| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Use of Estimates In preparing the consolidated and combined financial statements in accordance with GAAP, we make estimates and assumptions that affect amounts reported in the consolidated and combined financial statements and accompanying notes. Our significant estimates include provisions for excess and obsolete inventory, accruals for freight, duty, and tariff costs on international inventory purchases, valuation of goodwill and long-lived intangible assets, and realization of deferred tax assets. Actual results may differ from those estimates. Principles of Consolidation The accompanying consolidated and combined financial statements include the accounts of our company and our wholly owned subsidiaries, including AOB Products Company, or AOBPC (formerly Battenfeld Technologies, Inc., or BTI), BTI Tools LLC, Crimson Trace Corporation, Ultimate Survival Technologies, LLC, or ust, and AOB Consulting (Shenzhen), Co., LTD. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in equity, and cash flows at April 30, 2022, 2021, and 2020 and for the periods presented, have been included. All intercompany accounts and transactions have been eliminated in consolidation. Fair Value of Financial Instruments Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments not held for trading purposes, approximate the carrying values of such amounts because of their short-term nature or market rates of interest. Cash and Cash Equivalents We consider all highly liquid investments purchased with original maturities of three months or less at the date of acquisition to be cash equivalents. Accounts Receivable and Allowance for Estimated Credit Losses We record trade accounts receivable at net realizable value that include estimated allowances for trade terms, sales incentive programs, discounts, markdowns, chargebacks, and returns as discussed under Revenue Recognition. We extend credit to our domestic customers and some foreign distributors based on their credit worthiness. We sometimes offer discounts for early payment on invoices. When we believe the extension of credit is not advisable, we rely on either a prepayment or a letter of credit. We write off balances deemed uncollectible by us against our allowance for credit loss accounts. We maintain an allowance for credit losses related to accounts receivable for future expected credit losses resulting from the inability or unwillingness of our customers to make required payments. We estimate our allowance for credit losses based on relevant information such as historical experience, current conditions, and future expectation and in relation to a representative pool of assets consisting of a large number of customers with similar risk characteristics and similar financial assets. We adjust the allowance as appropriate to reflect differences in current conditions as well as changes in forecasted macroeconomic conditions. In November 2020, we entered into a factoring arrangement with a financial institution specifically designed to factor trade receivables with a certain customer that has extended payment terms, which are traditional to the customer’s industry. Under this factoring arrangement, from time to time, we sell this customer’s trade receivables at a discount on a non-recourse basis. We account for these transactions as sales and cash proceeds are included in cash provided by operating activities in the statement of cash flows. During the fiscal year ended April 30, 2022, we recorded an immaterial amount of factoring fees related to factoring transactions, which are included in other income/(loss), net on our consolidated and combined statement of operations. Inventories We state inventories at the lower of cost or net realizable value. We determine cost on the first-in, first-out method and net of discounts or rebates received from vendors. Provisions for potential non-saleable inventory due to excess stock or obsolescence are based upon a detailed review of inventory, past history, and expected future usage. Property, Plant, and Equipment We record property, plant, and equipment, consisting of leasehold improvements, machinery, equipment, software, hardware, furniture, and fixtures at cost and depreciate them using the straight-line method over their estimated useful lives. We recognize amortization expense for leasehold improvements over the shorter of their estimated useful lives or the lease terms, and include them in depreciation and amortization expense. We charge expenditures for maintenance and repairs to earnings as incurred, and we capitalize additions, renewals, and betterments. Upon the retirement, or other disposition of property and equipment, we remove the related cost and accumulated depreciation from the respective accounts and include any gain or loss in operations. A summary of the estimated useful lives is as follows:
Description Useful Life
Machinery and equipment 2 to 10 years We include tooling, dies, furniture, and fixtures as part of machinery and equipment and depreciate them over a period generally not exceeding 10 years. We assess the recoverability of assets whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. We recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. We measure the impairment loss as the difference between the carrying amount and the fair value of the asset. Intangible Assets We record intangible assets at cost or based on the fair value of the assets acquired. Intangible assets consist of developed technology, customer relationships, trademarks, trade names, and patents. We amortize intangible assets over their estimated useful lives or in proportion to expected yearly revenue generated from the intangibles that were acquired. Goodwill represents the excess of cost of an acquired business over the fair value of net tangible assets and identifiable intangible assets acquired. Goodwill is assigned at the reporting unit level. As mentioned below, we have determined that we have one operating unit. Valuation of Goodwill and Long-lived Assets We evaluate the recoverability of long-lived assets whenever events or changes in circumstances indicate that carrying amounts may not be recoverable in accordance with Accounting Standard Codification, or ASC, 360, Property, Plant, and Equipment . When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine the initial fair value, primarily using future anticipated cash flows that are directly associated with, and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved. We have significant long-lived assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant long-lived assets are developed technology, customer relationships, patents, trademarks, and trade names. We amortize all finite-lived assets either on a straight-line basis or based upon patterns in which we expect to utilize the economic benefits of such assets. We initially determine the values of assets by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of identifiable assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following: • significant underperformance relative to historical or projected future operating results; • significant changes in the manner or use of the assets or the strategy for our overall business; • significant negative industry or economic trends; • a significant decline in our stock price for a sustained period; and • a decline in our market capitalization below net book value. Future adverse changes in these or other unforeseeable factors could result in an impairment charge that could materially impact future results of operations and financial position in the reporting period identified. In accordance with ASC 350, Intangibles-Goodwill and Other, we test goodwill for impairment on an annual basis on February 1 and between annual tests if indicators of potential impairment exist. As of our valuation date in fiscal 2022, we had $ 64.3 million of goodwill. During the annual impairment review process, we performed a step one analysis to assess the recoverability of our goodwill. The step one analysis estimates the fair value of our reporting unit and compares it to the carrying value of the reporting unit, including goodwill, to assess whether impairment is present. We estimate the fair value of our operating unit using an equal weighting of the fair values derived from the income approach and the market approach because we believe a market participant would equally weight both approaches when valuing the operating unit. The income approach is based on the projected cash flows that are discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. Fair value is estimated using internally developed forecasts and assumptions. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Other significant assumptions include revenue growth rates, profitability projections, and terminal value growth rates. The market approach estimates fair values based on the determination of appropriate publicly traded market comparison companies and market multiples of revenue and earnings derived from those companies with similar operating and investment characteristics as the operating unit being valued. Finally, we compare and reconcile our overall fair value to our market capitalization in order to assess the reasonableness of the calculated fair values of our operating units. We recognize an impairment loss for goodwill if the implied fair value of goodwill is less than the carrying value. We completed a step one analysis as of February 1, 2022, and concluded there were no indicators of impairment. On April 30, 2022, the decline in our stock price and market capitalization indicated a reduction of the fair value of our reporting unit. We determined this decline to be a triggering event, which indicated it was more likely than not that the fair values of these reporting units were less than the respective book values and required us to complete an additional step one analysis. Given the volatility in the financial markets, we believe a market participant would determine that the income approach would be a more prominent metric for determining the fair value of our operating unit and thus we used a 75 % weighting on the income approach and a 25 % weighting on the market approach when valuing our operating unit. As of our interim valuation date, we had $ 67.8 million of goodwill. Based on the results of this evaluation, we recorded a non-cash impairment charge of our entire $ 67.8 million goodwill balance during our fourth quarter of fiscal 2022. We have reviewed the provisions of ASC 350-20, with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of ASC 350-20, we have determined that we have one operating unit. On March 23, 2020, we determined that our business was expected to be negatively impacted by several factors related to the COVID-19 pandemic, including a major online retail customer’s decision to halt or delay most non-essential product orders, COVID-19-related supply chain issues, as well as COVID-19-related “stay at home” orders and sporting goods store closures, which reduced retail foot traffic in many states. Given the extreme market volatility, we relied solely on the income approach to derive the current value of our business. Based on these factors, we expected reduced cash flows in our business, and we believed this constituted a triggering event under generally accepted accounting principles. Based on the results of this evaluation, we recorded a $ 98.9 million non-cash impairment of goodwill during our fourth quarter of fiscal 2020. Our assumptions related to the development of fair value could deviate materially from actual results and forecasts used to support asset carrying values and may change in the future, which could result in non-cash charges that would adversely affect our results of operations. The re-measurement of goodwill is classified as a Level 3 fair value assessment as described in Note 11 - Fair Value Measurement of the consolidated and combined financial statements , due to the significance of unobservable inputs developed using company-specific information. Based on the triggering event noted above, we evaluated the recoverability of our long-lived assets on April 30, 2022. Based on the results of this evaluation, on an undiscounted cash flow basis, there was no indications of impairment of our long-lived assets. Business Combinations We allocate the purchase price, including any contingent consideration, of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their fair values at the date of acquisition. The fair values are primarily based on third-party valuations using our management assumptions that require significant judgments and estimates. The purchase price allocated to intangibles is based on unobservable factors, including but not limited to, projected revenues, expenses, customer attrition rates, royalty rates, a weighted average cost of capital, among others. The weighted average cost of capital uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows. The unobservable factors we use are based upon assumptions believed to be reasonable, but are also uncertain and unpredictable, as a result these estimates, and assumptions may require adjustment in the future if actual results differ from our estimates. Revenue Recognition We recognize revenue for the sale of our products at the point in time when the control of ownership has transferred to the customer. The transfer of control typically occurs at a point in time based on consideration of when the customer has (i) a payment obligation, (ii) physical possession of goods has been received, (iii) legal title to goods has passed, (iv) risks and rewards of ownership of goods has passed to the customer, and (v) the customer has accepted the goods. The timing of revenue recognition occurs either on shipment or delivery of goods based on contractual terms with the customer. The duration of contractual arrangements with customers in our wholesale channels is typically less than one year. Payment terms with customers are typically between 20 and 90 days , with a discount available in certain cases for early payment. For contracts with discounted terms, we determine the transaction price upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each product purchased. We estimate variable consideration relative to the amount of cash discounts to which customers are likely to be entitled. In some instances, we provide longer payment terms, particularly as it relates to our hunting dating programs, which represent payment terms due in the fall for certain orders of hunting products received in the spring and summer. We do not consider these extended terms to be a significant financing component of the contract because the payment terms are less than one year. We have elected to treat all shipping and handling activities as fulfillment costs and recognize the costs as distribution expenses at the time we recognize the related revenue. Shipping and handling costs billed to customers are included in net sales. The amount of revenue we recognize reflects the expected consideration to be received for providing the goods or services to the customer, which includes estimates for variable consideration. Variable consideration includes allowances for trade term discounts, chargebacks, and product returns. Estimates of variable consideration are determined at contract inception and reassessed at each reporting date, at a minimum, to reflect any changes in facts and circumstances. We apply the portfolio approach as a practical expedient and utilize the expected value method in determining estimates of variable consideration, based on evaluations of specific product and customer circumstances, historical and anticipated trends, and current economic conditions. We have co-op advertising program expense, which we record within advertising expense, in recognition of a distinct service that we receive from our customers at the retail level. Disaggregation of Revenue The following table sets forth certain information regarding trade channel net sales for the fiscal years ended April 30, 2022, 2021, and 2020 (dollars in thousands):
2022 2021 $ Change % Change 2020
e-commerce channels $ 97,418 $ 108,726 $ ( 11,308 ) - 10.4 % $ 54,316
Traditional channels 150,108 167,961 ( 17,853 ) - 10.6 % 113,063
Total net sales $ 247,526 $ 276,687 $ ( 29,161 ) - 10.5 % $ 167,379 Our e-commerce channels include net sales from customers that do not traditionally operate a physical brick and mortar store, but generate the majority of their revenue from consumer purchases at their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick and mortar stores and generate the large majority of their revenue from consumer purchases at their brick and mortar locations. We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the fiscal years ended April 30, 2022, 2021, and 2020 (dollars in thousands):
2022 2021 $ Change % Change 2020
Domestic net sales $ 234,803 $ 267,573 $ ( 32,770 ) - 12.2 % $ 160,905
International net sales 12,723 9,114 3,609 39.6 % 6,474
Total net sales $ 247,526 $ 276,687 $ ( 29,161 ) - 10.5 % $ 167,379 Cost of Goods Sold Cost of goods sold for our purchased finished goods includes the purchase costs and related overhead. We source most of our purchased finished goods from manufacturers in Asia. Cost of goods sold for our manufactured goods includes all materials, labor, and overhead costs incurred in the production process. Overhead includes all costs related to manufacturing or purchasing finished goods, including costs of planning, purchasing, quality control, depreciation, freight, duties, royalties, and shrinkage. Research and Development We engage in both internal and external research and development, or R&D, in order to remain competitive and to exploit potential untapped market opportunities. We approve prospective R&D projects after analysis of the costs and benefits associated with the potential product. Costs in R&D expense include salaries, materials, utilities, and administrative costs. Advertising We expense advertising costs, primarily consisting of digital, printed, or television advertisements, either as incurred or upon the first occurrence of the advertising. Advertising expense, included in selling, marketing, and distribution expenses, totaled $ 13.3 million, $ 14.4 million, and $ 14.5 million in fiscal 2022, 2021, and 2020, respectively. We have co-op advertising program expense, which we record within advertising expense, in recognition of a distinct service that we receive from our customers at the retail level. Warranty We generally provide either a limited lifetime, four-year, three-year, two-year, or one-year warranty program to the original purchaser of most of our products. We will also repair or replace certain products or parts found to be defective under normal use and service with an item of equivalent value, at our option, without charge during the warranty period. We provide for estimated warranty obligations in the period in which we recognize the related revenue. We quantify and record an estimate for warranty-related costs based on our actual historical claims experience and current repair costs. We make adjustments to accruals as warranty claims data and historical experience warrant. Should we experience actual claims and repair costs that are higher than the estimated claims and repair costs used to calculate the provision, our operating results for the period or periods in which such returns or additional costs materialize could be adversely impacted. The following table sets forth the change in accrued warranties, a portion of which is recorded as a non-current liability, in the fiscal years ended April 30, 2022, 2021, and 2020 (in thousands):
April 30, 2022 April 30, 2021 April 30, 2020
Beginning balance 717 336 587
Warranties issued and adjustments to provisions 399 1,083 193
Changes related to preexisting product recall accruals - - ( 180 )
Warranties assumed in acquisition 150 - -
Warranty claims ( 480 ) ( 702 ) ( 264 )
Ending balance 786 717 336 Rent Expense We occasionally enter into non-cancelable operating leases for office space, distribution facilities, and equipment. Our leases for real estate have initial terms ranging from one to 18 years , generally with renewal options. Leases for equipment typically have initial terms ranging from one to 10 years . Most leases have fixed rentals, with many of the real estate leases requiring additional payments for real estate taxes and occupancy-related costs. We record rent expense for leases containing landlord incentives or scheduled rent increases on a straight-line basis over the lease term beginning with the earlier of the lease commencement date or the date we take possession or control of the leased premises. See Note 4 – Leases for more information. (Loss)/Earnings per Share On August 24, 2020, the date of consummation of the Separation, our former parent distributed 13,975,104 shares of our common stock, par value $ 0.001 per share, to our former parent’s stockholders of record as of August 10, 2020, or the Record Date. We utilize this share amount for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation as all common stock was owned by our former parent prior to the Separation. These shares are treated as issued and outstanding at April 30, 2020 for purposes of calculating historical basic and diluted earnings per share. For periods prior to the Separation, it is assumed that there are no dilutive equity instruments as we had no stock-based awards outstanding. We compute diluted earnings per share by giving effect to all potentially dilutive stock awards that are outstanding. For periods subsequent to the Separation, the computation of diluted earnings per share excludes the effect of the potential exercise of stock-based awards when the effect of the potential exercise would be anti-dilutive. There were no shares excluded from the computation of diluted earnings per share for the fiscal years ended April 30, 2022 and 2021, respectively. After the Separation, the weighted-average number of common shares outstanding for basic and diluted earnings per share for the fiscal year ended April 30, 2021 was based on the weighted-average number of actual common shares outstanding assuming the number of shares of AOUT common stock outstanding on August 24, 2020 had been outstanding at the beginning of the fiscal years ended April 30, 2021 and 2020, respectively. The following table provides a reconciliation of the net income/(loss) amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings/(loss) per common share (in thousands, except per share data):
For the Years Ended April 30,
2022 2021 2020
Net Per Share Net Per Share Net Per Share
(Loss) Shares Amount Income Shares Amount Loss Shares Amount
Basic (loss)/earnings $ ( 64,880 ) 13,930 $ ( 4.66 ) $ 18,405 13,997 $ 1.31 $ ( 96,201 ) 13,975 $ ( 6.88 )
Effect of dilutive stock awards — — — — 228 ( 0.02 ) — — —
Diluted (loss)/earnings $ ( 64,880 ) 13,930 $ ( 4.66 ) $ 18,405 14,225 $ 1.29 $ ( 96,201 ) 13,975 $ ( 6.88 ) Stock-Based Compensation Our stock-based compensation awards consist of stock options, performance-based restricted stock units, or PSUs, and restricted stock units, or RSUs, all of which are based on our common shares. Compensation costs for all awards expected to vest are recognized over the vesting period, which generally vest annually in four-year tranches, and are included in costs of goods sold; research and development; selling, marketing, and distribution; and general and administrative expenses in the consolidated and combined statements of operations and comprehensive income/(loss). Prior to the Separation, the combined statements of operations and comprehensive income/(loss) also include an allocation of our former parent's corporate and shared employee stock-based compensation expenses. See Note 12 – Stock-Based Compensation for additional information. Income Taxes We account for income taxes in accordance with ASC 740, Income Taxes (ASC 740). The provision for income taxes is based upon income reported in the accompanying consolidated and combined financial statements as required by ASC 740-10 . We determine deferred tax assets and liabilities based on temporary differences between financial reporting and tax bases in assets and liabilities and measure them by applying enacted rates and laws expected to be in place when the deferred items become subject to income tax or deductible for income tax purposes. We recognize the effect on deferred taxes and liabilities of a change in tax rates in the period that includes the enactment date. In assessing the realization of our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and before our net operating loss carryforwards expire. We periodically evaluate the recoverability of our deferred income tax assets by assessing the need for a valuation allowance. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, we establish a valuation allowance against some or all of our deferred income tax assets. Recording a valuation allowance could have a significant effect on our future results of operations and financial position. We determine unrecognized income tax benefits in accordance with ASC 740 on the basis of a two-step process in which first we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and second for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Accrued income taxes in the consolidated and combined balance sheet includes unrecognized income tax benefits along with related interest and penalties, appropriately classified as current or noncurrent. We recognize interest and penalties related to unrecognized tax benefits as interest income/(expense) and other income/(expense), respectively, in the accompanying consolidated and combined statement of operations. All deferred tax assets and liabilities are classified as noncurrent in the consolidated and combined balance sheet. We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. We establish valuation allowances if it is more likely than not that we will be unable to realize our deferred income tax assets. In making this determination, we consider available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results, and tax planning strategies. Significant judgment is required in this analysis. We determined in the current period that is more likely than not that the benefit from the Company’s net deferred tax assets will not be realized and accordingly we established a full valuation allowance recorded as an increase to income tax expense. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates. Estimates may change as new events occur, estimates of future taxable income may increase during the expected reversal period of our deferred tax assets, or additional information becomes available. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, a full or partial reversal of the valuation allowance could occur resulting in a decrease to the provision for income taxes in the period such a change in estimate is made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Prior to the Separation, income taxes were allocated in a manner that is systematic, rational, and consistent with the broad principles of ASC 740. Prior to the Separation, our operations have been included in our former parent federal consolidated tax return, certain foreign tax returns, and certain state tax returns. For the purposes of the financial statements presented on a “carve-out” basis, our income tax provisions were computed as if we filed separate tax returns (i.e., as if we had not been included in the consolidated income tax return group with our former parent). The separate return method applies ASC 740 to the combined financial statements of each member of a consolidated tax group as if the group member were a separate taxpayer. As a result, actual tax transactions included in the consolidated financial statements of our former parent may not be included in our consolidated and combined financial statements. Also, the tax treatment of certain items reflected in the consolidated and combined financial statements may not be reflected in the consolidated financial statements and tax returns of our former parent. It is conceivable that items such as net operating losses, other deferred taxes, uncertain tax positions, and valuation allowances may exist in the consolidated and combined financial statements that may or may not exist in our former parent’s consolidated financial statements. Since our results, prior to the Separation, were included in our former parent consolidated tax returns, payments to certain tax authorities were made by our former parent and not by us. For tax jurisdictions in which we are included with our former parent in a consolidated tax filing, we do not maintain taxes payable to or from our former parent and the payments are deemed to be settled immediately with the legal entities paying the tax in the respective tax jurisdictions through changes in parent company investment. Tax receivables in jurisdictions where we do not file a consolidated tax return with our former parent, such as certain state tax returns, are recorded as income tax receivable. Deferred income tax assets and liabilities, prior to the Separation, as presented in the combined balance sheet, reflect the net future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Concentration of Credit Risk Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents, and trade r |
