AMERICAN OUTDOOR BRANDS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

You should read the following Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with our consolidated and
combined financial statements and the related notes thereto contained elsewhere
in this report. This discussion contains forward-looking statements that involve
risks, uncertainties, and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of a
variety of factors, including those set forth under Item 1A, "Risk Factors" and
elsewhere in this report.

Set forth below is a comparison of the results of operations and changes in
financial condition for the fiscal years ended April 30, 2022 and 2021. The
comparison of, and changes between, the fiscal years ended April 30, 2021 and
2020 can be found within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in our Form 10-K for the fiscal
year ended April 30, 2021 filed with the SEC on July 15, 2021.

Background

On August 24, 2020, Smith & Wesson Brands, Inc., or our former parent company,
completed the spin-off of its outdoor products and accessories business to us,
or the Separation. The Separation was effected through the transfer of all of
the assets and legal entities, subject to any related liabilities, associated
with its outdoor products and accessories business to us, or the Transfer, and
the distribution of all the outstanding shares of our common stock to the
holders of the common stock of our former parent company, or the Distribution,
as of the close of business on August 10, 2020, the record date for the
Distribution, or the Record Date.

As a result of the Distribution, we became an independent public company and our
common stock became listed under the symbol "AOUT" on the Nasdaq Global Select
Market. Prior to the Separation, the combined financial statements reflected the
financial position, results of operations, and cash flows for the periods
presented as historically managed by our former parent. For those periods prior
to the Separation, the combined financial statements were prepared on a
"carve-out" basis as described below.

We operate as one reporting segment. We analyze revenue streams in different ways, including customer group, brands, and customer channels. However, this information does not include a complete set of discrete financial information.

presentation basis

Our financial statements for the periods through the Separation date of August
24, 2020 are combined financial statements prepared on a "carve-out" basis as
discussed below. Our financial statements for the period from August 24, 2020
through April 30, 2022 are consolidated financial statements based on the
reported results of our company as a standalone company. Accordingly, the period
subsequent to the Separation in fiscal 2021 included consolidated and combined
financial statements.

Prior to the Separation, we operated as part of our former parent and not as a
standalone company. The accompanying combined financial statements, prior to the
Separation, were prepared in connection with the Separation and were derived
from the consolidated financial statements and accounting records of our former
parent. The combined financial statements, prior to the Separation, reflect our
historical financial position, results of operations, and cash flows as they
were historically managed in accordance with accounting principles generally
accepted in the United States, or GAAP.

In addition, for purposes of preparing the combined financial statements, prior
to the Separation, on a "carve-out" basis, a portion of our former parent's
total corporate expenses were allocated to us. These expense allocations
included the cost of corporate functions and resources provided by our former
parent, 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 our former parent's
Springfield, Massachusetts corporate headquarters.

In fiscal 2020, our former parent began operating a new distribution facility in
Columbia, Missouri, which involved shared distribution expenses between our
former parent and us. In addition to the portion of our former parent's
corporate expenses allocated to us prior to the Separation, a portion of our
former parent's total distribution expenses was allocated to us. These expense
allocations included selling, distribution, inventory management, warehouse, and
fulfillment services provided by our former parent and the related benefit costs
associated with such functions, such as stock-based compensation and the cost of
our former parent's Columbia, Missouri distribution facility. For the period
prior to the Separation in fiscal 2021, we were allocated $2.7 million for such
corporate expenses, which were included within general and administrative
expenses in our consolidated and combined statements of operations and
comprehensive income/(loss). We were also allocated $1.9 million of such
distribution expenses, which were included within our cost of sales; selling,
marketing, and distribution expenses; and general and administrative expenses in
the consolidated and combined statements of operations and comprehensive
income/(loss).

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Prior to the Separation, 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 prior to the Separation. 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.

In March 2022, we acquired substantially all of the assets of Grilla Grills
(including its branded products) from Fahrenheit Technologies, Inc., or FTI, for
a purchase price of $27 million, subject to certain adjustments. Grilla Grills
is a provider of high-quality, barbecue grills; Wi-Fi-enabled wood pellet
grills; smokers; accessories; and modular outdoor kitchens. Because of the
timing of the acquisition, we are in the process of integrating Grilla Grills
into our business as we operate out of Holland, Michigan under a transition
services agreement with FTI. We plan to fully integrate Grilla Grills into our
business in fiscal 2023. Results of operations for the fiscal year ended April
30, 2022 include activity for the period subsequent to the acquisition date of
Grilla Grills.

Fiscal 2022 Highlights

Our operating results for fiscal 2022 included the following:

•

Net sales were $247.5 million, a decrease of $29.2 million, or 10.5%, from the
prior fiscal year, reflecting a decrease in net sales for both our e-commerce
channels and our traditional channels, partially offset by an increase in our
own direct-to-consumer business.
•
Gross margin was 46.2%, an increase of 40 basis points over the prior fiscal
year.
•
Net loss was $64.9 million, or ($4.66) per diluted share, compared with net
income of $18.4 million, or $1.29 per diluted share, for the prior fiscal year.
The net loss in fiscal 2022 included a $67.8 million non-cash goodwill
impairment charge.
•
Non-GAAP Adjusted EBITDAS was $35.0 million, compared with $47.3 million for the
prior fiscal year. See non-GAAP financial measure disclosures below for our
reconciliation of non-GAAP Adjusted EBITDAS.
•
On March 25, 2022, we amended our credit facility to increase our revolving line
of credit to $75.0 million secured by substantially all the assets of our
company with available borrowings determined by a borrowing base calculation.
The revolving line includes an option to increase the credit commitment for an
additional $15.0 million.
•
We repurchased 836,964 shares of our common stock, in the open market, for a
total of $15.0 million during fiscal 2022.

Operating results

Net sales and gross profit

The following table sets forth certain information regarding consolidated and
combined net sales for the fiscal years ended April 30, 2022 and 2021 (dollars
in thousands):

                                  2022          2021        $ Change       % Change
Net sales                       $ 247,526     $ 276,687     $ (29,161 )        -10.5 %
Cost of sales                     133,287       149,859       (16,572 )        -11.1 %
Gross profit                    $ 114,239     $ 126,828     $ (12,589 )         -9.9 %
% of net sales (gross margin)        46.2 %        45.8 %



The following table sets forth certain information regarding trade channel net
sales for the fiscal years ended April 30, 2022 and 2021 (dollars in thousands):

                         2022          2021        $ Change       % Change
e-commerce channels    $  97,418     $ 108,726     $ (11,308 )        -10.4 %
Traditional channels     150,108       167,961       (17,853 )        -10.6 %
Total net sales        $ 247,526     $ 276,687     $ (29,161 )        -10.5 %




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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 all over the world. The following table sets forth certain information regarding the geographic composition of net sales included in the above table for the years ended April 30, 2022 and 2021 (in thousands of dollars):

                            2022          2021        $ Change       % Change
Domestic net sales        $ 234,803     $ 267,573     $ (32,770 )        -12.2 %
International net sales      12,723         9,114         3,609           39.6 %
Total net sales           $ 247,526     $ 276,687     $ (29,161 )        -10.5 %

Net revenue for the 2022 financial year compared to the 2021 financial year

Total net sales decreased $29.2 millionor 10.5%, compared to the previous year.

Net sales in our traditional channels decreased $17.9 million, or 10.6%, from
the prior year, primarily because of lower net sales of our shooting sports
products. We believe our shooting sports products demand is more directly
associated with firearm demand, which declined 22.2% as indicated by adjusted
background checks reported in National Instant Criminal Background Check System,
or NICS, compared with the prior fiscal year, a period which we believe had
heightened demand as a result of certain news and pandemic related events. The
lower net sales in shooting sports was partially offset by increased net sales
of our outdoor lifestyle products, specifically for our fishing, hunting, and
rugged outdoor products. Net sales in our international channel increased 39.6%,
primarily because of increased demand for products in our hunting and shooting
sports categories, from customers in Canada as well as incremental new
international customers.

Net sales in our e-commerce channel decreased $11.3 million, or 10.4%, from the
prior year, a period that, we believe reflected heightened e-commerce net sales
because of COVID-19 related restrictions. In addition, our prior year included
replenishment of retailer inventory after non-essential product orders were
halted in our fourth quarter of fiscal 2020, which had a positive impact on our
net sales for the year ended April 30, 2021. During that period, we noted
numerous retail store closures and stay at home orders that we believe resulted
in a shift in consumer preferences to online retailers. Although our net sales
in our e-commerce channel decreased from the prior year, direct-to-consumer
sales from our own websites increased 73.0% over the prior year. In addition,
net sales in fiscal 2022 were negatively impacted by lower demand of our
shooting sports products partially offset by increased net sales of our outdoor
lifestyle products.

New products, defined as any new SKU introduced over the prior two fiscal years,
represented 25.8% of net sales for fiscal 2022. We have a history of introducing
approximately 250 to 350 new SKUs each year, the majority of which are
introduced late in our third fiscal quarter.

Our order backlog as of April 30, 2022 was $3.7 million, or $11.5 million lower
than at the end of fiscal 2021. Although we generally fulfill the majority of
our order backlog, we allow orders received which have not yet shipped to be
cancelled, and therefore, our backlog may not be indicative of future sales.

Cost of sales and gross profit for fiscal year 2022 compared to fiscal year 2021

Gross margin for fiscal 2022 increased 40 basis points over the prior fiscal
year, primarily because of favorable impacts of price increases and recoveries
from tariff drawbacks, partially offset by increased promotional product
discounts and higher freight expense.

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Functionnary costs

The following table presents certain information relating to operating expenses for the years ended April 30, 2022 and 2021 (in thousands of dollars):

                                         2022          2021        $ Change       % Change
Research and development               $   5,501     $   5,378     $     123            2.3 %
Selling, marketing, and distribution      56,168        56,773          (605 )         -1.1 %
General and administrative                41,244        41,182            62            0.2 %
Goodwill impairment                       67,849             -        67,849            N/A
Total operating expenses               $ 170,762     $ 103,333     $  67,429           65.3 %
% of net sales                              69.0 %        37.3 %

Operating expenses for fiscal year 2022 compared to fiscal year 2021

Excluding the impact of our non-cash goodwill impairment charge recorded during
fiscal 2022, operating expenses were relatively flat as compared to fiscal 2021.
Research and development expenses increased $123,000, primarily from increased
freight costs for new product development samples. Selling, marketing, and
distribution expenses decreased $605,000, primarily because of lower sales
volume related expenses offset by higher expenses related to trade shows and
increased freight costs. General and administrative expenses was relatively flat
as compared to the prior year with $3.7 million of increased standalone
expenses, such as our information technology infrastructure costs, subscription
and software costs, and insurance premium costs, partially offset by $2.5
million of lower acquired intangible asset amortization and $2.7 million of
lower employee compensation-related expenses.

Operating profit/(loss)

The following table sets forth certain information regarding operating
income/(loss) for the fiscal years ended April 30, 2022 and 2021 (dollars in
thousands):

                                      2022          2021       $ Change      % Change
Operating (loss)/income             $ (56,523 )   $ 23,495     $ (80,018 )      -340.6 %
% of net sales (operating margin)       -22.8 %        8.5 %

Operating profit for the 2022 financial year compared to the 2021 financial year

Excluding our non-cash goodwill impairment charge, we had operating income of
$11.3 million, a decrease of $12.2 million from the prior fiscal year. Operating
income decreased primarily because of lower sales volumes and gross profit.

Interest (expenses)/income, net

The following table sets forth certain information regarding interest income/(expense), net for the years ended April 30, 2022 and 2021 (in thousands of dollars):

                                  2022      2021       $ Change      % 

To change

Interest (expenses)/income, net $ (324 ) $300 $ (624 ) -208.0%

Interest (expense)/income, net decreased $624,000 from the prior fiscal year
because of interest to service the $25.2 million of borrowings on our revolving
line of credit and lower related party notes receivable balances. The related
party notes were settled on the date of the Distribution.

Income taxes

The following table presents certain information regarding the income tax expense for the years ended April 30, 2022 and 2021 (in thousands of dollars):

                                           2022          2021         $ Change       % Change
Income tax expense                       $   9,344     $   5,887     $    3,457            58.7 %
% of income from operations (effective
tax rate)                                    -16.8 %        24.2 %                        -41.1 %




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We recorded an income tax expense of $9.3 million for fiscal 2022 compared with
income tax expense of $5.9 million for fiscal 2021, primarily because of
recording a full valuation allowance against our deferred tax assets. The
effective tax rates were (16.8%) and 24.2% for fiscal 2022 and 2021,
respectively. Excluding the impact of the non-cash goodwill impairment charges,
and establishing the full valuation allowance against our deferred taxes, our
effective tax rate for the fiscal year ended April 30, 2022 was 19.6%.

Net revenue

The following table sets forth certain information regarding net earnings and related per share data for the years ended April 30, 2022 and 2021 (in thousands of dollars, except per share data):

                                2022          2021       $ Change      % Change
Net (loss)/income             $ (64,880 )   $ 18,405     $ (83,285 )      -452.5 %
Net (loss)/income per share
Basic                         $   (4.66 )   $   1.31     $   (5.97 )      -455.7 %
Diluted                       $   (4.66 )   $   1.29     $   (5.95 )      -461.2 %

(Loss)/Net profit for fiscal year 2022 compared to fiscal year 2021

Excluding our non-cash goodwill impairment charge and related income tax effect,
we had net income of $9.9 million, or $0.71 per diluted share, a decrease of
$8.6 million, or ($0.58) per diluted share, from the prior fiscal year,
primarily because of lower sales volumes and gross profit.

Non-GAAP Financial Measure

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

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

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The following table sets forth our calculation of Non-GAAP Adjusted EBITDA for the years ended April 30, 2022 and 2021 (in thousands of dollars):

                                 For the Years Ended April 30,
                                    2022                  2021

GAAP net (loss)/income        $         (64,880 )     $     18,405
Interest expense                            324                111
Income tax expense                        9,344              5,887
Depreciation and amortization            16,967             19,827
Related party interest income                 -               (424 )
Stock compensation                        2,812              2,910
Goodwill impairment                      67,849                  -
Transition costs                              -                264
Technology implementation                 1,948                  -
COVID-19 expenses                             -                223
Fair value inventory step-up                 27                  -
Acquisition costs                           599                  -
Other                                        40                125
Non-GAAP Adjusted EBITDAS     $          35,030       $     47,328

Cash and capital resources

Historically, we have generated strong annual cash flow from operating
activities. However, prior to the Separation, we operated within our former
parent company's cash management structure, which used a centralized approach to
cash management and financing of operations. Accordingly, a substantial portion
of our cash was regularly transferred to our former parent company. This
arrangement was not reflective of the manner in which we would have been able to
finance our operations had we been an independent, publicly traded company
during the periods presented. On August 24, 2020, our former parent company
capitalized our business with $25.0 million of cash as part of the Separation.

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

Following the Separation, our capital structure and sources of liquidity changed
from the historical capital structure because we no longer participate in our
former parent company's centralized cash management program. Our ability to fund
our operating needs depends on our future ability to continue to generate
positive cash flow from operations and obtain financing on acceptable terms.
Based upon our history of generating strong cash flows, we believe we will be
able to meet our short-term liquidity needs. We also believe 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 our existing $75.0 million credit facility. If these sources
of liquidity need to be augmented, additional cash requirements would likely be
financed through the issuance of debt or equity securities; however, there can
be no assurances that we will be able to obtain additional debt or equity
financing on acceptable terms in the future.

Our future capital requirements will depend on many factors, including net
sales, the timing and extent of spending to support product development efforts,
the expansion of sales and marketing activities, the timing of introductions of
new products and enhancements to existing products, the capital needed to
operate as an independent publicly traded company, including the establishment
of our enterprise resource planning systems, 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. Further equity or
debt financing may not be available to us on acceptable terms or at all. If
sufficient funds are not available or are not available on acceptable terms, our
ability to take advantage of unexpected business opportunities or to respond to
competitive pressures could be limited or severely constrained.

We have had $19.5 million cash equivalents available at April 30, 2022 and had
$60.8 million in cash and cash equivalents available at April 30. 2021.

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We expect to continue to utilize our cash flows to invest in our business,
including research and development for new product initiatives; hire additional
employees; fund growth strategies, including any potential acquisitions; repay
our $25.2 million of borrowings under our revolving line of credit and any
indebtedness we may incur over time; implement our enterprise resource planning
systems; and repurchase our common stock if we are authorized to do so. We
estimate that our information technology infrastructure will cost a total of
approximately $9.0 million over a period that spans fiscal 2022 and fiscal 2023.
In fiscal 2022, we recorded capital expenditures of $3.9 million and one-time
operating expenses of $1.0 million. In addition, we recorded $948,000 of
duplicative expenses in fiscal 2022, as we operate both our existing and our new
information technology and enterprise resource planning platforms in parallel
during the system changeover period. In fiscal 2023, we expect capital
expenditures of approximately $2.3 million and one-time operating expenses of
approximately $1.6 million. The one-time operating expenses and duplicative
expenses will be recorded in general and administrative expenses on our
consolidated and combined statement of operations and comprehensive income.

The following table presents certain cash flow information for the years ended April 30, 2022 and 2021 (in thousands of dollars):

                         2022          2021        $ Change      % Change
Operating activities   $ (17,953 )   $ 33,320     $  (51,273 )      -153.9 %
Investing activities     (33,588 )     (4,181 )      (29,407 )       703.3 %
Financing activities      10,261       31,428        (21,167 )       -67.4 %
Total cash flow        $ (41,280 )   $ 60,567     $ (101,847 )      -168.2 %




Operating Activities

Operating activities represent the main source of our cash flows.

Cash used in operating activities was $17.9 million for fiscal 2022 compared
with cash generated of $33.3 million for the prior fiscal year. Cash used in
operating activities for fiscal 2022 was impacted by $41.4 million of increased
inventory as a result of a planned inventory build on high moving items due to
the acceleration of planned purchases to help mitigate price increases on
materials, future supply chain disruptions and additional new product
introductions later in the year. In addition, our anticipated new products that
have a higher average cost; increases in pricing from our suppliers; and
increased freight costs increased our average finished goods per unit cost value
during fiscal 2022, $4.5 million of reduced accounts payable due to timing of
inventory shipments, $4.0 million of lower accrued payroll and incentives
primarily because of lower management incentive accruals, and $2.1 million of
lower sales volume variable expense accruals, partially offset by $8.6 million
of lower accounts receivable due to lower net sales and timing of customer
product shipments.

Our inventory increased during fiscal 2022 for the same reasons described above.
It is possible that worsening of conditions or increased fears of the COVID-19
pandemic could have a renewed and prolonged effect on manufacturing or
employment in Asia, travel to and from Asia, or other restrictions on imports,
all of which could have a longer-term effect on our sales and profitability in
future periods. In addition, increased demand for sourced products in various
industries could cause further delays at various U.S. ports and as products move
throughout the country, which could affect the timing of receipts of our
products.

Investing activities

Cash used in investing activities was $33.6 million in fiscal 2022 compared with
a cash usage of $4.2 million in the prior fiscal year. This increase was
primarily because of the $27.0 million used to acquire Grilla Grills during
fiscal 2022 and the fact that we recorded capital expenditures for property and
equipment, and patents and software of $6.6 million for fiscal 2022, which was
$2.4 million higher than the prior fiscal year. The increase in capital
expenditures was a result of the development and implementation of our
independent information technology infrastructure noted above. We recorded
spending of $3.9 million of capital expenditures during fiscal 2022 related to
our development and implementation of our independent information technology
infrastructure.

Financing Activities

Cash provided by financing activities was $10.3 million in fiscal 2022 compared
with $31.4 million in the prior fiscal year. Cash provided by financing activity
in fiscal 2022 was primarily from $25.2 million borrowings on our revolving line
of credit, offset by $15.0 million to repurchase our common stock under our
authorized stock repurchase program. Cash provided by financing activities in
fiscal 2022 was a result of changes in net transfers from our former parent
company and the $25.0 million cash capital contribution from our former parent
company as part of the Separation.

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Credit facility

On August 24, 2020, we entered into a five-year financing arrangement in
anticipation of the Separation, consisting of a $50.0 million revolving line of
credit secured by substantially all our assets, maturing five years from the
start date, with available borrowings determined by a borrowing base
calculation. The revolving line included an option to increase the credit
commitment for an additional $15.0 million. The revolving line bore interest at
a fluctuating rate equal to the Base Rate or LIBOR, as applicable, plus the
applicable margin. During fiscal 2021, we recorded $410,000 of debt issuance
costs associated with entering into this financing arrangement.

On March 25, 2022, we amended our secured loan and security agreement, or the
Amended Loan and Security Agreement, increasing the revolving line of credit to
$75.0 million, secured by substantially all our assets, maturing in March 2027,
with available borrowings determined by a borrowing base calculation. The
amendment also includes an option to increase the credit commitment for an
additional $15 million. The amended revolving line bears interest at a
fluctuating rate equal to the Base Rate or the Secured Overnight Financing Rate,
or SOFR, as applicable, plus the applicable margin. The applicable margin can
range from a minimum of 0.25% to a maximum of 1.75% based on certain conditions
as defined in the Amended Loan and Security Agreement. The financing arrangement
contains covenants relating to minimum debt service coverage. During fiscal
2022, we recorded $192,000 of additional debt issuance costs associated with
entering into the Amended Loan and Security Agreement.

As of April 30, 2022, we had $25.2 million of borrowings outstanding on the
revolving line of credit, which bore interest at 1.56%, equal to SOFR plus the
applicable margin. The proceeds from the borrowings on our revolving line of
credit were used to acquire Grilla Grills.

Inflation

We have been impacted by changes in prices of finished product inventory from
our suppliers and logistics as well as other inflationary factors such as
increased labor and overhead costs. We evaluate the need for price changes to
offset these inflationary factors while taking into account the competitive
landscape. Although we do not believe that inflation had a material impact on us
during fiscal 2022, increased inflation in the future may have a negative effect
on our ability to achieve certain expectations in gross margin and operating
expenses. If we are unable to offset the negative impacts of inflation with
increased prices, our future results from operations and cash flows would be
materially impacted. Additionally, inflation may cause consumers to reduce
discretionary spending, which could cause decreases in demand for our products.

Critical accounting 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, which is generally upon
shipment but could be delayed until the receipt of customer acceptance. The
revenue recognized for the sale of our products reflect various sales
adjustments for discounts, returns, allowances, and other customer incentives.
These sales adjustments can vary based on market conditions, customer
preferences, timing of customer payments, volume of products sold, and timing of
new product launches. These adjustments require us to make reasonable estimates
of the amount we expect to receive from the customer. We estimate sales
adjustments by customer or by product category on the basis of our historical
experience with similar contracts with customers, adjusted as necessary to
reflect current facts and circumstances and our expectations for the future.

Valuation of Good will and Long-term intangible assets

We test goodwill for impairment annually on February 1st and between annual tests if there are indications of potential impairment.

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

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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 assess the number of operating units that exist. Based on our review of the ASC 350-20, we have determined that we have an 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.

We evaluate the recoverability of long-lived assets on an annual basis on
February 1 or whenever events or changes in circumstances indicate that carrying
amounts may not be recoverable. 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 of our long-lived assets, 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. 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.

Inventories

We value inventories at the lower of cost, using the first-in, first-out, or
FIFO, method, or net realizable value. We evaluate quantities that make up our
current inventory against past and future demand and market conditions to
determine excess or slow-moving inventory that may be sold below cost. For each
product category, we estimate the market value of the inventory comprising that
category based on current and projected selling prices. If the projected market
value is less than cost, we will record a provision adjustment to reflect the
lower value of the inventory. This methodology recognizes projected inventory
losses at the time such losses are evident rather than at the time goods are
actually sold. The projected market value of the inventory may decrease because
of consumer preferences or loss of key contracts, among other events.

Income Tax Assessment Allowance

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.

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In making this decision, we consider the available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable profits, expected 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.

Recent accounting pronouncements

The nature and impact of recent accounting pronouncements is discussed in Note 2
- Summary of Significant Accounting Policies to our consolidated and combined
financial statements, which is incorporated herein by reference.

Contractual obligations and commercial commitments

The following table provides a summary of our main contractual obligations and commercial commitments as of April 30, 2022 (in thousands):

                                             Less Than                                        More Than
                               Total          1 Year         1-3 Years        3-5 Years        5 Years

Long-term debt obligations       25,170               -                -          25,170               -
Interest on debt                  2,425             485              970             970               -
Operating lease obligations      37,758           3,092            6,119           4,102          24,445
Purchase obligations             50,768          50,768                -               -               -
Total obligations           $   116,121     $    54,345     $      7,089     $    30,242     $    24,445




As of April 30, 2022, we had $25.2 million of borrowings outstanding on our
revolving line of credit, which included $170,000 of interest and other fees. We
are required to make interest payments for the unused portion of our revolving
line of credit in accordance with the financing arrangement. Future unused loan
fee obligations are not included above, which could accumulate up to
approximately $190,000 per year, under certain circumstances, until the maturity
date in fiscal 2026.

Interest on debt is based on outstanding debt as of April 30, 2022, and includes
debt issue costs to be amortized over the life of the financing arrangement. The
interest rate used to calculate was 1.6% as of April 30, 2022. See Note 10,
Debt, for additional information.

Operating lease obligations represent required minimum lease payments during the
noncancelable lease term. Most real estate leases also require payments of
related operating expenses such as taxes, insurance, utilities, and maintenance,
which are not included above. Our operating lease obligations are net of
$605,000 of expected future sublease income. See Note 4, Leases, for additional
information.

Purchase obligations represent binding commitments to purchase raw materials,
contract production, and finished products that are payable upon delivery of the
inventory. This obligation excludes the amount included in accounts payable at
April 30, 2022 related to inventory purchases. Other obligations represent other
binding commitments for the expenditure of funds, including (i) amounts related
to contracts not involving the purchase of inventories, such as the
noncancelable portion of service or maintenance agreements for management
information systems, (ii) capital spending, and (iii) advertising.

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