technologies, are amortizable over their estimated useful lives. There was a decrease in gross other intangible assets subject to amortization during the six months ended June 30, 2018 due to the impact of foreign currency exchange rates. The following table summarizes the changes in gross other intangible assets:

 

Gross balance at December 31, 2017 $33,062 
     
Impact of foreign currency exchange rates  (133)
     
Gross balance at June 30, 2018 $32,929 
Gross balance at December 31, 2018 $33,010 
     
Impact of foreign currency exchange rates  (29)
     
Gross balance at June 30, 2019 $32,981 

 

Other intangible assets, net of amortization as of June 30, 20182019 and December 31, 2017,2018, were as follows:

 

  June 30, 2018  December 31, 2017 
       
Customer lists and relationships $26,092  $26,166 
Product technologies  4,790   4,849 
Tradename / trademark  1,100   1,100 
Core technologies  947   947 
   32,929   33,062 
Less accumulated amortization  (11,697)  (9,824)
  $21,232  $23,238 

NOTE 6. LONG-TERM DEBT

Long-term debt as of June 30, 2018 and December 31, 2017, was as follows:

  June 30, 2018  December 31, 2017 
       
Revolving credit facility (a) $16,000  $20,842 
Capital lease  104   - 
   16,104   20,842 
Less current portion  (40)  - 
  $16,064  $20,842 
  June 30, 2019  December 31, 2018 
Customer lists and relationships $26,030  $26,047 
Product technologies  4,741   4,753 
Tradename / trademark  1,263   1,263 
Core technologies  947   947 
   32,981   33,010 
Less accumulated amortization  (15,358)  (13,594)
  $17,623  $19,416 

 

1211

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

NOTE 5. LONG-TERM DEBT

 

Long-term debt as of June 30, 2019 and December 31, 2018, was as follows:

  June 30, 2019  December 31, 2018 
       
Revolving credit facility (a) $16,650  $22,062 
Other  -   84 
   16,650   22,146 
Less current portion  -   (41)
  $16,650  $22,105 

(a)As of June 30, 2018,2019, the Company had drawn $16,000$16,650 on amountsthe $60,000 revolving commitment that was available under the Credit Agreement (as defined below).credit agreement with JPMorgan Chase Bank, N.A., with a maturity date of May 3, 2024.

 

On June 27, 2018,May 3, 2019, the Company Black Diamond Equipment, Black Diamond Retail, Inc., Sierra (collectivelytogether with the Company, thecertain of its direct and indirect domestic subsidiaries (the “Borrowers”) and the other loan parties party thereto (together with the Borrowers, the “Loan Parties”) entered into an asset based revolvinga Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto. Eachthereto, for borrowings of the Loan Parties, other than the Company, is a direct or indirect subsidiary of the Company.

The Credit Agreement provides forup to $60,000 under a revolving commitment of $75,000credit facility (including up to $5,000 for letters of credit), and matures on June 27, 2022.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 permits the Borrowers, subject to certain requirements, to arrange with lenders for an aggregate of up to $75,000$50,000 of additional revolving and/or term loan commitments (which(both of which are currently uncommitted), for a potential aggregate revolving commitmentand term loan commitments under the Credit Agreement of up to $150,000. The amount of the revolving commitment available for borrowing at any given time is subject to a borrowing base formula that is based upon the Company’s accounts receivable, inventory and intellectual property.

The obligations of each Loan Party under the Credit Agreement are unconditionally guaranteed by each other Loan Party. All obligations under the Credit Agreement, and the guarantees of those obligations (as well as banking services obligations and certain swap agreements), are secured by the accounts receivable, inventory, intellectual property and certain other assets of the Loan Parties pursuant to the Pledge and Security Agreement, dated June 27, 2018, by and among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative agent.matures on May 3, 2024.

 

The Borrowers may elect to have the revolving and term loans under the Credit Agreement bear interest at either (a)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 “CBFR”alternate base rate borrowings, a rate generally equaland 1.50% to the London Interbank Offered Rate (“LIBOR”) for an interest period of one month, subject to a 0.00% floor, or (b)2.25% per annum, in the case of “Eurodollar” borrowings, a rate generally equal to an adjusted LIBOR for the interest period relevant to such borrowing, subject to a 0.00% floor, plus, in each such case, an applicable rate generally ranging from 1.50% to 2.20% per annum.Eurodollar borrowings. The applicable rate was initially 1.50%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 primarily based upon the achievementlevel of a specified fixed charge coverage ratio, and also based upon the type of assets that generate availability under the borrowing base formula.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 commitment.and term loan commitments. Such commitment fee will range between 0.25%0.15% and 0.375%0.25% per annum, and is also based upon the average percentagelevel of the revolving commitment that is used in each month of the fiscal year.

Company’s consolidated total leverage ratio. The Credit Agreement contains customary affirmative and negative covenants, including limitationsCompany pays interest monthly on any borrowings on the abilityCredit Agreement. As of June 30, 2019, 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, liquidations or dissolutions other than in certain permitted instances as described in the 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 Credit Agreement; (vi) sell assets; (vii) pay dividends or make distributions or other restricted payments if certain conditions in the 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; and (xii) sell, assign, transfer, encumber or license certain intellectual property without the prior written consent of the administrative agent.rate was 4.3055%.

 

On June 27, 2018,May 3, 2019, concurrent with entering into the Credit Agreement, the Company terminated its revolvingCompany’s previous credit agreementfacility with JPMorgan Chase Bank, N.A. (the “Terminated“2018 Credit Agreement”), which provided for a revolving commitment of up to $75,000, was paid in full and promissory note (the “Terminated Promissory Note”) with ZB, N.A. dba Zions First National Bank.  The Terminated Credit Agreement provided a $40,000 revolving credit facility pursuant to the Terminated Promissory Note.terminated. The Company satisfied in full the outstanding balance of $16,199 as of June 27, 2018 throughpaid interest monthly on any borrowings on the 2018 Credit Agreement.Agreement at London Inter-bank Offered Rate (“LIBOR”) plus 1.5% (3.8493% as of December 31, 2018), and an annual commitment fee of 0.25% on the unused portion of the commitment.

13

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

 

NOTE 7.6. DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company’s primary exchange rate risk management objective is to mitigate the uncertainty of anticipated cash flows attributable to changes in foreign currency exchange rates. The Company primarily focuses on mitigating changes in cash flows resulting from sales denominated in currencies other than the U.S. dollar. The Company manages this risk primarily by using currency forward and option contracts. If the anticipated transactions are deemed probable, the resulting relationships are formally designated as cash flow hedges. The Company accounts for these contracts as cash flow hedges and tests effectiveness by determining whether changes in the expected cash flow of the derivative offset, within a range, changes in the expected cash flow of the hedged item.

 

At June 30, 2018,2019, the Company’s derivative contracts had remaining maturities of approximatelyless than one and one-half years or less.years. The counterparty to these transactions had both long-term and short-term investment grade credit ratings. The maximum net exposure of the Company’s credit risk to the counterparty is generally limited to the aggregate unrealized loss of all contracts with that counterparty. Atcounterparty, which is $68 as of June 30, 2018, there was no such exposure to the counterparty.2019. The Company’s exposure of counterparty credit risk is limited to the aggregate unrealized gain of $680 on all contracts atcontracts. At June 30, 2018.2019, there was no such exposure to the counterparty. The Company’s derivative counterparty has strong credit ratings and as a result, the Company does not require collateral to facilitate transactions.

 

12

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

The Company held the following contracts designated as hedged instruments as of June 30, 20182019 and December 31, 2017:2018:

 

 June 30, 2018
 Notional Latest June 30, 2019 
 Amount Maturity Notional Latest 
     Amount  Maturity 
Foreign exchange contracts - Canadian Dollars $10,535  August 2019 $14,954   August 2020 
Foreign exchange contracts - British Pounds £266  September 2018
Foreign exchange contracts - Euros €11,693  August 2019 €20,051   August 2020 

 

 December 31, 2017 December 31, 2018 
 Notional Latest Notional Latest 
 Amount Maturity Amount  Maturity 
    
Foreign exchange contracts - Norwegian Kroner  NOK 2,629  February 2018
Foreign exchange contracts - Canadian Dollars $9,538  February 2019 $6,166   August 2019 
Foreign exchange contracts - British Pounds £1,737  February 2019
Foreign exchange contracts - Euros €15,928  February 2019 €10,710   February 2020 

 

For contracts that qualify as effective hedge instruments, the effective portion of gains and losses resulting from changes in fair value of the instruments are included in accumulated other comprehensive (loss) income and reclassified to sales in the period the underlying hedged transaction is recognized in earnings. Gains (losses) of $(5)$302 and $90$(5) were reclassified to sales during the three months ended June 30, 20182019 and 2017,2018, respectively, and $(330)$583 and $386$(330) were reclassified to sales during the six months ended June 30, 2019 and 2018, and 2017, respectively.

The Company held the following contracts not designated as hedged instruments as of June 30, 2018. There were no derivative contracts not designated as hedged instruments as of December 31, 2017.

June 30, 2018
NotionalLatest
AmountMaturity
Foreign exchange contracts - British Pounds£465February 2019

14

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

 

The following table presents the balance sheet classification and fair value of derivative instruments as of June 30, 20182019 and December 31, 2017:2018:

 

 Classification June 30, 2018  December 31, 2017 
        Classification June 30, 2019  December 31, 2018 
Derivative instruments in asset positions:                    
Forward exchange contracts Prepaid and other current assets $634  $40 
Forward exchange contracts Other long-term assets $56  $6  Prepaid and other current assets $61  $729 
                    
Derivative instruments in liability positions:                    
Forward exchange contracts Accounts payable and accrued liabilities $10  $919  Accounts payable and accrued liabilities $93  $- 
Forward exchange contracts Other long-term liabilities $-  $74  Other long-term liabilities $36  $5 

 

NOTE 8.7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Accumulated other comprehensive income (“AOCI”) primarily consists of foreign currency translation adjustments and changes in our forward foreign exchange contracts. The components of AOCI, net of tax, were as follows:

 

  Foreign Currency
Translation Adjustments		  Unrealized Gains
(Losses) on Cash Flow
Hedges		  Total 
          
Balance as of December 31, 2017 $905  $(406) $499 
Other comprehensive income (loss) before reclassifications  (533)  893   360 
Amounts reclassified from other comprehensive income (loss)  41   21   62 
Net current period other comprehensive income  (492)  914   422 
Balance as of June 30, 2018 $413  $508  $921 
  Foreign Currency
Translation
Adjustments		  Unrealized Gains
(Losses) on Cash
Flow Hedges		  Total 
          
Balance as of December 31, 2018 $  73  $404  $477 
Other comprehensive loss before reclassifications  (143)  (161)  (304)
Amounts reclassified from other comprehensive loss  -   (427)  (427)
Net current period other comprehensive loss  (143)  (588)  (731)
Balance as of June 30, 2019 $(70) $(184) $(254)
             

 

13

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

The effects on net income of amounts reclassified from unrealized gains (losses) on cash flow hedges for foreign exchange contracts and foreign currency translation adjustments for the three and six months ended June 30, 2018,2019, were as follows:

 

  Gains (losses) reclassified from AOCI to the Condensed
Consolidated Statements of Comprehensive Income (Loss)		 
Affected line item in the Condensed Consolidated Statements
of Comprehensive Income (Loss)		 For the Three Months Ended
June 30, 2018		  For the Six Months Ended
June 30, 2018		 
Foreign exchange contracts:        
Sales $(5) $(330)
Less: Income tax expense  (250)  (309)
Amount reclassified, net of tax $245  $(21)
Foreign currency translation adjustments:        
Other, net $(172) $(41)
Total reclassifications from AOCI $73  $(62)

15

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

  Gains reclassified from AOCI to the
Condensed Consolidated Statements of
Comprehensive Income (Loss)		 
Affected line item in the Condensed Consolidated Statements
of Comprehensive Income (Loss)		 For the Three
Months Ended
June 30, 2019		  For the Six
Months Ended
June 30, 2019		 
Foreign exchange contracts:        
Sales $302  $583 
Less: Income tax expense  132   156 
Amount reclassified, net of tax $170  $427 
         
Total reclassifications from AOCI $170  $427 

 

The Company’s policy is to classify reclassifications of cumulative foreign currency translation from AOCI to Other, net.

 

NOTE 9.8. FAIR VALUE MEASUREMENTS

 

We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

 

Level 1- inputs to the valuation methodology are quoted market prices for identical assets or liabilities in active markets.

Level 1 - inputs to the valuation methodology are quoted market prices for identical assets or liabilities in active markets.

 

Level 2

Level 2 - inputs to the valuation methodology include quoted prices in markets that are not active or model inputs that are not active or model inputs that are

observable either directly or indirectly for substantially the full term of the asset or liability.

 

Level 3 - inputs to the valuation methodology are based on prices or valuation techniques that are unobservable.

Level 314- inputs to the valuation methodology are based on prices or valuation techniques that are unobservable.

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

Assets and liabilities measured at fair value on a recurring basis at June 30, 20182019 and December 31, 20172018 were as follows:

 

  June 30, 2018 
  Level 1  Level 2  Level 3  Total 
             
Assets                
Forward exchange contracts $-  $690  $-  $690 
  $-  $690  $-  $690 
                 
Liabilities                
Forward exchange contracts $-  $10  $-  $10 
  $-  $10  $-  $10 

  June 30, 2019 
  Level 1  Level 2  Level 3  Total 
Assets                
Forward exchange contracts $-  $61  $-  $61 
  $-  $61  $-  $61 
                 
Liabilities                
Forward exchange contracts $-  $129  $-  $129 
  $-  $129  $-  $129 
                 

 

 December 31, 2017 
 Level 1  Level 2  Level 3  Total  December 31, 2018 
          Level 1  Level 2  Level 3  Total 
Assets                                
Forward exchange contracts $-  $46  $-  $46  $-  $729  $-  $729 
 $-  $46  $-  $46  $-  $729  $-  $729 
                                
Liabilities                                
Forward exchange contracts $-  $993  $-  $993  $-  $5  $-  $5 
 $-  $993  $-  $993  $-  $5  $-  $5 

 

Derivative financial instruments are recorded at fair value based on current market pricing models. No nonrecurring fair value measurements existed at June 30, 20182019 and December 31, 2017.2018.

  

NOTE 10.9. EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share is computed by dividing earnings (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per share is computed by dividing earnings (loss) by the total of the weighted average number of shares of common stock outstanding during each period, plus the effect of dilutive outstanding stock options and unvested restricted stock grants. Potentially dilutive securities are excluded from the computation of diluted earnings per share if their effect is anti-dilutive to the loss from continuing operations.

 

16

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

The following table is a reconciliation of basic and diluted shares of common stock outstanding used in the calculation of earnings (loss) per share:

 

 Three Months Ended  Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  Three Months Ended  Six Months Ended 
          June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Weighted average shares outstanding - basic  30,041   30,013   30,041   30,014   29,898   30,041   29,824   30,041 
Effect of dilutive stock awards  -   -   -   -   -   -   1,137   - 
Weighted average shares outstanding - diluted  30,041   30,013   30,041   30,014   29,898   30,041   30,961   30,041 
                                
Net loss per share:                
Net (loss) income per share:                
Basic $(0.03) $(0.12) $(0.01) $(0.17) $(0.02) $(0.03) $0.10  $(0.01)
Diluted  (0.03)  (0.12)  (0.01)  (0.17)  (0.02)  (0.03)  0.10   (0.01)

 

For the three months ended June 30, 20182019 and 2017,2018, equity awards of 4,5094,395 and 2,730,4,509, respectively, and for the six months ended June 30, 20182019 and 2017,2018, equity awards of 3,943605 and 2,772,3,943, respectively, were outstanding and anti-dilutive and therefore not included in the calculation of earnings (loss) per share for these periods.

15

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

NOTE 11.10. STOCK-BASED COMPENSATION PLAN

 

Under the Company’s current 2015 Stock Incentive Plan (the “2015 Plan”), the Company’s Board of Directors (the “Board of Directors”) has flexibility to determine the type and amount of awards to be granted to eligible participants, who must be employees, directors, officers or consultants of the Company or its subsidiaries. The 2015 Plan allows for grants of incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation rights, and restricted units. The aggregate number of shares of common stock that may be granted through awards under the 2015 Plan to any employee in any calendar year may not exceed 500 shares. The 2015 Plan will continue in effect until December 2025 unless terminated sooner. 

 

During the six months ended June 30, 2018,2019, the Company issued stock options for an aggregate of 1,538188 shares under the 2015 Plan to directors and employees of the Company. The 1,500Of the 188 options issued, vest in five equal tranches on December 31, 2018, 2019, 2020, 2021 and 2022. The remaining38 options vest in four equal consecutive quarterly tranches from the date of grant. 150 vest in three equal tranches on June 5, 2020, 2021 and 2022.

 

For computing the fair value of the stock-based awards, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Options Granted During the Six Months Ended June 30, 2019

Options Granted During the Six Months Ended June 30, 2018
Number of options 1,538188
Option vesting period 1 - 53 Years
Grant price $6.80 - $7.3513.21
Dividend yield 0.00%0.76%
Expected volatility (a) 41.2%41.0% - 42.5%41.2%
Risk-free interest rate 2.65%1.88% - 2.79%1.93%
Expected life (years) (b) 5.005.31 - 6.506.00
Weighted average fair value $2.774.87 - $3.09$5.13

 

(a)Expected volatility is based upon the Company’s historical volatility.

 

(b)The expected term was determined based upon the underlying terms of the awards and the category and employment history of employee award recipient.

 

Using these assumptions, the fair value of the stock options granted during the six months ended June 30, 20182019 was $4,595,$952, which will be recognized over the vesting period of the options.

 

Market Condition Restricted Shares Granted:

On January 7, 2019, the Company issued and granted to an employee a restricted stock award of 350 restricted shares under the 2015 Plan, that will vest as follows: (A) the stock award will vest and become nonforfeitable if, on or before January 7, 2024, the closing price of the Company’s common stock shall have equaled or exceeded $15.00 per share for twenty consecutive trading days (such 20th day being the “Price Trigger Date”); and (B) once the Price Trigger Date occurs, (i) 117 shares of the Company’s common stock shall vest on each of the first and second anniversary of the Price Trigger Date; and (ii) 116 shares of the Company’s common stock shall vest on the third anniversary of the Price Trigger Date. For computing the fair value of the 350 restricted shares with a market condition, the fair value of each restricted stock award grant has been estimated as of the date of grant using the Monte-Carlo pricing model with the assumptions below.

On January 7, 2019, the Company issued and granted to an employee a restricted stock award of 150 restricted shares under the 2015 Plan, that will vest as follows: (A) the stock award will vest and become nonforfeitable if, on or before January 7, 2024, the closing price of the Company’s common stock shall have equaled or exceeded $15.00 per share for twenty consecutive trading days (such 20th day being the Price Trigger Date); and (B) once the Price Trigger Date occurs, the shares shall equally vest on each of the first, second, third and fourth anniversary of the Price Trigger Date. For computing the fair value of the 150 restricted shares with a market condition, the fair value of each restricted stock award grant has been estimated as of the date of grant using the Monte-Carlo pricing model with the assumptions below.

1716

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

January 7, 2019
Number issued500
Vesting period$15.00 stock price target
Grant price$10.21
Expected volatility42.4%
Risk-free interest rate2.53%
Expected term (years)4.28 - 5.28
Weighted average fair value$7.92

Using these assumptions, the fair value of the market condition restricted stock awards granted on January 7, 2019 was approximately $3,962.

 

The total non-cash stock compensation expense related to restricted stock, stock options and stock awards recorded by the Company for the three months ended June 30, 2019 and 2018 was $783 and 2017 was $656, and $309, respectively, and for the six months ended June 30, 2019 and 2018 was $1,568 and 2017 was $1,155, and $342, respectively. For the three and six months ended June 30, 20182019 and 2017,2018, the majority of stock-based compensation costs were classified as selling, general and administrative expenses.

 

As of June 30, 2018,2019, there were 1,8761,695 unvested stock options and unrecognized compensation cost of $4,949$5,082 related to unvested stock options, as well as 850600 unvested restricted stock awards and unrecognized compensation costs of $826$3,529 related to unvested restricted stock awards.

NOTE 12. RESTRUCTURING

In 2015, the Company initiated restructuring activities in an effort to further realign resources within the organization (“2015 Restructuring Plan”); the Company currently anticipates completing the plan in 2018. During the three months ended June 30, 2018 and 2017, we incurred restructuring charges of $24 and $42, respectively, related to the 2015 Restructuring Plan. During the six months ended June 30, 2018 and 2017, we incurred restructuring charges of $64 and $83, respectively, related to the 2015 Restructuring Plan. We incurred $2,608 of cumulative restructuring charges in connection with the 2015 Restructuring Plan. We estimate that we will incur an immaterial amount of restructuring charges related to the 2015 Restructuring Plan during the remainder of 2018.

The following table summarizes the restructuring charges, payments and the remaining accrual related to employee termination costs and facility exit costs.

  2015 Restructuring Plan 
Balance at December 31, 2017 $93 
Charges to expense:    
Other costs  64 
Total restructuring charges  64 
Cash payments and non-cash charges:    
Cash payments  (63)
Balance at June 30, 2018 $94 

As of June 30, 2018, termination costs and restructuring costs remained in accrued liabilities and are expected to be paid during the remainder of 2018.

 

NOTE 13.11. COMMITMENTS AND CONTINGENCIES

 

The Company is involved in various legal disputes and other legal proceedings that arise from time to time in the ordinary course of business. Based on currently available information, the Company does not believe that it is reasonably possible that the disposition of any of the legal disputes the Company or its subsidiaries is currently involved in will have a material adverse effect upon the Company’s consolidated financial condition, results of operations or cash flows. There is a reasonable possibility of loss from contingencies in excess of the amounts accrued by the Company in the accompanying condensed consolidated balance sheets; however, the actual amounts of such possible losses cannot currently be reasonably estimated by the Company at this time. It is possible that, as additional information becomes available, the impact on the Company could have a different effect.

 

The Company leases office, warehouse and distribution space under non-cancelable operating leases. As leases expire, it can be expected that, in the normal course of business, certain leases will be renewed or replaced. Certain lease agreements include escalating rents over the lease terms. The Company expenses rent on a straight-line basis over the lease term which commences on the date the Company has the right to control the property. The cumulative expense recognized on a straight-line basis in excess of the cumulative payments is included in accounts payable and accrued liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets.

18

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

Total rent expense of the Company for the three months ended June 30, 2018 and 2017 was $194 and $194, respectively, and for the six months ended June 30, 2018 and 2017 was $421 and $397, respectively.

NOTE 14.12. INCOME TAXES

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Cuts and Jobs Act (“Tax Act made broad and complex changes to existing U.S. tax laws that impact the Company.  Most notably, the Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. The Tax Act also provides for a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Repatriation Tax”Act”) and the acceleration of depreciation for certain assets placed in service after September 27, 2017. The Tax Act also establishes prospective changes beginning in 2018 including the move to a modified territorial system, the repeal of the domestic production activity deduction, limitations on the deductibility of certain executive compensation, and other new international tax provisions. For tax years beginning after December 31, 2017, net operating losses generated will have an indefinite carry forward period but will only be able to offset 80% of taxable income each year. Lastly, as. As a result of the Tax Act, the U.S. federal corporate alternative minimum tax ("AMT"rate was reduced to 21%, effective January 1, 2018. In addition, the corporate Alternative Minimum Tax (“AMT”) was repealed. Taxpayersrepealed and taxpayers with AMT credit carryovers in excess of their regular tax liability may have the credits refunded over multiple years from 2018 to 2022. However, AMT transactions, including refunds, are subject to sequestration by the Office of Management and Budget.

 

The Company’s foreign operations that are considered to be permanently reinvested have astatutory tax rates of approximately 25%.

The difference between the Company’s estimated effective tax rate and the U.S. federal statutory tax rate of 25%.

The Company recognized the income tax effects of the Tax Act in its 2017 financial statements in accordance with SAB 118, which provides guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law.  SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC Topic 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC Topic 740 is complete. To the extent a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

The first provisional matter recorded in 2017 relates to the Repatriation Tax and a dividend paid by the Company’s wholly owned subsidiary, Ember Scandinavia AB (“Ember”), to Clarus. Under the Repatriation Tax, all activity should be added back to the accumulated earnings and profits of specified foreign corporations (“SFC”) in order to calculate the Repatriation Tax. However, the dividend from Ember created a de facto liquidation. The guidance is unclear as to whether a liquidating dividend should be added back to accumulating earnings and profits, or if, due to the de facto liquidation, the company did not exist as of the date of measurement. The Company did not add the dividend back to the Repatriation Tax calculation, and had it done so, it would have resulted in a tax benefit of approximately $2,500 due to offsetting accumulated earnings and profits deficits of other SFCs. With additional guidance from the Internal Revenue Service, this position could change and impact the overall tax provision. As of June 30, 2018, no guidance has been issued by the Internal Revenue Service.

The second provisional matter recorded in 2017 relates to the measurement of valuation allowance on net deferred tax assets that create future indefinite net operating losses, which can be realized through indefinite deferred tax liabilities and thus be considered as a source of future taxable income. In several states in which the Company operates, the states’ position is to conform to Federal tax legislation, however in practice no formal declaration is made by the states upon tax legislation changes. It is unclear at this time whether states have conformed to the Tax Act or adopted their own laws to address the federal changes. On a provisional basis, the Company released federal valuation allowance of $4,512. If the Company had released the state valuation allowance, it would have resulted in an incremental tax benefit of approximately $400.

The Company took into consideration the various changes of the Tax Act when calculating the annual effective tax rate.

The tax (benefit) expense includes a discrete benefit of $24 and discrete charge of $10221% for the three months ended June 30, 2018 and 2017, respectively, and2019, was primarily attributed to a discrete benefit of $52 and discrete charge of $235 forrelated to stock compensation. For the six months ended June 30, 20182019, the difference between the Company’s estimated effective tax rate and 2017, respectively, associated with a disproportionatethe U.S. federal statutory tax effect released from AOCI.rate was primarily attributed to the release of an additional portion of the Company’s valuation allowance based on the Company’s forecasted pre-tax earnings for the year.

 

As of December 31, 2017,2018, the Company’s gross deferred tax asset was $50,732.$47,922. The Company had recorded a valuation allowance of $45,811,$42,122, resulting in a net deferred tax asset of $4,921,$5,800, before deferred tax liabilities of $8,587.$8,719. The Company has provided a valuation allowance against a portion of the deferred tax assets as of December 31, 2017,2018, because the ultimate realization of those assets did 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.

 

1917

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating loss and credit carryforwards expire. The estimates and judgments associated with the Company’s valuation allowance on deferred tax assets are considered critical due to the amount of deferred tax assets recorded by the Company on its consolidated balance sheet and the judgment required in determining the Company’s future taxable income. The need for a valuation allowance is reassessed at each interim reporting period.

 

As of December 31, 2017,2018, the Company had net operating loss (“NOL”) and research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $156,598, $3,452$141,067 and $0,$3,791, respectively. The Company believes its U.S. federal net operating loss (“NOL”)NOL will substantially 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.

 

NOLs available to offset taxable income, subject to compliance with Section 382 of the Code, begin to expire based upon the following schedule:

 

Net Operating Loss Carryforward Expiration Dates
December 31, 2017
    
Expiration Dates December 31, Net Operating Loss Amount 
2021 $21,026 
2022  115,000 
2023  5,712 
2024  3,566 
2025 and beyond  11,294 
Total $156,598 

Net Operating Loss Carryforward Expiration Dates

December 31, 2018

Expiration Dates December 31,  Net Operating
Loss Amount		 
2021  $5,495 
2022   115,000 
2023   5,712 
2024   3,566 
2025 and beyond   11,294 
Total  $141,067 

 

NOTE 15.13. SEGMENT INFORMATION

 

As a result of our August 21, 2017 acquisition of Sierra, we now operate our business structure within two segments. These segments are defined based on the internal financial reporting used by management. Certain significant selling and general and administrative expenses are not allocated to the segments including non-cash stock compensation expense. Each segment is described below:

 

·The Black Diamond segment, which includes Black Diamond Equipment, PIEPS, and PIEPS,SKINourishment, is a global leader in designing, manufacturing, and marketing innovative outdoor engineered equipment and apparel for climbing, mountaineering, trail running, backpacking, skiing, and a wide range of other year-round outdoor recreation activities. The Black Diamond segment offers a broad range of products including: high performance activity-based apparel (such as jackets, shells, insulation, midlayers, pants and bibs)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; tents; trekking poles; headlamps and lanterns; and gloves and mittens. Itmittens; and skincare and other sport-enhancing products. We also offersoffer advanced skis, ski poles, ski skins, and snow safety products, including avalanche airbag systems, avalanche transceivers, shovels, and probes.

 

·The Sierra segment, which consists ofincludes Sierra, is an iconic American manufacturer of a wide range of high performancehigh-performance bullets and ammunition for both rifles and pistols. These bullets and ammunition are used for precision target shooting, hunting and military and law enforcement purposes.

 

The Company recognizes revenue when a contract exists with a customer that specifies the goods and services to be provided at an agreed upon sales price and when the performance obligation is satisfied by transferring the goods or service to the customer. The performance obligation is considered complete when products are shipped or delivered to the customer depending on the terms of the contract. Sales are made on normal and customary short-term credit terms or upon delivery at point of sale transactions. As noted above, the Company has a wide variety of technical outdoor equipment and lifestyle products focused on the climb, ski, mountain and sport product categories that are sold to a variety of customers in multiple end markets. While there are multiple products sold, the terms and nature of revenue recognition policy is similar for all segments. The sport product category represents the Sierra segment revenue.

2018

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

We divide our product offerings into four primary categories of climb, mountain, ski and sport.  Revenue by category is as follows:

  Three Months Ended  Six Months Ended 
  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Climb  37%  35%  36%  35%
Mountain  36%  33%  32%  34%
Ski  8%  8%  15%  12%
Sport  19%  24%  17%  19%

Contract liabilities are recorded as a component of accounts payable and accrued liabilities when customers remit contractual cash payments in advance of us satisfying performance obligations which are satisfied at a future point of time. Contract liabilities were not material at June 30, 2019 and December 31, 2018. Contract liabilities are derecognized when the performance obligation is satisfied. Revenue recognized from satisfaction of performance obligations relating to the advanced payments during the three and six months ended June 30, 2019 was not material. No other material remaining performance obligations exist at June 30, 2019.

 

Financial information for our segments is as follows:

 

 Three Months Ended  Six Months Ended  Three Months Ended  Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Sales to external customers:                                
Black Diamond                                
Domestic sales $20,323  $16,996  $39,594  $38,333  $22,149  $20,323  $46,681  $39,594 
International sales  14,630   13,684   40,386   33,903   15,696   14,630   43,565   40,386 
Total Black Diamond  34,953   30,680   79,980   72,236   37,845   34,953   90,246   79,980 
Sierra                                
Domestic sales  7,522   -   13,905   -   6,273   7,522   12,330   13,905 
International sales  3,406   -   5,263   -   2,876   3,406   5,636   5,263 
Total Sierra  10,928   -   19,168   -   9,149   10,928   17,966   19,168 
Total sales to external customers  45,881   30,680   99,148   72,236   46,994   45,881   108,212   99,148 
Segment operating income (loss):                
Segment operating income:                
Black Diamond  (322)  (2,006) 1,615  (986)  (468)  (322)  4,708   1,615 
Sierra  2,374   -   3,171   -   1,418   2,374   3,079   3,171 
Total segment operating income (loss)  2,052   (2,006)  4,786   (986)
Total segment operating income  950   2,052   7,787   4,786 
Restructuring charge  (24)  (42)  (64)  (83)  -   (24)  (13)  (64)
Transaction costs  (168)  -   (333)  -   (41)  (168)  (87)  (333)
Corporate and other expenses  (2,175)  (1,608)  (4,089)  (2,849)  (1,967)  (2,175)  (4,351)  (4,089)
Interest expense, net  (463)  106   (717)  (877)  (315)  (463)  (625)  (717)
Loss before income tax $(778) $(3,550) $(417) $(4,795)
Income before income tax $(1,373) $(778) $2,711  $(417)

 

There were no intercompany sales between the Black Diamond and Sierra segments for the periods presented. Restructuring charges for the periods presented relate to the Black Diamond segment.

 

Total assets by segment, as of June 30, 2018 and December 31, 2017, were as follows:

  June 30, 2018  December 31, 2017 
       
Black Diamond $128,544  $127,202 
Sierra  75,349   77,270 
Corporate  3,363   2,977 
  $207,256  $207,449 

Capital expenditures, depreciation and amortization by segment is as follows.

  Three Months Ended  Six Months Ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Capital expenditures:                
Black Diamond $558  $722  $1,216  $1,148 
Sierra  107   -   302   - 
Total capital expenditures $665  $722  $1,518  $1,148 
Depreciation:                
Black Diamond $633  $547  $1,220  $1,105 
Sierra  502   -   988   - 
Total depreciation $1,135  $547  $2,208  $1,105 
Amortization:                
Black Diamond $275  $269  $550  $535 
Sierra  693   -   1,387   - 
Total amortization $968  $269  $1,937  $535 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

Total assets by segment, as of June 30, 2019 and December 31, 2018, were as follows:

  June 30, 2019  December 31, 2018 
Black Diamond $138,672  $138,029 
Sierra  74,931   72,796 
Corporate  3,101   2,303 
  $216,704  $213,128 

Capital expenditures, depreciation and amortization by segment is as follows.

  Three Months Ended  Six Months Ended 
  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Capital expenditures:                
Black Diamond $426  $558  $1,190  $1,216 
Sierra  522   107   804   302 
Total capital expenditures $948  $665  $1,994  $1,518 
Depreciation:                
Black Diamond $631  $633  $1,242  $1,220 
Sierra  508   502   1,000   988 
Total depreciation $1,139  $1,135  $2,242  $2,208 
Amortization:                
Black Diamond $277  $275  $556  $550 
Sierra  611   693   1,221   1,387 
Total amortization $888  $968  $1,777  $1,937 

 

NOTE 16. RELATED PARTY TRANSACTIONS14. LEASES

 

5% Unsecured Subordinated Notes due May 28, 2017The Company has entered into leases for certain facilities, vehicles and other equipment. Our operating leases have remaining contractual terms of up to six years, some of which include options to extend the leases for up to five years. Our operating lease costs are primarily related to facility leases for inventory warehousing, administration offices and vehicles. The Company’s finance leases are immaterial.

Operating lease ROU assets and liabilities as of June 30, 2019 are as follows:

  Balance Sheet Classification June 30, 2019 
Assets      
Operating lease ROU assets Other long-term assets $1,522 
       
Liabilities      
Current operating lease liabilities Accounts payable and accrued liabilities $707 
Noncurrent operating lease liabilities Other long-term liabilities $822 

Operating lease costs are as follows:

  Affected line item in the Condensed Consolidated Three Months
Ended		  Six Months
Ended		 
  Statements of Comprehensive Income June 30, 2019  June 30, 2019 
Lease costs Cost of goods sold, Selling, general and administrative $194  $363 
Variable lease costs Cost of goods sold, Selling, general and administrative  51   115 
Short-term lease costs Cost of goods sold, Selling, general and administrative  47   109 
    $292  $587 

20

CLARUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(in thousands, except per share amounts)

The maturity of operating lease liabilities as of June 30, 2019 are as follows:

Years Ending December 31, Future Minimum
Lease Payments		 
2019 (excluding the six months ended June 30, 2019) $388 
2020  729 
2021  340 
2022  87 
2023 and thereafter  59 
Total future minimum lease payments  1,603 
Less: amount representing interest  (74)
Present value of future minimum lease payments  1,529 
Less: current lease obligations  (707)
Long-term lease obligations $822 

 

As partof June 30, 2019, our operating leases have a weighted-average remaining lease term of 2.2 years and a weighted-average discount rate of 3.97%. Total rent expense of the consideration payableCompany for the three and six months ended June 30, 2018 was $194 and $421, respectively, as determined prior to the stockholdersadoption of Gregory whenASU 842. Future minimum lease payments required under noncancelable operating leases that have initial or remaining noncancelable lease term in excess of one year at December 31, 2018 as determined prior to the Company acquired Gregory, the Company issued 5% Unsecured Subordinated Notes due May 28, 2017 (the “Merger Consideration Subordinated Notes”) to membersadoption of the Board of Directors and five former employees of Gregory. Given the below market interest rate for comparably secured notes and the relative illiquidity of the Merger Consideration Subordinated Notes, we discounted the notes at the date of acquisition. We were accreting the discount on the Merger Consideration Subordinated Notes to interest expense using the effective interest method over the term of the Merger Consideration Subordinated Notes. In February 2017, the Board of Directors approved the repayment of the Merger Consideration Subordinated Notes. On February 13, 2017, the entire principal amounts and all accrued interest amounts were paid in full, at which time, the note discount of $814 was expensed and recognizedASU 842 are as interest expense during the three months ended March 31, 2017.follows:

 

NOTE 17. SUBSEQUENT EVENT

Years Ending December 31, Future Minimum
Lease Payments		 
2019 $687 
2020  634 
2021  243 
2022  24 
2023  - 
Thereafter  - 
  $1,588 

 

On August 6, 2018, the Company implemented a quarterly cash dividend of $0.025 per share on the Company’s common stock. The dividend will be paid on September 4, 2018, to shareholders of record on the close of business on August 20, 2018.

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MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

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; stability of the Company’s manufacturing facilities and suppliers; the Company’s ability to protect patents, trademarks and other intellectual property rights; any breaches of, or interruptions in, our information systems; 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’sCompany’s ability to declaremaintain 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 substantial net operating tax loss carryforwards thatwhich it is seeking to redeploy to maximize shareholder value in a diverse array of businesses.value. Clarus’ primary business is as a leading developer, manufacturer and distributor of outdoor equipment and lifestyle products focused on the climb, ski, mountain, sport and sport categories.skincare markets. The Company’s products are principally sold under the Black Diamond®, Sierra®, PIEPS® and PIEPS®SKINourishment® brand names through specialty and online retailers, distributors and original equipment manufacturers throughout the U.S. and internationally.

 

Through our Black Diamond, PIEPS, and PIEPSSKINourishment brands, we offer a broad range of products including: high performance activity-based apparel (such as jackets, shells, insulation, midlayers, pants and bibs)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; tents; trekking poles; headlamps and lanterns; and gloves and mittens.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 performancehigh-performance bullets and ammunition for both rifles and pistols that are used for precision target shooting, hunting and military and law enforcement purposes.

 

Clarus Corporation, incorporated in Delaware in 1991, acquired Black Diamond Equipment, Ltd. (which may be referred to as “Black Diamond Equipment”) and Gregory Mountain Products, LLC (which may be referred to as “Gregory Mountain Products” or “Gregory”) in May 2010 and changed its name to Black Diamond, Inc., in January 2011. In July 2012, we acquired POC Sweden AB and its subsidiaries (collectively, “POC”) and in October 2012, we acquired PIEPS Holding GmbH and its subsidiaries (collectively, “PIEPS”).

 

On July 23, 2014, the Company completed the sale of certain assets to Samsonite LLC comprising Gregory Mountain Product’s business. On October 7, 2015, the Company sold its equity interests in POC.

 

2322

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MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

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 May 8,August 6, 2018, the Company announced that its Board of Directors approved the initiation of a “modified Dutch auction” tender offer for Clarus’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 July 26, 2019, the Company announced that its Board of Directors approved the payment on August 16, 2019 of the Quarterly Cash Dividend to the record holders of shares of the Company’s common stock as well asof the preferred share purchase rights associated with such shares (collectively, the “Shares”). close of business on August 5, 2019.

On July 11,November 6, 2018, the tender offer expired, following whichCompany acquired the Company announced it would accept 417,237 Shares for purchase at a priceassets of $8.00 per Share, for an aggregate cost of approximately $3,338, excluding fees and expenses.SKINourishment, Inc.

 

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 continually evaluate our estimates and assumptions including those related to derivatives, revenue recognition, income taxespurchase price allocation, excess or obsolete inventory, valuation of deferred tax assets, and valuation of goodwill, long-lived assets and other intangible assets. 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.

 

See “Significant Accounting Policies” in Note 1 to the notes to the unaudited condensed consolidated financial statements for discussion related to changes to our critical accounting policies including revenue recognitionleases from the adoption of Accounting Standards Codification Topic 606.842. There have been no other significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

 

Accounting Pronouncements Issued Not Yet Adopted

 

See “Accounting Pronouncements Not Yet Adopted” in Note 1 to the notes to the unaudited condensed consolidated financial statements.None.

 

2423

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MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Results of Operations

 

Condensed Consolidated Three Months Ended June 30, 20182019 Compared to Condensed Consolidated Three Months Ended June 30, 20172018

 

The following presents a discussion of condensed consolidated operations for the three months ended June 30, 2018,2019, compared with the condensed consolidated three months ended June 30, 2017.2018.

 

 Three Months Ended 
 June 30, 2018  June 30, 2017  Three Months Ended 
      June 30, 2019  June 30, 2018 
Sales                
Domestic sales $27,845  $16,996  $28,422  $27,845 
International sales  18,036   13,684   18,572   18,036 
Total sales  45,881   30,680   46,994   45,881 
                
Cost of goods sold  30,021   21,642   31,002   30,021 
Gross profit  15,860   9,038   15,992   15,860 
                
Operating expenses                
Selling, general and administrative  15,791   12,860   17,192   15,791 
Restructuring charge  24   42   -   24 
Transaction costs  168   -   41   168 
                
Total operating expenses  15,983   12,902   17,233   15,983 
                
Operating loss  (123)  (3,864)  (1,241)  (123)
                
Other (expense) income                
Interest (expense) income, net  (463)  106 
Interest expense  (315)  (463)
Other, net  (192)  208   183   (192)
                
Total other (expense) income, net  (655)  314 
Total other expense, net  (132)  (655)
                
Loss before income tax  (778)  (3,550)  (1,373)  (778)
Income tax (benefit) expense  (1)  104 
Income tax benefit  (679)  (1)
Net loss $(777) $(3,654) $(694) $(777)

 

Sales

 

Consolidated sales increased $15,201,$1,113, or 49.5%2.4%, to $45,881$46,994 during the three months ended June 30, 2018,2019, compared to consolidated sales of $30,680 during the three months ended June 30, 2017. The increase in sales was partially attributable to the inclusion of Sierra, which contributed $10,928 in sales$45,881 during the three months ended June 30, 2018. The remaining increase in sales was attributable to the increase in the quantity of new and existing climb, mountain, and ski products sold during the period. These increases were partially offset by a decrease in the quantity of new and existing sport products sold during the period and an increasea decrease in sales of $770$370 due to the strengthening of foreign currencies against the U.S. dollar against foreign currencies during the three months ended June 30, 20182019 compared to the prior period.

 

Consolidated domestic sales increased $10,849,$577, or 63.8%2.1%, to $28,422 during the three months ended June 30, 2019, compared to consolidated domestic sales of $27,845 during the three months ended June 30, 2018, compared to consolidated domestic sales of $16,996 during the three months ended June 30, 2017.2018. The increase in domestic sales was attributable to the inclusion of Sierra, which contributed $7,522 in sales, and an increase in the quantity of new and existing climb, mountain, and ski products sold during the three months ended June 30, 2018.

25

CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(2019. These increases were partially offset by a decrease in thousands, except per share amounts)the quantity of new and existing sport products sold during the period.

 

Consolidated international sales increased $4,352,$536, or 31.8%3.0%, to $18,572 during the three months ended June 30, 2019, compared to consolidated international sales of $18,036 during the three months ended June 30, 2018, compared to consolidated international sales of $13,684 during the three months ended June 30, 2017. The increase in sales was partially attributable to the inclusion of Sierra, which contributed $3,406 in sales during the three months ended June 30, 2018. The remaining increase in international sales was attributable to the increase in the quantity of new and existing climb and mountainski products sold during the period. These increases were partially offset by a decrease in the quantity of new and existing sport products sold during the period and an increasea decrease in sales of $770$370 due to the strengthening of foreign currencies against the U.S. dollar against foreign currencies during the three months ended June 30, 20182019 compared to the prior period.

 

24

CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Cost of Goods Sold

 

Consolidated cost of goods sold increased $8,379,$981, or 38.7%3.3%, to $31,002 during the three months ended June 30, 2019, compared to consolidated cost of goods sold of $30,021 during the three months ended June 30, 2018, compared to consolidated cost of goods sold of $21,642 during the three months ended June 30, 2017.2018. The increase in cost of goods sold was partially attributable to the inclusion of Sierra of $6,900. The remaining increase was attributable to an increase in the number of units sold and the mix of higher cost products sold.

 

Gross Profit

 

Consolidated gross profit increased $6,822$132, or 75.5%0.8%, to $15,992 during the three months ended June 30, 2019, compared to consolidated gross profit of $15,860 during the three months ended June 30, 2018, compared to consolidated2018. Consolidated gross profit of $9,038margin was 34.0% during the three months ended June 30, 2017. Consolidated2019, compared to a consolidated gross margin wasof 34.6% during the three months ended June 30, 2018, compared to a consolidated gross margin of 29.5% during the three months ended June 30, 2017.2018. Consolidated gross margin during the three months ended June 30, 2018, increased2019 decreased compared to the prior year due to a favorable productan unfavorable mix in higherlower margin productschannel distribution and channel distribution. Gross margin also benefited from the inclusionnegative impacts of Sierra.foreign currency.

 

Selling, General and Administrative

 

Consolidated selling, general, and administrative expenses increased $2,931,$1,401, or 22.8%8.9%, to $15,791$17,192 during the three months ended June 30, 2018,2019, compared to consolidated selling, general and administrative expenses of $12,860$15,791 during the three months ended June 30, 2017.2018. The increase in selling, general and administrative expenses was partially attributable to the inclusion of Sierra of $1,654, with the remaining increase being attributable to the Company’s continued investment in the brand related activities of sales, fulfillment,marketing and researchdirect-to-consumer, a shift in timing of summer tradeshows from traditionally the third quarter to the second quarter, and developmentcosts incurred with the move of the Company’s warehouse in supporting its strategic initiatives around new product introduction and increasing brand equity.Europe. Stock compensation also increased $347$127 during the three months ended June 30, 20182019 compared to the prior year.

 

Restructuring Charges

 

Consolidated restructuring expense decreased $18, or 42.9%, to $0 during the three months ended June 30, 2019, compared to consolidated restructuring expense of $24 during the three months ended June 30, 2018, compared to consolidated restructuring expense of $42 during the three months ended June 30, 2017.2018. Restructuring expenses incurred during the three months ended June 30, 2018, 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 increaseddecreased to $41 during the three months ended June 30, 2019, compared to consolidated transaction costs of $168 during the three months ended June 30, 2018, compared to consolidated transaction costs of $0 during the three months ended June 30, 2017, which consisted of expenses related to the Company’s acquisition of Sierra.

 

Interest (Expense) income,Expense, net

 

Consolidated interest (expense) income,expense, net decreased $569,$148, or 536.8%32.0%, to $315 during the three months ended June 30, 2019, compared to consolidated interest expense, net, of $463 during the three months ended June 30, 2018, compared to consolidated interest income, net, of $1062018. Interest expense recognized during the three months ended June 30, 2017.2019 was primarily associated with the average outstanding debt amounts during the period. Interest expense recognized during the three months ended June 30, 2018 was primarily attributable to the write-off of previously capitalized origination costs associated with the Company’s previous revolving credit agreement with ZB, N.A. dba Zions First National Bank (the “Terminated Credit Agreement”), which was replaced with the new credit agreement with JPMorgan Chase Bank, N.A. (the “Credit Agreement”).

26

CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)costs.

 

Other, net

 

Consolidated other, net, decreased $400,increased $375, or 192.3%195.3%, to income of $183 during the three months ended June 30, 2019, compared to consolidated other, net expense of $192 during the three months ended June 30, 2018, compared to consolidated other, net income of $208 during the three months ended June 30, 2017.2018. The decreaseincrease in other, net, was primarily attributable to a decreasean increase in remeasurement gains recognized on the Company’s foreign denominated accounts receivable and accounts payable and lossespayable. This increase was partially offset by gains on mark-to-market adjustments on non-hedged foreign currency contracts. During the three months ended June 30, 2018, the expense was primarily related to recognition of cumulative translation adjustments due to the substantial liquidation of a foreign entity. This increase was partially offset by gains on mark-to-market adjustments on non-hedged foreign currency contracts.

 

Income Taxes

 

Consolidated income tax (benefit) expensebenefit increased $105, or 101.0%, to a benefit of $1$679 during the three months ended June 30, 2018,2019, compared to a consolidated income tax expensebenefit of $104$1 during the same period in 2017. The tax benefit recorded during the three months ended June 30, 2018 includes a discrete benefit associated with a disproportionate tax effect released from accumulated other comprehensive income of $24.2018. The tax expense recorded during the three months ended June 30, 20172019 includes a discrete chargesbenefit associated with a disproportionate tax effect released from accumulated other comprehensive loss of $102.stock compensation windfall for $560.

 

Our effective income tax rate was 0.1%49.5% for the three months ended June 30, 2018,2019, compared to 2.9%0.1% for the same period in 2017.2018. The primary reasons for the effective income tax rate changes are due to differing levels of income (loss) before income tax and discrete charges recorded during the respective periods. 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.

 

2725

CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Results of Operations

 

Condensed Consolidated Six Months Ended June 30, 20182019 Compared to Condensed Consolidated Six Months Ended June 30, 20172018

 

The following presents a discussion of condensed consolidated operations for the six months ended June 30, 2018,2019, compared with the condensed consolidated six months ended June 30, 2017.2018.

 

 Six Months Ended 
 June 30, 2018  June 30, 2017  Six Months Ended 
      June 30, 2019  June 30, 2018 
Sales                
Domestic sales $53,499  $38,333  $59,011  $53,499 
International sales  45,649   33,903   49,201   45,649 
Total sales  99,148   72,236   108,212   99,148 
                
Cost of goods sold  65,461   50,898   70,164   65,461 
Gross profit  33,687   21,338   38,048   33,687 
                
Operating expenses                
Selling, general and administrative  32,919   25,395   34,772   32,919 
Restructuring charge  64   83   13   64 
Transaction costs  333   -   87   333 
                
Total operating expenses  33,316   25,478   34,872   33,316 
                
Operating income (loss)  371   (4,140)
Operating income  3,176   371 
                
Other (expense) income                
Interest expense, net  (717)  (877)
Interest expense  (625)  (717)
Other, net  (71)  222   160   (71)
                
Total other expense, net  (788)  (655)  (465)  (788)
                
Loss before income tax  (417)  (4,795)
Income tax (benefit) expense  (43)  314 
Net loss $(374) $(5,109)
Income (loss) before income tax  2,711   (417)
Income tax benefit  (382)  (43)
Net income (loss) $3,093  $(374)

 

Sales

 

Consolidated sales increased $26,912,$9,064, or 37.3%9.1%, to $99,148$108,212 during the six months ended June 30, 2018,2019, compared to consolidated sales of $72,236 during the six months ended June 30, 2017. The increase in sales was partially attributable to the inclusion of Sierra, which contributed $19,168 in sales$99,148 during the six months ended June 30, 2018. The remaining increase was attributable to the increase in the quantity of new and existing climb, mountain, and ski products sold during the period and an increase in sales of $2,421 due to the strengthening of foreign currencies against the U.S. dollar during the six months ended June 30, 2018 compared to the prior period.

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MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Consolidated domestic sales increased $15,166, or 39.6%, to $53,499 during the six months ended June 30, 2018, compared to consolidated domestic sales of $38,333 during the six months ended June 30, 2017. The increase in sales was attributable to the inclusion of Sierra, which contributed $13,905 in sales, and an increase in the quantity of new and existing climb products sold during the six months ended June 30, 2018. These increases were partially offset by a decrease in the quantity of new and existing mountain and ski products sold during the period.

Consolidated international sales increased $11,746, or 34.6%, to $45,649 during the six months ended June 30, 2018, compared to consolidated international sales of $33,903 during the six months ended June 30, 2017. The increase in sales was partially attributable to the inclusion of Sierra, which contributed $5,263 in sales during the six months ended June 30, 2018. The remaining increase in international sales was attributable to the increase in the quantity of new and existing climb, mountain, and ski products sold during the period. These increases were partially offset by a decrease in the quantity of new and existing sport products sold during the period and an increasea decrease in sales of $2,421$1,133 due to the strengthening of foreign currencies against the U.S. dollar against foreign currencies during the six months ended June 30, 20182019 compared to the prior period.

 

Consolidated domestic sales increased $5,512, or 10.3%, to $59,011 during the six months ended June 30, 2019, compared to consolidated domestic sales of $53,499 during the six months ended June 30, 2018. The increase in domestic sales was attributable to an increase in the quantity of new and existing climb, mountain, and ski products sold during the six months ended June 30, 2019. These increases were partially offset by a decrease in the quantity of new and existing sport products sold during the period.

Consolidated international sales increased $3,552, or 7.8%, to $49,201 during the six months ended June 30, 2019, compared to consolidated international sales of $45,649 during the six months ended June 30, 2018. The increase in international sales was attributable to the increase in the quantity of new and existing climb, mountain, ski, and sport products sold during the period. These increases were partially offset by a decrease in sales of $1,133 due to the strengthening of the U.S. dollar against foreign currencies during the six months ended June 30, 2019 compared to the prior period.

26

CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Cost of Goods Sold

 

Consolidated cost of goods sold increased $14,563,$4,703, or 28.6%7.2%, to $70,164 during the six months ended June 30, 2019, compared to consolidated cost of goods sold of $65,461 during the six months ended June 30, 2018, compared to consolidated cost of goods sold of $50,898 during the six months ended June 30, 2017.2018. The increase in cost of goods sold was partially attributable to the inclusion of Sierra of $12,541, which included $1,049 related to the sale of inventory that was recorded at fair value in purchase accounting. The remaining increase was attributable to an increase in the number of units sold and the mix of higher cost products sold.

 

Gross Profit

 

Consolidated gross profit increased $12,349$4,361, or 57.9%12.9%, to $38,048 during the six months ended June 30, 2019, compared to consolidated gross profit of $33,687 during the six months ended June 30, 2018, compared to consolidated2018. Consolidated gross profit of $21,338margin was 35.2% during the six months ended June 30, 2017. Consolidated2019, compared to a consolidated gross margin wasof 34.0% during the six months ended June 30, 2018, compared to a consolidated gross margin of 29.5% during the six months ended June 30, 2017.2018. Consolidated gross margin during the six months ended June 30, 2018,2019, increased compared to the prior year due to a favorable product mix in higher margin products and channel distribution. Gross margin also benefited fromduring the inclusion of Sierra; however, this benefit was partially offset bysix months ended June 30, 2018 included a decrease in gross margin of 1.1% due to the sale of inventory that was recorded at its fair value in purchase accounting.

 

Selling, General and Administrative

 

Consolidated selling, general, and administrative expenses increased $7,524,$1,853, or 29.6%5.6%, to $32,919$34,772 during the six months ended June 30, 2018,2019, compared to consolidated selling, general and administrative expenses of $25,395$32,919 during the six months ended June 30, 2017.2018. The increase in selling, general and administrative expenses was partially attributable to the inclusion of Sierra of $3,456, with the remaining increase being attributable to the Company’s continued investment in the brand related activities of sales, marketing and research and development and fulfillment in supporting its strategic initiatives around new product introduction and increasing brand equity. The increase was also attributable to a shift in timing of summer tradeshows from traditionally the third quarter to the second quarter and costs incurred with the move of the Company’s warehouse in Europe. Stock compensation also increased $813$413 during the six months ended June 30, 20182019 compared to the prior year.

 

Restructuring Charges

 

Consolidated restructuring expense decreased $19,$51, or 22.9%79.7%, to $13 during the six months ended June 30, 2019, compared to consolidated restructuring expense of $64 during the six months ended June 30, 2018, compared to consolidated restructuring expense of $83 during the six months ended June 30, 2017.2018. Restructuring expenses incurred during the six months ended June 30, 2019 and 2018, 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 increaseddecreased to $87 during the six months ended June 30, 2019, compared to consolidated transaction costs of $333 during the six months ended June 30, 2018, compared to consolidated transaction costs of $0 during the six months ended June 30, 2017, which consisted of expenses related to the Company’s acquisition of Sierra.

 

Interest Expense, net

 

Consolidated interest expense, net decreased $160,$92, or 18.2%12.8%, to $625 during the six months ended June 30, 2019, compared to consolidated interest expense, net, of $717 during the six months ended June 30, 2018, compared to consolidated interest2018. Interest expense net, of $877recognized during the six months ended June 30, 2017.2019 was primarily associated with the average outstanding debt amounts during the period. Interest expense recognized during the six months ended June 30, 2018 was primarily attributable to the write-off of previously capitalized origination costs associated with the Terminated Credit Agreement, which was replaced with the new Credit Agreement with JPMorgan Chase Bank, N.A. Interest expense recognizedcosts.

Other, net

Consolidated other, net, increased $231, or 325.4%, to income of $160 during the six months ended June 30, 2017 was primarily attributable2019, compared to the Company’s 5% Senior Subordinated Notes which were repaidconsolidated other, net expense of $71 during the six months ended June 30, 2017.2018. 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 gains on mark-to-market adjustments on non-hedged foreign currency contracts. During the six months ended June 30, 2018, the expense included the recognition of cumulative translation adjustments due to the substantial liquidation of a foreign entity.

 

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(in thousands, except per share amounts)

Other, net

Consolidated other, net, decreased $293, or 132.0%, to expense of $71 during the six months ended June 30, 2018, compared to consolidated other, net income of $222 during the six months ended June 30, 2017. The decrease in other, net, was primarily attributable to a decrease in remeasurement gains recognized on the Company’s foreign denominated accounts receivable and accounts payable and losses related to recognition of cumulative translation adjustments due to the substantial liquidation of a foreign entity. This increase was partially offset by gains on mark-to-market adjustments on non-hedged foreign currency contracts.

 

Income Taxes

 

Consolidated income tax (benefit) expensebenefit increased $357,$339, or 113.7%788.4%, to a benefit of $43$382 during the six months ended June 30, 2018,2019, compared to a consolidated income tax expensebenefit of $314$43 during the same period in 2017. The tax benefit recorded during the six months ended June 30, 2018 includes a discrete benefit associated with a disproportionate tax effect released from accumulated other comprehensive income of $52.2018. The tax expense recorded during the six months ended June 30, 20172019 includes a discrete chargesbenefit associated with a disproportionaterelease of a tax effect released from accumulated other comprehensive lossreserve of $235.$63 and a discrete benefit associated with stock compensation windfall for $590.

 

Our effective income tax rate was 10.3%14.1% for the six months ended June 30, 2018,2019, compared to 6.5%10.3% for the same period in 2017.2018. The primary reasons for the effective income tax rate changes are due to differing levels of income (loss) before income tax and discrete charges recorded during the respective periods. 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 Six Months Ended June 30, 20182019 Compared to Condensed Consolidated Six Months Ended June 30, 20172018

 

The following presents a discussion of cash flows for the condensed consolidated six months ended June 30, 20182019 compared with the condensed consolidated six months ended June 30, 2017.2018. 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. 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. At June 30, 2018,2019, we had total cash of $2,571,$1,969, compared to a cash balance of $1,856$2,486 at December 31, 2017,2018, which was substantially controlled by the Company’s U.S. entities. At June 30, 2018,2019, the Company had $489$1,612 of the $2,571$1,969 in cash held by foreign entities, of which $489$743 is considered permanently reinvested.

 

 Six Months Ended  Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018 
     
Net cash provided by (used in) operating activities $7,915  $(7,619)
Net cash provided by operating activities $9,672  $7,915 
Net cash used in investing activities  (1,861)  (1,096)  (1,993)  (1,861)
Net cash used in financing activities  (5,377)  (22,733)  (8,195)  (5,377)
Effect of foreign exchange rates on cash  38   143   (1)  38 
Change in cash  715   (31,305)  (517)  715 
Cash, beginning of period  1,856   94,738   2,486   1,856 
Cash, end of period $2,571  $63,433  $1,969  $2,571 

Net Cash From Operating Activities

 

Consolidated net cash provided by operating activities was $9,672 during the six months ended June 30, 2019, compared to $7,915 during the six months ended June 30, 2018, compared to consolidated net cash used in operating activities of $7,619 during the six months ended June 30, 2017.2018. The increase in net cash provided by operating activities during 20182019 is primarily due to an increase in net income, partially offset by a decrease in net operating assets, net of assets acquired or non-cash working capital of $7,854 and a decrease in net loss$2,307 during the six months ended June 30, 2018,2019, compared to the same period in 2017.

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CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)2018.

 

Free cash flow, defined as net cash provided by operating activities less capital expenditures, of $7,678 was free cash flows generated of $6,397 during the six months ended June 30, 20182019 compared to free cash flows used of $8,767$6,397 generated during the same period in 2017.2018. 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:

 

 Six Months Ended  Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018 
     
Net cash provided by (used in) operating activities $7,915  $(7,619)
Net cash provided by operating activities $9,672  $7,915 
Purchase of property and equipment  (1,518)  (1,148)  (1,994)  (1,518)
Free cash flow $6,397  $(8,767) $7,678  $6,397 

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CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

Net Cash From Investing Activities

 

Consolidated net cash used in investing activities was $1,993 during the six months ended June 30, 2019, compared to $1,861 during the six months ended June 30, 2018, compared to consolidated net cash used in investing activities of $1,096 during the six months ended June 30, 2017.2018. The increase in cash used during the six months ended June 30, 20182019 is primarily due to an increase in purchases of property and equipment, compared to the same period in 2017 and recording the working capital adjustment related to the purchase price of Sierra during the six months ended June 30, 2018.

 

Net Cash From Financing Activities

 

Consolidated net cash used in financing activities was $8,195 during the six months ended June 30, 2019, compared to $5,377 during the six months ended June 30, 2018, compared to consolidated cash used2018. The increase in financing activities of $22,733 during the six months ended June 30, 2017. The cash used during the six months ended June 30, 2019 compared to the same period in 2018 relateswas primarily due to net repayments ofto the revolving line of credit, facilitythe purchase of treasury stock, and debt issuance costs. The cash used during the six months ended June 30, 2017 relates to repaymentsdividend payments, and was partially offset by proceeds from exercise of debt and the repurchase of the Company’s common stock.stock options.

 

Net Operating Loss

 

As of December 31, 2017,2018, the Company had net operating loss (“NOL”) and research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $156,598, $3,452$141,067 and $0,$3,791, respectively. The Company believes its U.S. federal net operating loss (“NOL”)NOL will substantially offset some of its future U.S. federalFederal 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. $156,598None of NOLsthe NOL available to offset taxable income does notwill expire until 2021 or later, subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).amended.

 

As of December 31, 2017,2018, the Company’s gross deferred tax asset was $50,732.$47,922. The Company has recorded a valuation allowance of $45,811,$42,122, resulting in a net deferred tax asset of $4,921,$5,800, before deferred tax liabilities of $8,587.$8,719. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of December 31, 2017,2018, 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 Code.Internal Revenue Code of 1986 (“Code”), as amended.

 

Revolving Credit FacilityAgreement

On June 27, 2018,May 3, 2019, the Company Black Diamond Equipment, Ltd., Black Diamond Retail, Inc., Sierra Bullets, L.L.C. (collectivelytogether with the Company, thecertain of its direct and indirect domestic subsidiaries (the “Borrowers”) and the other loan parties party thereto (together with the Borrowers, the “Loan Parties”) entered into an asset based revolvinga Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto. Eachthereto, for borrowings of the Loan Parties, other than the Company, is a direct or indirect subsidiary of the Company.

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CLARUS CORPORATION

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

The Credit Agreement provides forup to $60,000 under a revolving commitment of $75,000credit facility (including up to $5,000 for letters of credit), and matures on June 27, 2022.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 permits the Borrowers, subject to certain requirements, to arrange with lenders for an aggregate of up to $75,000$50,000 of additional revolving and/or term loan commitments (which(both of which are currently uncommitted), for a potential aggregate revolving commitmentand term loan commitments under the Credit Agreement of up to $150,000. The amount of the revolving commitment available for borrowing at any given time is subject to a borrowing base formula that is based upon the Company’s accounts receivable, inventory and intellectual property.

The obligations of each Loan Party under the Credit Agreement are unconditionally guaranteed by each other Loan Party. All obligations under the Credit Agreement, and the guarantees of those obligations (as well as banking services obligations and certain swap agreements), are secured by the accounts receivable, inventory, intellectual property and certain other assets of the Loan Parties pursuant to the Pledge and Security Agreement, dated June 27, 2018, by and among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative agent.matures on May 3, 2024.

 

The Borrowers may elect to have the revolving and term loans under the Credit Agreement bear interest at either (a)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 “CBFR”alternate base rate borrowings, a rate generally equaland 1.50% to the London Interbank Offered Rate (“LIBOR”) for an interest period of one month, subject to a 0.00% floor, or (b)2.25% per annum, in the case of “Eurodollar” borrowings, a rate generally equal to an adjusted LIBOR for the interest period relevant to such borrowing, subject to a 0.00% floor, plus, in each such case, an applicable rate generally ranging from 1.50% to 2.20% per annum.Eurodollar borrowings. The applicable rate was initially 1.50%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 primarily based upon the achievementlevel of a specified fixed charge coverage ratio, and also based upon the type of assets that generate availability under the borrowing base formula.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 commitment.and term loan commitments. Such commitment fee will range between 0.25%0.15% and 0.375%0.25% per annum, and is also based upon the average percentagelevel of the revolving commitment that is used in each month of the fiscal year.Company’s consolidated total leverage ratio.

 

The 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, liquidations or dissolutions other than in certain permitted instances as described in the 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 Credit Agreement; (vi) sell assets; (vii) pay dividends or make distributions or other restricted payments if certain conditions in the 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; and (xii) sell, assign, transfer, encumber or license certain intellectual property without the prior written consent of the administrative agent. As of June 30, 2018,2019, the Company had drawn $16,000 on the approximately $47,000$16,650 of the $60,000 revolving loan commitment, and none of the $40,000 term loan commitment, that was available for borrowing.

5% Senior Subordinated Notes due May 28, 2017

borrowing under the Credit Agreement. As part of June 30, 2019, the consideration payable to the stockholders of Gregory when the Company acquired Gregory, the Company issued 5% Unsecured Subordinated Notes due May 28, 2017 (the “Merger Consideration Subordinated Notes”) to members of the Board of Directors and five former employees of Gregory. Given the below market interest rate for comparably secured notes andsuch loans was 4.3055%.

On May 3, 2019, concurrent with entering into the relative illiquidityCredit Agreement, the Company’s previous credit facility with JPMorgan Chase Bank, N.A., which provided for a revolving commitment of the Merger Consideration Subordinated Notes, we discounted the notes at the date of acquisition. We were accreting the discount on the Merger Consideration Subordinated Notesup to interest expense using the effective interest method over the term of the Merger Consideration Subordinated Notes. In February 2017, the Board of Directors approved the repayment of the Merger Consideration Subordinated Notes. On February 13, 2017, the entire principal amounts and all accrued interest amounts were paid in full, at which time, the note discount of $814$75,000, was expensed and recognized as interest expense during the three months ended March 31, 2017.terminated.

 

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.

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MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

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, 2017.2018.

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MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except per share amounts)

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Executive Chairman and Chief Administrative Officer/Chief Financial Officer, its principal executive officer and principal financial officer, respectively, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e)13a-15I and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, 2018,2019, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, the Company’s Executive Chairman and Chief Administrative Officer/Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2018,2019, were effective. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting Sierra’s internal control over financial reporting associated with total assets of $25,542 and total revenues of $19,168 included in the condensed consolidated financial statements of the Company as of June 30, 2018.

 

Changes in Internal Control over Financial Reporting

 

On August 21, 2017, the Company acquired Sierra. The Company’s management is reviewing and evaluating its internal control procedures and the design of those control procedures related to the Sierra acquisition and evaluating when it will complete an evaluation and review of Sierra’s internal controls over financial reporting.

Effective January 1, 2018, we adopted Accounting Standards Codification 606,Revenue from Contracts with Customers (“ASC Topic 606”). Although the adoption of ASC Topic 606 had an immaterial impact on our financial statements, we implemented certain changes to our related revenue recognition control activities, including the development of new policies and periodic reviews of revenue transactions, based on the five-step model provided in the new revenue standard. There werehas been no other changeschange in our internal control over financial reporting that occurred during the six months ended June 30, 2018,2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

3330

CLARUS CORPORATOINCORPORATION

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Legal Proceedings

 

The Company is involved in various legal disputes and other legal proceedings that arise from time to time in the ordinary course of business. Based on currently available information, the Company does not believe that the disposition of any of the legal disputes the Company or its subsidiaries is currently involved in will have a material adverse effect upon the Company’s consolidated financial condition, results of operations or cash flows. It is possible that, as additional information becomes available, the impact on the Company of an adverse determination could have a different effect.

 

Litigation

 

The Company is involved in various lawsuits arising from time to time that the Company considers ordinary routine litigation incidental to its business. Amounts accrued for litigation matters represent the anticipated costs (damages and/or settlement amounts) in connection with pending litigation and claims and related anticipated legal fees for defending such actions, which legal fees are expensed as incurred. The costs are accrued when it is both probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are based upon the Company’s assessment, after consultation with counsel (if deemed appropriate), of probable loss based on the facts and circumstances of each case, the legal issues involved, the nature of the claim made, the nature of the damages sought and any relevant information about the plaintiffs and other significant factors that vary by case. When it is not possible to estimate a specific expected cost to be incurred, the Company evaluates the range of probable loss and records the minimum end of the range. Based on currently available information, the Company does not believe that it is reasonably possible that the disposition of any of the legal disputes the Company or its subsidiaries is currently involved in will have a material adverse effect upon the Company’s consolidated financial condition, results of operations or cash flows.There is a reasonable possibility of loss from contingencies in excess of the amounts accrued by the Company in the accompanying condensed consolidated balance sheets; however, the actual amounts of such possible losses cannot currently be reasonably estimated by the Company at this time. It is possible that, as additional information becomes available, the impact on the Company could have a different effect.

 

Product Liability

 

As a consumer goods manufacturer and distributor, the Company faces the risk of product liability and related lawsuits involving claims for substantial money damages, product recall actions and higher than anticipated rates of warranty returns or other returns of goods. The Company is therefore vulnerable to various personal injury and property damage lawsuits relating to its products and incidental to its business.

 

Based on current information, there are no pending product liability claims and lawsuits of the Company, which the Company believes in the aggregate, will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

Except as set forth below, thereThere have been no material changes in our risk factors from those disclosed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.

 

The risk factor titled “Our operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political, and economic risks,” is hereby amended and restated in its entirety as follows:

Our operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political, and economic risks.

Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth in existing and new international markets is subject to risks associated with international operations. These include the burdens of complying with a variety of foreign laws and regulations, unexpected changes in regulatory requirements, new tariffs or other barriers to some international markets. For example, the United States’ withdrawal from the Trans-Pacific Partnership, any future withdrawal or renegotiation of trade agreements, including the North American Free Trade Agreement, and the prosecution of trade disputes or the imposition of tariffs, duties, taxes and other charges on imports or exports between the United States and countries like China or members of the European Union, among others, may adversely affect our ability to operate our business and execute our growth strategy. In addition, it may be more difficult for us to enforce agreements, collect receivables, receive dividends and repatriate earnings through foreign legal systems. We cannot predict whether quotas, duties, taxes, exchange controls or other restrictions will be imposed by the United States, China, members of the European Union or other countries upon the import or export of our products and the commodities and components used to manufacture our products, or what effect any of these actions would have on our business, financial condition or results of operations. We cannot predict whether there might be changes in our ability to repatriate earnings or capital from international jurisdictions. Changes in regulatory and geopolitical policies and other factors may adversely affect our business or may require us to modify our current business practices.

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CLARUS CORPORATOIN

The risk factor titled “We use foreign suppliers and manufacturing facilities for a significant portion of our raw materials and finished products, which poses risks to our business operations,” is hereby amended and restated in its entirety as follows:

We use foreign suppliers and manufacturing facilities for a significant portion of our raw materials and finished products, and disruptions to international trade, such as potential ‘trade wars,’ pose a risk to our business operations.

A majority of our products sold were produced by and purchased from independent manufacturers primarily located in Asia and Eastern Europe, with substantially all of the remainder produced by our manufacturing facility located in Utah. Although no single supplier and no one country controls a majority of our production needs, any of the following could materially and adversely affect our ability to produce or deliver our products and, as a result, have a material adverse effect on our business, financial condition, and results of operations:

·political or labor instability in countries where our facilities, contractors, and suppliers are located;
·political or military conflict, which could cause a delay in the transportation of raw materials and products to us and an increase in transportation costs;
·heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more lengthy inspections, leading to delays in deliveries or impoundment of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;
·disease epidemics and health-related concerns, such as the H1N1 virus, bird flu, SARS, mad cow, and hoof-and-mouth disease outbreaks in recent years, which could result in closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargo of our goods produced in infected areas;
·imposition of regulations and quotas relating to imports and our ability to adjust timely to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed;
·imposition of tariffs, duties, taxes and other charges on imports and/or exports; and
·imposition or the repeal of laws that affect intellectual property rights.

In addition, the recent announcements by the United States of the imposition of tariffs on certain imported products, and the retaliatory announcements by certain other countries of tariffs to be imposed on certain U.S. products imported into such countries, could result in the imposition or escalation of tariffs or other restrictions on trade between such countries. Any ‘trade war’ that arises, including one arising from the events discussed above, could have a material adverse effect on our business, financial condition and results of operations.

35

CORPORATION

CLARUS CORPORATOIN 

ITEM 6. EXHIBITS

 

ExhibitDescription
  
10.1Credit Agreement, effective as of June 27, 2018,May 3, 2019, by and among the Loan Parties,Company, Black Diamond Retail, Inc., Black Diamond Retail – Alaska, LLC, Sierra Bullets, L.L.C., SKINourishment, LLC, the other loan parties party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders from time to time party theretothereto. (filed as Exhibit 10.110.2 to the Company’s CurrentQuarterly Report on Form 8-K,10-Q, filed with the Commission on July 3, 2018May 6, 2019 and incorporated herein by reference).
  
10.2Pledge and Security Agreement, effective as of June 27, 2018,May 3, 2019, by and among the Loan PartiesCompany, Black Diamond Equipment, Ltd., Black Diamond Retail, Inc., Sierra Bullets, L.L.C., Everest/Sapphire Acquisition, LLC, BD European Holdings, LLC, SKINourishment, LLC, Black Diamond Retail – Alaska, LLC, the other grantors party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.210.3 to the Company’s CurrentQuarterly Report on Form 8-K,10-Q, filed with the Commission on July 3, 2018May 6, 2019 and incorporated herein by reference).
  
31.1Certification of Principal Executive Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
  
31.2Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
  
32.1Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
  
32.2Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
  
101.INSXBRL Instance Document *
  
101.SCHXBRL Taxonomy Extension Schema Document *
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document *
  
101.LABXBRL Taxonomy Extension Label Linkbase Document *
  
101.PREXBRL Taxonomy Extension Presentation Linkbase Document *
  
*Filed herewith
  
**Furnished herewith

 

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CLARUS CORPORATION

CLARUS CORPORATOINSIGNATURES

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 CLARUS CORPORATION
  
Date: August 6, 20185, 2019By:/s/ /s/ Warren B. Kanders
  Name:Warren B. Kanders
  

Title:

Executive Chairman

(Principal Executive Officer)

 

 By:/s/ /s/ Aaron J. Kuehne
  Name:Aaron J. Kuehne
  

Title:

Chief Administrative Officer and

Chief Financial Officer

(Principal Financial Officer)

(Principal Accounting Officer)

 

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