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, 2022and 2021. The comparison of, and changes between, the fiscal years ended April 30, 2021and 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, 2021filed with the SECon July 15, 2021.
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.
Our financial statements for the periods through the Separation date of
August 24, 2020are combined financial statements prepared on a "carve-out" basis as discussed below. Our financial statements for the period from August 24, 2020through April 30, 2022are 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, Massachusettscorporate 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, Missouridistribution facility. For the period prior to the Separation in fiscal 2021, we were allocated $2.7 millionfor 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 millionof 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). 52 -------------------------------------------------------------------------------- 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, Michiganunder 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, 2022include 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 $1.29per diluted share, for the prior fiscal year. The net loss in fiscal 2022 included a $67.8 millionnon-cash goodwill impairment charge. • Non-GAAP Adjusted EBITDAS was $35.0 million, compared with $47.3 millionfor 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 millionsecured 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 millionduring fiscal 2022.
The following table sets forth certain information regarding consolidated and combined net sales for the fiscal years ended
April 30, 2022and 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, 2022and 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 % 53
-------------------------------------------------------------------------------- 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
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
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 Canadaas 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, 2022was $3.7 million, or $11.5 millionlower 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. 54 --------------------------------------------------------------------------------
The following table presents certain information relating to operating expenses for the years ended
2022 2021 $ Change % Change Research and development
$ 5,501 $ 5,378 $ 1232.3 % 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 $ 67,42965.3 % % 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 millionof increased standalone expenses, such as our information technology infrastructure costs, subscription and software costs, and insurance premium costs, partially offset by $2.5 millionof lower acquired intangible asset amortization and $2.7 millionof lower employee compensation-related expenses.
The following table sets forth certain information regarding operating income/(loss) for the fiscal years ended
April 30, 2022and 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 millionfrom 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
2022 2021 $ Change %
Interest (expenses)/income, net
Interest (expense)/income, net decreased
$624,000from the prior fiscal year because of interest to service the $25.2 millionof 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.
The following table presents certain information regarding the income tax expense for the years ended
2022 2021 $ Change % Change Income tax expense
$ 9,344 $ 5,887 $ 3,45758.7 % % of income from operations (effective tax rate) -16.8 % 24.2 % -41.1 % 55
-------------------------------------------------------------------------------- We recorded an income tax expense of
$9.3 millionfor fiscal 2022 compared with income tax expense of $5.9 millionfor 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, 2022was 19.6%.
The following table sets forth certain information regarding net earnings and related per share data for the years ended
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 $0.71per 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. 56 --------------------------------------------------------------------------------
The following table sets forth our calculation of Non-GAAP Adjusted EBITDA for the years ended
For the Years Ended April 30, 2022 2021 GAAP net (loss)/income $ (64,880 )
$ 18,405Interest 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 millionof 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 millioncredit 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
57 -------------------------------------------------------------------------------- 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 millionof 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 millionover a period that spans fiscal 2022 and fiscal 2023. In fiscal 2022, we recorded capital expenditures of $3.9 millionand one-time operating expenses of $1.0 million. In addition, we recorded $948,000of 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 millionand 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
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 millionfor fiscal 2022 compared with cash generated of $33.3 millionfor the prior fiscal year. Cash used in operating activities for fiscal 2022 was impacted by $41.4 millionof 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 millionof reduced accounts payable due to timing of inventory shipments, $4.0 millionof lower accrued payroll and incentives primarily because of lower management incentive accruals, and $2.1 millionof lower sales volume variable expense accruals, partially offset by $8.6 millionof 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.
Cash used in investing activities was
$33.6 millionin fiscal 2022 compared with a cash usage of $4.2 millionin the prior fiscal year. This increase was primarily because of the $27.0 millionused 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 millionfor fiscal 2022, which was $2.4 millionhigher 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 millionof 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 millionin fiscal 2022 compared with $31.4 millionin the prior fiscal year. Cash provided by financing activity in fiscal 2022 was primarily from $25.2 millionborrowings on our revolving line of credit, offset by $15.0 millionto 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 millioncash capital contribution from our former parent company as part of the Separation. 58 --------------------------------------------------------------------------------
August 24, 2020, we entered into a five-year financing arrangement in anticipation of the Separation, consisting of a $50.0 millionrevolving 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 $410,000of 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 $192,000of additional debt issuance costs associated with entering into the Amended Loan and Security Agreement. As of April 30, 2022, we had $25.2 millionof 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.
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
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.
We test goodwill for impairment annually on
As of our valuation date in fiscal 2022, we had
$64.3 millionof 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 59 -------------------------------------------------------------------------------- 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 millionof goodwill. Based on the results of this evaluation, we recorded a non-cash impairment charge of our entire $67.8 milliongoodwill 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.
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 millionnon-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 1or 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.
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. 60 --------------------------------------------------------------------------------
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
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 $ 24,445As of April 30, 2022, we had $25.2 millionof borrowings outstanding on our revolving line of credit, which included $170,000of 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 $190,000per 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 $605,000of 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, 2022related 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. 61
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