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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2020

Commission File No. 001-39366

 

American Outdoor Brands, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

84-4630928

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1800 North Route Z

Columbia, Missouri

 

65202

(Address of principal executive offices)

 

(Zip Code)

(800331-0852

(Registrant’s telephone number, including area code)

 

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

 

Title of each Class

Trading Symbol

Name of exchange on which registered

Common Stock, par value $0.001 per share

AOUT

Nasdaq Global Select Market

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

☐  

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☒  

  

Smaller reporting company

 

 

 

 

 

 

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 Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 13,975,104 shares of common stock, par value $0.001, outstanding as of August 24, 2020.  

 


AMERICAN OUTDOOR BRANDS, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended July 31, 2020 and 2019

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

5

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

27

 

Item 4. Controls and Procedures

  

27

 

 

 

 

PART II - OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

28

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

Item 6. Exhibits

  

28

Signatures

  

30

 

1st Response®, 24/7®, Accumax®, Ammo Vault®, Black Ops®, BOG®, Boneyard®, Bubba®, Caldwell®, Deadshot®, Deathgrip®, Delta Series®, Delta Force®, E-MAX®, Extreme Ops®, F.A.T. Wrench®, Fieldpod®, Flexware®, Frankford Arsenal®, Frontier®, Galaxy®, Golden Rod®, Great Divide®, Grip A Legend®, Gun Butler®, Homeland Security®, Hooyman®, H.R.T.®, Hydrosled®, Imperial®, Intellidropper®, Key Gear®, Jolt®, Lead Sled®, Lockdown®, M-Press®, M.A,G.I.C.®, Mag Charger®, Magnum Rifle Gong®, Night Guard®, Night Terror®, Nitro®, Non-Typical Wildlife Solutions®, Old Timer®, One Cut and You’re Through®, Orange Peel®, Outback®, Pico Light®, S.W.A.T.®, Safe-T-Lock®, Schrade®, Schrade Tough®, Search & Rescue®, Sharpfinger®, Special Ops®, Special Tactical®, Spright®, Stable Table®, Sure-Lock®, Switcheroo®, Switch-it®, Tack Driver®, Tipton®, U-Dig-It®, Ultra Glide®, Uncle Henry®, Wheeler®, XLA Bipod®, ®,  Zinx®, 10,000 Rounds in Your Pocket®, Color Guard®, Complete Focus®, Crimson Trace®, Kryptonyte®, Lasergrips®, Laserguard®, Laserlyte®, Lightguard®, LINQ®, Quick Tyme®, Rail Master®, Reaction Tyme®, Rumble Tyme®, Score Tyme®, Shockstop®, Steel Tyme®, Trigger Tyme®, and Triple Tyme® are some of the registered U.S. trademarks of our company or one of our subsidiaries. Adrenaline™, Bloodmoon™, Built for Generations™, Clandestine™, Dominion™, Don’t Settle for Average. Demand Perfection™, Duro™, Engineered for the Unknown™, Field General™, Flex Change™, It’s not protected unless it’s on LOCKDOWN™, Learn and Live™, Lockdown Puck™, Magnum Magnet™, MEAT!™, MEAT Your Maker!™, Officer™, On the Edge of Adventure™, Pile Driver™, Stinger™, Survival Born, Adventure Ready™, Secure Your Lifestyle™, The Ultimate Lifestyle™, Triple Play™, Tunnel Vision™, Turkinator™, Unmatched Accuracy at the Bench and in the Field™, UST™, Velociradar™, Water to Plate™, Your Land. Your Legacy™, Accu-Guard™, Accu-Grips™, Dart Tyme™, Defender Series™, Instant Activation™, Instinctive Activation™, Lasersaddle™, Master Series™, and Popper Tyme™ are some of the unregistered trademarks of our company or one of our subsidiaries. Trademarks licensed to us by Smith & Wesson Brands, Inc. in connection with the manufacture, distribution, marketing, advertising, promotion, merchandising, shipping, and sale of certain licensed accessory product categories include Gemtech®, M&P®, Performance Center®, Smith & Wesson®, T/C®, and Thompson/Center Arms™, among others. This report also may contain trademarks and trade names of other companies.

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in the Quarterly Report on Form 10-Q include statements regarding:

 

our expectation to incur costs to establish certain standalone functions, information technology systems, and other one-time costs;

 

the performance of certain functions using our own resources or outsourced services, going forward;

 

the impact on profitability and operating cash flows, resulting from recurring standalone costs possibly differing materially from historical allocations;

 

our expectation that the unrecognized compensation expense related to unvested RSUs and PSUs will be recognized over a weighted average remaining contractual term of 2 years;

 

our intention to vigorously defend ourselves in the lawsuits to which we are subject;

 

the possibility that unfavorable outcome of litigation or prolonged litigation could harm our business;

 

in the future, our disclosure of an estimate of the possible loss or range of loss, if such estimate could be made, or our disclosure that an estimate could not be made, should we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material;

 

our belief that we have provided adequate accruals for defense costs;

 

the combined financial statements may not be indicative of our future performance;

 

the changes we expect to experience in the future as a result of the Separation, including changes in the financing, cash management, operations, cost structure, and personnel needs of our business;

 

the possibility that worsening of conditions or increased fears of a pandemic could have a renewed and prolonged effect on manufacturing or employment in China, travel to and from China, or other restrictions on imports – all of which could have a longer-term effect on our sales and profitability in future periods, with regard to concerns surrounding COVID-19;

 

our future ability to fund our operating needs; our belief that we will be able to meet our short-term liquidity needs, based upon our history of generating strong cash flows;

 

our belief we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through the issuance of third-party debt;

 

our expectation that our separation from SWBI may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to us;

 

our future capital requirements dependency on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the capital needed to operate as an independent publicly traded company, any acquisitions or strategic investments that we may determine to make, and our ability to navigate through the many negative business impacts from the COVID-19 pandemic;

 

our expectation to utilize our cash flows to continue to invest in our brands, including research and development of new product initiatives, talent and capabilities, and growth strategies, including any potential acquisitions, and to repay any indebtedness we may incur over time; and,

 

our expectation that our inventory will decline in our second and third fiscal quarters due to the holiday shopping season, which is consistent with our seasonal inventory trends.

A number of factors could cause our actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among others, the following:

 

the effects of the coronavirus, or COVID-19, pandemic, including potential disruptions in our ability to source the raw materials necessary for the production of our products, disruptions and delays in the manufacture of our products, and difficulties encountered by retailers and other components of the distribution channel for our products;

 

lower levels of consumer spending;

 

our ability to introduce new products that are successful in the marketplace;

 

interruptions of our arrangements with third-party contract manufacturers that disrupt our ability to fill our customers’ orders;

 

increases in costs or decreases in availability of finished products, product components, and raw materials;

 

the failure to maintain or strengthen our brand recognition and reputation;


 

the ability to forecast demand for our products accurately;

 

our ability to continue to expand our e-commerce business;

 

our ability to compete in a highly competitive market;

 

our dependence on large customers;

 

an increase on emphasis of private label products by our customers;

 

pricing pressures by our customers;

 

our ability to collect our accounts receivable;

 

the potential for product recalls, product liability, and other claims or lawsuits against us;

 

our ability to protect our intellectual property;

 

inventory levels, both internally and in the distribution channel, in excess of demand;

 

our ability to identify acquisition candidates, to complete acquisitions of potential acquisition candidates, to integrate their businesses with our business, and to achieve success with acquired companies;

 

the performance and security of our information systems;

 

the risk of complying with any applicable foreign laws or regulations and the effect of increased protective tariffs;

 

economic, social, political, legislative, and regulatory factors;

 

the potential for increased regulation of firearms and firearms- related products;

 

the effect of political pressures on firearm laws and regulations;

 

the failure to realize the anticipated benefits of being a separate, public company following the Separation or to achieve the benefits anticipated from our new principal facility;

 

future investments for capital expenditures, liquidity and anticipated cash needs and availability;

 

the potential for impairment charges;

 

estimated amortization expense of intangible assets for future periods;

 

actions of social activists that could have an adverse effect on our business;

 

our assessment of factors relating to the valuation of assets acquired and liabilities assumed in acquisitions, the timing for such evaluations, and the potential adjustment in such evaluations; and

 

other factors detailed from time to time in our reports that will be filed with the Securities and Exchange Commission, or the SEC, including our Information Statement forming Exhibit 99.1 to our current Report on Form 8-K, filed with the SEC on August 4, 2020.

All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements.

 

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN OUTDOOR BRANDS, INC. AND SUBSIDIARIES

COMBINED BALANCE SHEETS

 

 

 

As of:

 

 

 

July 31, 2020

(Unaudited)

 

 

April 30, 2020

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

234

 

Accounts receivable, net of allowance for credit losses of $334 on July 31, 2020 and

   $448 on April 30, 2020

 

 

41,993

 

 

 

35,096

 

Inventories

 

 

69,593

 

 

 

59,999

 

Prepaid expenses and other current assets

 

 

3,471

 

 

 

3,244

 

Income tax receivable

 

 

136

 

 

 

104

 

Total current assets

 

 

115,193

 

 

 

98,677

 

Property, plant, and equipment, net

 

 

9,994

 

 

 

9,677

 

Intangibles, net

 

 

65,413

 

 

 

69,152

 

Goodwill

 

 

64,315

 

 

 

64,315

 

Right of use assets

 

 

2,264

 

 

 

2,772

 

Deferred income taxes

 

 

3,580

 

 

 

3,580

 

Other assets

 

 

19

 

 

 

242

 

 

 

$

260,778

 

 

$

248,415

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,112

 

 

$

8,936

 

Accrued expenses

 

 

10,995

 

 

 

7,655

 

Accrued payroll and incentives

 

 

3,315

 

 

 

3,249

 

Lease liabilities, current

 

 

1,258

 

 

 

1,324

 

Accrued profit sharing

 

 

275

 

 

 

217

 

Total current liabilities

 

 

30,955

 

 

 

21,381

 

Lease liabilities, net of current portion

 

 

2,298

 

 

 

2,830

 

Other non-current liabilities

 

 

183

 

 

 

106

 

Total liabilities

 

 

33,436

 

 

 

24,317

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Parent company investment

 

 

227,342

 

 

 

224,098

 

Total equity

 

 

227,342

 

 

 

224,098

 

 

 

$

260,778

 

 

$

248,415

 

 

See accompanying notes to unaudited combined financial statements.

5


 

AMERICAN OUTDOOR BRANDS, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME

(Unaudited)

 

 

 

 

For the Three Months Ended July 31,

 

 

 

 

2020

 

 

2019

 

 

 

(In thousands, except per share data)

 

Net sales (including $1.5 million and $4.1 million of related party sales

         for the three months ended July 31, 2020 and 2019, respectively)

 

 

$

50,468

 

 

$

33,216

 

Cost of sales

 

 

 

26,737

 

 

 

19,550

 

Gross profit

 

 

 

23,731

 

 

 

13,666

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

 

1,230

 

 

 

1,332

 

Selling, marketing, and distribution

 

 

 

10,543

 

 

 

7,717

 

General and administrative

 

 

 

9,494

 

 

 

11,836

 

Total operating expenses

 

 

 

21,267

 

 

 

20,885

 

Operating income/(loss)

 

 

 

2,464

 

 

 

(7,219

)

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

 

84

 

 

 

(2

)

Related party interest income, net

 

 

 

336

 

 

 

939

 

Total other (expense)/income, net

 

 

 

420

 

 

 

937

 

Income/(loss) from operations before income taxes

 

 

 

2,884

 

 

 

(6,282

)

Income tax expense/(benefit)

 

 

 

1,095

 

 

 

(1,299

)

Net income/(loss)/comprehensive income/(loss)

 

 

$

1,789

 

 

$

(4,983

)

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.13

 

 

$

(0.36

)

Diluted

 

 

$

0.13

 

 

$

(0.36

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

13,975

 

 

 

13,975

 

Diluted

 

 

 

13,975

 

 

 

13,975

 

 

See accompanying notes to unaudited combined financial statements.

6


 

AMERICAN OUTDOOR BRANDS, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

 

Total

 

(In thousands)

 

Equity

 

Balance at April 30, 2019

 

$

324,614

 

Net loss

 

 

(4,983

)

Net transfers from Parent

 

 

2,035

 

Balance at July 31, 2019

 

$

321,666

 

 

 

 

 

 

 

 

Total

 

 

 

Equity

 

Balance at April 30, 2020

 

$

224,098

 

Net income

 

 

1,789

 

Net transfers from Parent

 

 

1,455

 

Balance at July 31, 2020

 

$

227,342

 

 

See accompanying notes to unaudited combined financial statements.

7


 

AMERICAN OUTDOOR BRANDS, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended July 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

1,789

 

 

$

(4,983

)

Adjustments to reconcile net income to net cash provided

   by/(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,388

 

 

 

5,977

 

Provision for losses on notes and accounts receivable

 

 

97

 

 

 

922

 

Stock-based compensation expense

 

 

298

 

 

 

314

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,994

)

 

 

3,542

 

Inventories

 

 

(9,594

)

 

 

(5,630

)

Prepaid expenses and other current assets

 

 

(227

)

 

 

(710

)

Income taxes

 

 

(32

)

 

 

(57

)

Accounts payable

 

 

6,165

 

 

 

150

 

Accrued payroll and incentives

 

 

66

 

 

 

(1,717

)

Right of use assets

 

 

232

 

 

 

168

 

Accrued profit sharing

 

 

58

 

 

 

62

 

Accrued expenses

 

 

3,340

 

 

 

972

 

Other assets

 

 

223

 

 

 

(15

)

Lease liabilities

 

 

(322

)

 

 

(180

)

Other non-current liabilities

 

 

77

 

 

 

(73

)

Net cash (used in)/provided by operating activities

 

 

564

 

 

 

(1,258

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Payments to acquire patents and software

 

 

(105

)

 

 

(38

)

Payments to acquire property and equipment

 

 

(879

)

 

 

(433

)

Net cash used in investing activities

 

 

(984

)

 

 

(471

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net transfers from Parent

 

 

186

 

 

 

1,754

 

Net cash provided by financing activities

 

 

186

 

 

 

1,754

 

Net decrease in cash and cash equivalents

 

 

(234

)

 

 

25

 

Cash and cash equivalents, beginning of period

 

 

234

 

 

 

162

 

Cash and cash equivalents, end of period

 

$

-

 

 

$

187

 

 

See accompanying notes to unaudited combined financial statements.

 

8


 

AMERICAN OUTDOOR BRANDS, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Supplemental Disclosure of Non-cash Investing and Financing Activities:

 

 

 

For the Three Months Ended July 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

65

 

 

$

 

Changes in right of use assets for operating lease obligations

 

 

 

 

 

3,369

 

Changes in lease liabilities for operating lease obligations

 

 

 

 

 

4,449

 

 

See accompanying notes to unaudited combined financial statements.

 

 

 

9


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

(1) Background, Description of Business, and Basis of Presentation:

Background

On November 13, 2019, Smith & Wesson Brands, Inc., or SWBI, announced that it was proceeding with a plan to spin-off its outdoor products and accessories business to our company (formerly known as American Outdoor Brands Spin Co.), a newly formed wholly owned subsidiary formed in anticipation of the Separation (collectively, our “company, “we,” “us,” or “our”), and separate into two distinct, publicly traded companies, or the Separation.

On August 24, 2020, SWBI completed the Separation through a pro-rata distribution, or the Distribution, of all the outstanding shares of our common stock to the stockholders of record of SWBI as of the close of business on August 10, 2020, the record date for the Distribution, or the Record Date. Each SWBI stockholder of record received one share of our common stock, $0.001 par value, for every four shares of SWBI common stock, $0.001 par value, held by such stockholder as of the close of business on the Record Date. SWBI distributed 13,975,104 shares of our common stock in the Distribution, which was effective at 12:01 a.m., Eastern Time, on August 24, 2020. As a result of the Distribution, we became an independent public company and our common stock is listed under the symbol “AOUT” on the Nasdaq Global Select Market. The financial statements as of July 31, 2020 are prior to the Separation and thus are prepared on a “carve out” basis as described below.

Description of Business

We are a leading provider of outdoor products and accessories encompassing hunting, fishing, camping, shooting, and personal security and defense products for rugged outdoor enthusiasts. We conceive, design, produce or source, and sell products and accessories, including shooting supplies, rests, vaults, and other related accessories; premium sportsman knives and tools for fishing and hunting; land management tools for hunting preparedness; harvesting products for post-hunt or post-fishing activities; electro-optical devices, including hunting optics, firearm aiming devices, flashlights, and laser grips; reloading, gunsmithing, and firearm cleaning supplies; and survival, camping, and emergency preparedness products.  We develop and market our products at our facility in Columbia, Missouri and contract for the manufacture and assembly of most of our products with third-parties located in Asia. We also manufacture some of our electro-optics products in our facility in Wilsonville, Oregon.

We focus on our brands and the establishment of product categories in which we believe our brands will resonate strongly with the activities and passions of consumers and enable us to capture an increasing share of our overall addressable markets. Our owned brands include Caldwell, Wheeler, Tipton, Frankford Arsenal, Hooyman, BOG, MEAT!, Uncle Henry, Old Timer, Imperial, Crimson Trace, LaserLyte, Lockdown, UST, BUBBA, and Schrade, and we license for use in association with certain products we sell additional brands, including M&P, Smith & Wesson, Performance Center by Smith & Wesson, and Thompson/Center Arms.  In focusing on the growth of our brands, we organize our creative, product development, sourcing, and e-commerce teams into four brand lanes, each of which focuses on one of four distinct consumer verticals – Marksman, Defender, Harvester, and Adventurer – with each of our brands included in one of the brand lanes. Our sales activities are focused and measured on how we go to market within the e-commerce and traditional distribution channels.  These two channels involve distinct strategies to increase net sales and enhance market share.  Our sales team is organized by customer groups, which we refer to as classes of trade, within the e-commerce and traditional channels and sells our products from all brands in all four of our brand lanes.  We measure our success through sales performance in these distribution channels against prior results and our own expectations.  

Our Marksman brands address product needs arising from consumer activities that take place primarily at the shooting range and where firearms are cleaned, maintained, and worked on. Our Defender brands include products that help consumers aim their firearms more accurately, including situations that require self-defense, and products that help secure, store, and maintain connectivity to those possessions that some consumers would consider to be high value or high consequence. Our Harvester brands focus on the activities hunters typically engage in, including hunting preparation, the hunt itself, and the activities that follow a hunt, such as meat processing. Our Adventurer brands include products that help enhance consumers’ fishing and camping experiences.

Basis of Presentation

The combined financial statements at July 31, 2020 and for the three months ended July 31, 2020 and 2019 are unaudited, but in our opinion include all normal recurring adjustments necessary for a fair statement of the results for the interim periods. The Combined Balance Sheet at April 30, 2020 was derived from audited financial statements. The results reported in these combined financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our registration statement on Form 10 (File No. 001-39366), initially filed with the Securities and Exchange Commission, or SEC, on July 2, 2020, as amended by Amendment No. 1 filed with the SEC on July 13, 2020, or the Form 10.


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

The combined financial statements include certain assets and liabilities that have historically been held by SWBI and various of its subsidiaries, but are specifically identifiable to or otherwise attributable to the outdoor products and accessories business. Our combined statements of operations and comprehensive income/(loss) also include costs for certain pre-Separation centralized functions and programs provided and administered by SWBI that have been charged directly to SWBI businesses, including us. These centralized functions and programs, include information technology, human resources, accounting, legal, and insurance. We were directly charged for these costs that were included in general and administrative expenses in the combined statements of operations and comprehensive income/(loss).

In addition, for purposes of preparing the combined financial statements on a “carve-out” basis, a portion of SWBI’s total corporate expenses were allocated to us. These expense allocations include the cost of corporate functions and resources provided by SWBI, including executive management, finance, accounting, legal, human resources, internal audit, and the related benefit costs associated with such functions, such as stock-based compensation, and the cost of the SWBI Springfield, Massachusetts corporate headquarters. In fiscal 2020, SWBI began operating a new distribution facility in Columbia, Missouri, which included shared distribution expenses between SWBI and us. In addition to the portion of SWBI corporate expenses allocated to us, a portion of SWBI total distribution expenses was allocated to us. These expense allocations include selling, distribution, inventory management, warehouse, and fulfillment services provided by SWBI and the related benefit costs associated with such functions, such as stock-based compensation and the cost of the SWBI Columbia, Missouri distribution facility. We were allocated $2.1 million for the three months ended July 31, 2020 and $2.4 million for the three months ended July 31, 2019 for such corporate expenses, which were included within general and administrative expenses in the combined statements of operations and comprehensive income/(loss). For the three months ended July 31, 2020 and 2019, we were also allocated $1.6 million and $936,000, respectively, of such distribution expenses, which were included within cost of sales; selling, marketing, and distribution expenses; and general and administrative expenses in the combined statements of operations and comprehensive income/(loss).

Costs were allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net sales, employee headcount, delivery units, or square footage, as applicable. We consider the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, us during the periods presented. However, the allocations may not reflect the expenses we would have incurred if we had been a standalone company for the periods presented. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Going forward, we may perform these functions using our own resources or outsourced services. For a period following the Separation, however, some of these functions will continue to be provided by SWBI under a Transition Services Agreement. Additionally, we will provide some services to SWBI under such Transition Services Agreement. We also entered into certain commercial arrangements with SWBI in connection with the Separation.

Subsequent to the completion of the Separation, we expect to incur costs to establish certain standalone functions, information technology systems, and other one-time costs. Recurring standalone costs include accounting, financial reporting, tax, regulatory compliance, corporate governance, treasury, legal, internal audit, and investor relations functions, as well as the annual expenses associated with running an independent, publicly traded company, including listing fees, board of director fees, and external audit costs. Recurring standalone costs may differ materially from historical allocations, which may have an impact on profitability and operating cash flows.

SWBI utilized a centralized approach to cash management and financing its operations. The cash and cash equivalents held by SWBI at the corporate level are not specifically identifiable to us and therefore have not been reflected in our combined balance sheet. Cash transfers between us and SWBI have been accounted for through parent company investment. Cash and cash equivalents in the combined balance sheet represent cash and cash equivalents held by legal entities that will be transferred to us or amounts otherwise attributable to us.

The combined financial statements include certain assets and liabilities that have historically been held at the SWBI corporate level, but are specifically identifiable or otherwise attributable to us.

SWBI incurred debt and related debt issuance costs with respect to the acquisitions of the carved-out businesses. However, such debt has been refinanced since the consummation of these acquisitions, and the proceeds of such refinancing have been utilized for retirement of original debt obligations and the funding of other SWBI expenditures. As a result, the SWBI third-party long-term debt and the related interest expense have not been allocated to us for any of the periods presented as we were not the legal obligor of such debt.

11


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

All intracompany transactions have been eliminated. All transactions between us and SWBI have been included in these combined financial statements. The aggregate net effect of such transactions that are not historically settled in cash has been reflected in the combined balance sheet as parent company investment and in the combined statements of cash flows as net transfers to and from SWBI.

Reclassification

 

We have adjusted the accompanying combined balance sheet as of April 30, 2020 for an immaterial correction of an error to appropriately present deferred income taxes, in the amount of $3.6 million, as non-current, which was previously presented as a current asset.

Fiscal Year

We operate and report using a fiscal year ending on April 30 of each year.

Revenue Recognition

We recognize revenue in accordance with the provisions of Accounting Standards Update, or ASU 2016-10, Revenue from Contracts with Customers (Topic 606), which became effective for us on May 1, 2018. Performance obligations are satisfied and revenue is recognized when control of ownership has transferred to the customer, which is generally upon shipment, but could be delayed until the receipt of customer acceptance.

In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which customers are entitled to receive free goods based upon their purchase of our products, which we have identified as a material right. The fulfillment of these free goods is our responsibility. In such instances, we allocate the transaction price of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the products included in the promotional program, including the free goods. We recognize revenue related to the material right proportionally as each performance obligation is satisfied. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.

We generally sell our products free on board, or FOB, shipping point and provide payment terms to most commercial customers ranging from 20 to 90 days of product shipment with a discount available to some customers for early payment. Generally, framework contracts define the general terms of sales, including payment terms, freight terms, insurance requirements, and cancelation provisions. Purchase orders define the terms for specific sales, including 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 promotional programs. As a result of utilizing practical expedients upon the adoption of ASC 606, 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. In all cases, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer.

We sponsor direct to consumer customer loyalty programs in which customers earn rewards from qualifying purchases or activities. We defer revenue for a portion of the transaction price from product sales to customers that earn loyalty points. We recognize revenue upon shipment of the products associated with the loyalty points and record an offsetting reserve utilizing a breakage factor based on historical redemption.

Net sales reflects adjustments for estimated allowances for trade terms, sales incentive programs, discounts, markdowns, chargebacks, and returns. These allowances are estimated based on evaluations of specific product and customer circumstances, historical and anticipated trends, and current economic conditions.

Concentration of credit risk

Financial instruments that potentially subject us to concentration of credit risk consist principally of cash, cash equivalents, and trade receivables. We place our cash and cash equivalents in overnight U.S. government securities. Concentrations of credit risk with respect to trade receivables are limited by the large number of customers comprising our customer base and their geographic and business dispersion. We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral.

12


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

For the three months ended July 31, 2020, one of our external customers accounted for more than 10% of our net sales and accounted for $19.2 million, or 38.1%, of our net sales. As of July 31, 2020, one of our external customers exceeded 10% or more of our accounts receivable and accounted for $20.4 million, or 48.1%, of our accounts receivable.

Disaggregation of revenue

The following table sets forth certain information regarding trade channel net sales for the three months ended July 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

e-commerce channels

$

24,548

 

 

$

10,688

 

 

$

13,860

 

 

 

129.7

%

 

Traditional channels

 

25,920

 

 

 

22,528

 

 

 

3,392

 

 

 

15.1

%

 

Total net sales

$

50,468

 

 

$

33,216

 

 

$

17,252

 

 

 

51.9

%

 

 

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 from their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick-and-mortar stores and generate the large majority of revenue from consumer purchases in their brick-and-mortar locations.

We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the three months ended July 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

Domestic net sales

$

48,472

 

 

$

31,964

 

 

$

16,508

 

 

 

51.6

%

 

International net sales

 

1,996

 

 

 

1,252

 

 

 

744

 

 

 

59.4

%

 

Total net sales

$

50,468

 

 

$

33,216

 

 

$

17,252

 

 

 

51.9

%

 

 

(2) Recently Adopted and Issued Accounting Standards:

 

Recently Issued Accounting Standards – In March 2020, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) to provide temporary optional expedients and exceptions to the contract modifications, hedge relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU, which was effective upon issuance and may be applied through December 31, 2022, is applicable to all contracts and hedging relationships that reference the London Interbank Offered Rate or any other reference rate expected to be discontinued. We are currently evaluating the new guidance and the expected effect on our combined financial statements and related disclosures.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), an amendment of the FASB Accounting Standards Codification. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions for intraperiod tax allocations and deferred tax liabilities for equity method investments and adds guidance whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the new guidance and the expected effect on its combined financial statements and related disclosures.

 

Recently Adopted Accounting Standards – In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Effective May 1, 2020 we adopted Accounting ASU 2016- 13, which requires financial assets measured at amortized cost, such as our trade receivables, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions and future expectation for each pool of similar financial assets. We adopted ASU 2016-13 using the modified retrospective method, whereby the guidance is applied prospectively as of the date of adoption and prior periods are not restated. The cumulative effect of adoption was not material.

13


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

(3) Leases:

We lease certain of our real estate, machinery, photocopiers, and vehicles under non-cancelable operating lease agreements.

We recognize expenses under our operating lease assets and liabilities at the commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. Tenant improvement allowances are recorded as an offsetting adjustment included in our calculation of the respective right-of-use asset.

Many of our leases include renewal options that can extend the lease term. The execution of those renewal options is at our sole discretion and are reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

The amounts of assets and liabilities related to our operating leases as of July 31, 2020 are as follows (in thousands):

 

 

 

 

 

July 31, 2020

 

Operating Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

3,329

 

Accumulated amortization

 

 

 

 

(1,065

)

Right-of-use assets, net

 

 

 

$

2,264

 

 

 

 

 

 

 

 

Lease liabilities, current portion

 

 

 

$

1,258

 

Lease liabilities, net of current portion

 

 

 

 

2,298

 

Total operating lease liabilities

 

 

 

$

3,556

 

 

We recorded $335,000 of operating lease costs, of which $133,000 were short-term operating lease costs, during the three months ended July 31, 2020. We recorded $372,000 of operating lease costs, of which $57,000 were short term operating lease costs, during the three months ended July 31, 2019. As of July 31, 2020, our weighted average lease term and weighted average discount rate for our operating leases was 2.9 years and 4.5%, respectively. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.

 

During the three months ended July 31, 2020, we terminated an operating lease for office space in Park City, Utah. We recorded a reduction of Right-Of-Use asset and lease liability of approximately $640,000 for terminating this lease.

 

During the three months ended July 31, 2020, we entered into an operating lease for administrative office space in Chicopee, Massachusetts and recorded a Right-of Use asset and lease liability of $369,000.

Future lease payments for all our operating leases for the remainder of fiscal 2021 and for succeeding fiscal years is as follows (in thousands):

 

 

 

 

 

Operating

 

2021

 

 

 

$

1,041

 

2022

 

 

 

 

1,334

 

2023

 

 

 

 

1,177

 

2024

 

 

 

 

141

 

2025

 

 

 

 

85

 

Thereafter

 

 

 

 

7

 

Total future lease payments

 

 

 

 

3,785

 

Less amounts representing interest

 

 

 

 

(229

)

Present value of lease payments

 

 

 

 

3,556

 

Less current maturities of lease liabilities

 

 

 

 

(1,258

)

Long-term maturities of lease liabilities

 

 

 

$

2,298

 

14


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

 

During the three months ended July 31, 2020, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $324,000.

 

On August 24, 2020 and as part of the Separation, we entered into an 18-year sublease for our corporate offices from SWBI that will be recorded as an operating Right-of-Use lease asset and liability in the amount of approximately $25.0 million.

 

(4) Goodwill and Intangible Assets:

The following table presents a summary of intangible assets as of July 31, 2020 and April 30, 2020 (in thousands):

 

 

 

July 31, 2020

 

 

April 30, 2020

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

 

$

89,980

 

 

$

(53,373

)

 

$

36,607

 

 

$

89,980

 

 

$

(51,049

)

 

$

38,931

 

Developed technology

 

 

21,588

 

 

 

(13,004

)

 

 

8,584

 

 

 

21,588

 

 

 

(12,529

)

 

 

9,059

 

Patents, trademarks, and trade names

 

 

49,709

 

 

 

(30,499

)

 

 

19,210

 

 

 

49,697

 

 

 

(29,229

)

 

 

20,468

 

Backlog

 

 

1,150

 

 

 

(1,150

)

 

 

 

 

 

1,150

 

 

 

(1,150

)

 

 

 

 

 

 

162,427

 

 

 

(98,026

)

 

 

64,401

 

 

 

162,415

 

 

 

(93,957

)

 

 

68,458

 

Patents in progress

 

 

582

 

 

 

 

 

 

582

 

 

 

490

 

 

 

 

 

 

490

 

Total definite-lived intangible assets

 

 

163,009

 

 

 

(98,026

)

 

 

64,983

 

 

 

162,905

 

 

 

(93,957

)

 

 

68,948

 

Indefinite-lived intangible assets

 

 

430

 

 

 

 

 

 

430

 

 

 

204

 

 

 

 

 

 

204

 

Total intangible assets

 

$

163,439

 

 

$

(98,026

)

 

$

65,413

 

 

$

163,109

 

 

$

(93,957

)

 

$

69,152

 

 

We amortize intangible assets with determinable lives over a weighted-average period of approximately five years. The weighted-average periods of amortization by intangible asset class is approximately five years for customer relationships, six years for developed technology, and five years for patents, trademarks, and trade names. Amortization expense amounted to $4.0 million and $4.7 million for the three months ended July 31, 2020 and 2019, respectively.

Estimated amortization expense of intangible assets for the remainder of fiscal 2021 and succeeding full fiscal years is as follows (in thousands):

 

Fiscal

 

Amount

 

2021

 

$

12,180

 

2022

 

 

13,923

 

2023

 

 

11,409

 

2024

 

 

9,670

 

2025

 

 

6,028

 

Thereafter

 

 

11,191

 

Total

 

$

64,401

 

 

As of July 31, 2020, we had $64.3 million of goodwill. We did not have any adjustments to goodwill during the three months ended July 31, 2020 and 2019, respectively. As of April 30, 2020, we had recorded $109.3 million of goodwill impairment charges since fiscal 2015 on gross goodwill of $173.6 million.

(5) Fair Value Measurement:

We follow the provisions of ASC 820-10, Fair Value Measurements and Disclosures Topic, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

15


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

Financial assets and liabilities recorded on the accompanying combined balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).

Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $234,000 as of April 30, 2020. We did not have any cash balance as of July 31, 2020. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

 

quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds which trade infrequently);

 

inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and

 

inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.

(6) Inventories:

The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of July 31, 2020 and April 30, 2020 (in thousands):

 

 

 

July 31, 2020

 

 

April 30, 2020

 

Finished goods

 

$

57,838

 

 

$

50,171

 

Finished parts

 

 

4,499

 

 

 

3,499

 

Work in process

 

 

168

 

 

 

249

 

Raw material

 

 

7,088

 

 

 

6,080

 

Total inventories

 

$

69,593

 

 

$

59,999

 

 

16


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

(7) Equity:

Earnings per Share

On August 24, 2020, the date of consummation of the Separation, SWBI distributed 13,975,104 shares of our common stock, par value $0.001 per share, to SWBI stockholders of record as of August 10, 2020. This share amount is being utilized 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 SWBI prior to the Separation. For the 2019 quarter to date calculations, these shares are treated as issued and outstanding at July 31, 2019 for purposes of calculating historical basic and diluted earnings per share.

The following table provides a reconciliation of the net (loss)/income amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three months ended July 31, 2020 and 2019 (in thousands, except per share data):

 

 

For the Three Months Ended July 31,

 

 

2020

 

 

2019

 

 

Net

 

 

 

 

 

 

Per Share

 

 

Net

 

 

 

 

 

 

Per Share

 

 

Income

 

 

Shares

 

 

Amount

 

 

Income

 

 

Shares

 

 

Amount

 

Basic earnings

$

 

1,789

 

 

 

13,975

 

 

$

 

0.13

 

 

$

 

(4,983

)

 

 

13,975

 

 

$

 

(0.36

)

Effect of dilutive stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings

$

 

1,789

 

 

 

13,975

 

 

$

 

0.13

 

 

$

 

(4,983

)

 

 

13,975

 

 

$

 

(0.36

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Stock and Employee Stock Purchase Plans

SWBI sponsors two stock incentive plans: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at the SWBI September 23, 2013 annual meeting of stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan. Post-Separation, we have a separate stock incentive plan, or the 2020 Incentive Compensation Plan, that we will grant new awards to our employees and directors.

Certain of our employees have participated in SWBI’s 2013 Incentive Stock Plan. The following disclosures of stock-based compensation expense recognized by us are based on grants related directly to our employees and an allocation of SWBI corporate and shared employee stock-based compensation expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that we would have experienced as an independent company for the periods presented.

Except in specific circumstances, grants vest over a period of three or four years and grants of stock options are exercisable for a period of 10 years. The 2013 Incentive Stock Plan also permits the grant of awards to non-employees, which the SWBI Board of Directors or their designated committee has authorized in the past. No stock options have been granted to our employees under the 2013 Incentive Stock Plan.

Certain of our employees have participated in SWBI’s Employee Stock Purchase Plan, or ESPP, in which each participant is granted an option to purchase SWBI common stock on each subsequent exercise date during the offering period (as such terms are defined in the ESPP) in accordance with the terms of the ESPP. Post-Separation, we have a separate employee stock purchase plan, or the 2020 Employee Stock Purchase Plan, in which each participant is granted an option to purchase our common stock on each subsequent exercise date during the offering period (as such terms are defined in the ESPP) in accordance with the terms of the ESPP.

We recognized $298,000 and $314,000 of stock-based compensation expense during the three months ended July 31, 2020 and 2019, respectively. Of the total stock-based compensation cost recognized by us during the three months ended July 31, 2020 and 2019, $172,000 and $109,000, respectively, related directly to our employees and $126,000 and $205,000, respectively, is related to allocations of SWBI corporate and shared employee stock-based compensation expenses. Stock-based compensation expense is included in cost of sales, sales and marketing, research and development, and general and administrative expenses.

A restricted stock unit, or RSU, represents the right to receive one share of SWBI common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees vest over a period of four years with one-fourth of the

17


AMERICAN OUTDOORS BRANDS, INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended July 31, 2020 and 2019

 

units vesting on each anniversary of the grant date. The aggregate fair value of our RSU grants is amortized to compensation expense over the vesting period. Awards that do not vest are forfeited.

Performance-based restricted stock units, or PSUs, vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period.

During the three months ended July 31, 2020, we granted an aggregate of 1,465 service-based RSUs to non-executive officer employees. During the three months ended July 31, 2020, we cancelled 7,896 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the three months ended July 31, 2020, we delivered common stock to our employees with a total market value of $321,000.

During the three months ended July 31, 2019, we granted an aggregate of 29,513 service-based RSUs to non-executive officer employees. During the three months ended July 31, 2019, we cancelled 12,269 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the three months ended July 31, 2019, we delivered common stock to our employees, including our executive officers with a total market value of $111,000.

A summary of activity for unvested RSUs and PSUs for the three months ended July 31, 2020 and 2019 is as follows:

 

 

 

For the three months ended July 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

Total # of

 

 

Average