# Clarus Corp (CLAR) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Clarus Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/913277/000110465922031076/clar-20211231x10k.htm
Accession: 0001104659-22-031076
Filing date: 2022-03-07
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CLAR/
All MD&A years: /company/CLAR/mda/
Next year: /company/CLAR/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Please note that in this Annual Report on Form 10-K Clarus Corporation (which may be referred to as the “Company,” “Clarus,” “we,” “our” or “us”) may use words such as “appears,” “anticipates,” “believes,” “plans,” “expects,” “intends,” “future,” and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, the overall level of consumer demand on our products; general economic conditions and other factors affecting consumer confidence, preferences, and behavior; disruption and volatility in the global currency, capital and credit markets; the financial strength of the Company’s customers; the Company’s ability to implement its business strategy; the ability of the Company to execute and integrate acquisitions; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition, and the possession and use of firearms and ammunition by our customers; the Company’s exposure to product liability or product warranty claims and other loss contingencies; disruptions and other impacts to the Company’s business, as a result of the COVID-19 global pandemic and government actions and restrictive measures implemented in response; stability of the Company’s manufacturing facilities and suppliers, as well as consumer demand for our products, in light of disease epidemics and health-related concerns such as the COVID-19 global pandemic; the impact that global climate change trends may have on the Company and its suppliers and customers, increased focus on sustainability issues as a result of global climate change, the Company's ability to protect patents, trademarks and other intellectual property rights; any breaches of, or interruptions in, our information systems; the ability of our information technology systems or information security systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes; our ability to properly maintain, protect, repair or upgrade our information technology systems or information security systems, or problems with our transitioning to upgraded or replacement systems; the impact of adverse publicity about the Company and/or its brands, including without limitation, through social media or in connection with brand damaging events and/or public perception; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations; ongoing disruptions and delays in the shipping and transportation of our products due to port congestion, container ship availability and/or other logistical challenges; our ability to utilize our net operating loss carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; the Company’s ability to maintain a quarterly dividend; and any material differences in the actual financial results of the Rhino-Rack acquisition as compared with expectations, including the impact of the acquisition on the Company’s future earnings per share. More information on potential factors that could affect the Company’s financial results can be found under Item 1A. Risk Factors of this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to the Company as of the date of this Annual Report on Form 10-K, and speak only as the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K.

Overview

Headquartered in Salt Lake City, Utah, Clarus is a global leading designer, developer, manufacturer and distributor of best-in-class outdoor equipment and lifestyle products focused on the outdoor and consumer enthusiast markets. Our mission is to identify, acquire and grow outdoor “super fan” brands through our unique “innovate and accelerate” strategy. We define a “super fan” brand as a brand that creates the world’s pre-eminent, performance-defining product that the best-in-class user cannot live without. Each of our brands has a long history of continuous product innovation for core and everyday users alike. The Company’s products are principally sold globally under the Black Diamond®, Sierra®, Barnes® and Rhino-Rack® and MAXTRAX® brand names through outdoor specialty and online retailers, our own websites, distributors and original equipment manufacturers. Our portfolio of iconic brands is well-positioned for sustainable, long-term growth underpinned by powerful industry trends across the outdoor and adventure sport end markets.

One of the key elements of our sustained financial performance is our persistent focus on brand building through product initiatives. Our iconic brands are rooted in performance-defining technologies that enable our customers to have their best days outdoors. We have a long history of technical innovation and product development, backed by an extensive patent portfolio that continues to evolve and advance our markets. We currently employ approximately 120 engineers across the portfolio, focusing on enhancing our customers’ performance in the most critical moments. Our commitment to quality, rigorous safety, and ultimately best-in-class design is evidenced by outstanding industry recognition, as we have received numerous product awards across our portfolio of super fan brands.

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Each of our brands represents a unique customer value proposition. Supported by six decades of proven innovation, Black Diamond, is an established global leader in high-performance, activity-based climbing, skiing, and technical mountain sports equipment. The brand is synonymous with premium performance, safety and reliability. Our Sierra and Barnes brands have been leading specialty manufacturers of bullets and ammunition for over 50 years. Since 1947, Sierra has been dedicated to manufacturing the highest-quality, most accurate bullets in the world for hunting and sport shooting enthusiasts. Barnes traces its history back to 1932, and since 1989 has manufactured technologically-advanced lead-free bullets and premium ammunition for hunters, range shooters, military and law enforcement professionals. Founded in 1992, our Rhino-Rack brand is a globally-recognized designer and distributor of highly-engineered automotive roof racks and accessories to enhance the outdoor enthusiast’s overlanding experience. Founded in 2005, our MAXTRAX brand offers high-quality overlanding and off-road vehicle recovery and extraction tracks for the overland and off-road market.

Clarus, incorporated in Delaware in 1991, acquired Black Diamond Equipment, Ltd. (“Black Diamond Equipment”) in May 2010 and changed its name to Black Diamond, Inc. in January 2011. In October 2012, we acquired PIEPS Holding GmbH and its subsidiaries (collectively, “PIEPS”). On August 14, 2017, the Company changed its name from Black Diamond, Inc. to Clarus Corporation and its stock ticker symbol from “BDE” to “CLAR” on the NASDAQ stock exchange.

On August 21, 2017, the Company acquired Sierra Bullets, L.L.C. (“Sierra”). On November 6, 2018, the Company acquired the assets of SKINourishment, Inc. (“SKINourishment”). On October 2, 2020, the Company completed the acquisition of certain assets and liabilities constituting the Barnes business (“Barnes”). On July 1, 2021, the Company completed the acquisition of Australia-based Rhino-Rack Holdings Pty Ltd (“Rhino-Rack”). On December 1, 2021, the Company completed the acquisition of Australia-based MaxTrax Australia Pty Ltd (“MAXTRAX”).

On August 6, 2018, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend program of $0.025 per share of the Company’s common stock (the “Quarterly Cash Dividend”) or $0.10 per share on an annualized basis. The declaration and payment of future Quarterly Cash Dividends is subject to the discretion of and approval of the Company’s Board of Directors. On May 1, 2020, the Company announced that, in light of the operational impact of the COVID-19 pandemic, its Board of Directors temporarily replaced its Quarterly Cash Dividend with a stock dividend (the “Quarterly Stock Dividend”). On October 19, 2020, the Company announced that its Board of Directors approved the reinstatement of its Quarterly Cash Dividend. In 2021, 2020 and 2019, our total Quarterly Cash Dividends were $3,335,000, $1,520,000 and $2,987,000, respectively. In 2020, our total Quarterly Stock Dividends were $1,533,000. In 2020, our total Quarterly Stock Dividends were $1,533,000, which combined with our cash dividend in 2020 of $1,520,000, resulted in total dividends in 2020 of $3,053,000. On February 25, 2022, the Company announced that its Board of Directors approved the payment on March 18, 2022 of the Quarterly Cash Dividend to the record holders of shares of the Company’s common stock as of the close of business on March 7, 2022.

Impact of COVID-19

The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by each of the U.S., European, and Australian governments in March 2020, with governments world-wide implementing safety measures restricting travel and requiring citizen lockdowns and self-confinements for quarantining purposes. This has negatively affected the U.S., European, Australian and global economies, disrupted global supply chains, and resulted in significant transport restrictions and disruption of global financial markets.

The COVID-19 pandemic has significantly impacted the global supply chain, with restrictions and limitations on related activities causing disruption and delay, along with increased raw material, storage, and shipping costs. These disruptions and delays have strained domestic and international supply chains, which have affected and could continue to negatively affect the flow or availability of certain critical raw materials and finished good products that the Company relies upon. Furthermore, significantly increased demand from online sales channels, including our website, has impacted our logistical operations, including our fulfillment and shipping functions, which has resulted in periodic delays in the delivery of our products.

We experienced a decline in retail demand within our Outdoor segment beginning in the second half of March 2020 through December 2020, which negatively impacted our sales and profitability during this period. During 2021, our Outdoor segment continued to be impacted by the pandemic due to disruptions in the global supply chains; however, the Outdoor segment experienced an increase in overall sales as participation in outdoor recreation has increased as certain countries began to ease restrictions. During the third quarter of 2021, the Australian government instituted a mandatory lockdown for its citizens. This caused a decline in retail demand and a disruption in operations within our Adventure segment, which negatively impacted our sales and profitability for the third quarter of 2021 and to a lesser extent during the fourth quarter of 2021. Our Precision Sport segment has experienced higher demand which has positively impacted our sales and profitability since the beginning of the pandemic. We expect a continued impact on the Company’s sales and profitability in future periods due to the ongoing impact of the pandemic. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (some of which are outside management’s control), including those presented in Item 1A. Risk Factors.

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Critical Accounting Policies and Use of Estimates

Management’s discussion of our financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates and assumptions including those related to derivatives, revenue recognition, income taxes and valuation of long-lived assets, goodwill and other intangible assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.

We believe the following critical accounting policies include the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Our accounting policies are more fully described in Note 1 of our consolidated financial statements.

Fair value of net assets acquired in business combinations – We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill.  We engage independent third-party valuation specialists to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Different valuations approaches are used to value different types of intangible assets. The income approach is a valuation technique that capitalizes anticipated income associated with the asset being valued. This approach is predicated on developing net income and cash flow projections which are discounted for risk and the time value of money. This approach is generally the principal approach to the valuation of most intangible assets. The market approach involves the compilation and analysis of recent acquisitions of similar assets in the open market. A fair value can be estimated after adjustments are made to reflect comparability differences between the assets sold and those being valued. This method of valuation applies primarily to the valuation of owned land, inventory, and certain intangible assets. The cost approach estimates the amount that would be required to replace the service capacity of an asset (often referred to as current replacement cost). We typically apply all three approaches to estimate the fair value of our tangible and intangible tangible assets depending on the type of asset acquired. Business acquisitions may include contingent consideration payments based on various future financial measures, such as sales-based milestones, related to the acquired entity. We estimate the fair value of contingent consideration liabilities based on estimated sales growth rates, discount rates, and other relevant factors.

Significant estimates in valuing certain intangible assets include but are not limited to the projected financial information related to each individual asset, particularly forecasted sales growth rates, cash flows, market-based royalty rates and estimated discount rates. Product technology and trademarks are valued using the relief-from-royalty method, and customer relationships are valued using the multi-period excess earnings model. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The multi-period excess earnings method supposes that the owner of the intangible asset is able to achieve a return in excess of that received without the intangible asset through enhanced revenues or cost savings. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account our operating plans and strategies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our intangible assets, which would adversely affect our operating results in the period of impairment.

Income taxes – We account for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. We may make assumptions, judgments and estimates in order to determine the future taxable income available to support the recoverability of deferred tax assets at a more-likely-than-not threshold. The sources of future taxable income include 1) future reversal of existing taxable temporary differences, 2) taxable income in carryback years if carryback is permitted, 3) future taxable income from future operations, and 4) tax planning strategies. The degree and subjectivity and judgment increases as the source of future taxable income becomes more inherently subjective. Our assumptions, judgments and estimates relative to the realizability of a deferred tax asset take into account predictions of the amount and category of expected future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred taxes to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above related to the realizability of deferred tax assets, could materially affect our financial position and results of operations.

Goodwill and intangible assets – We assess the recoverability of our reporting unit’s carrying value of goodwill by performing a qualitative assessment and/or a quantitative goodwill impairment test.  At a minimum, we perform an annual assessment of possible

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goodwill impairment as of each December 31. Management may perform an interim goodwill impairment assessment whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of the reporting unit. If we begin with a qualitative assessment and are able to support the conclusion that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, we are not required to perform the quantitative goodwill impairment test.  Otherwise, we are required to perform the quantitative goodwill impairment test which compares the reporting unit’s carrying value including goodwill to its estimated fair value. We estimate the reporting unit’s fair value using either the income approach based upon projected discounted cash flows of the reporting unit or the market approach based upon comparable market acquisition transactions. If the estimated fair value of the reporting entity exceeds the carrying value, the goodwill is not impaired, and no further review is required. However, if the carrying value exceeds the estimated fair value of the reporting unit, an impairment expense should be recognized for the excess of the carrying value over the fair value.

Under the income approach, the estimated discounted cash flows are based on the best information available to us at the time, including supportable assumptions and projections we believe are reasonable. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account our operating plans and strategies. Certain other key assumptions utilized, including revenue projections, costs of goods sold, operating expenses and effective tax rates, are based on estimates consistent with those utilized in our annual budgeting and planning process that we believe are reasonable. However, if we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our goodwill, which would adversely affect our operating results in the period of impairment.

The market approach identifies the EBITDA multiples of recent industry and competitor acquisitions. The reporting unit’s current EBITDA is multiplied by the median industry and competitor acquisition market multiple to estimate its current estimated fair value. If the market multiples or EBITDA value assumptions are incorrect, our goodwill impairment evaluation could also be adversely affected, and we may impair a portion or all of our goodwill, which would adversely affect our operating results in the period of impairment.

No impairment was recorded during the years ended December 31, 2021, 2020, and 2019. During the first quarter of 2019, we early adopted Accounting Standards Update 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removed the requirement to perform the previous two-step goodwill impairment test.

We also test indefinite-lived intangible assets for impairment at least annually during the fourth quarter, generally on December 31. Management may perform an interim indefinite-lived intangible asset impairment assessment whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of the reporting unit. If the carrying value of the indefinite-lived asset is higher than its fair value, then the asset is deemed to be impaired and the impairment charge is estimated as the difference. The Company calculates the fair value of its indefinite-lived intangible assets using the income approach, specifically the relief-from-royalty method. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. Internally forecasted revenues, which the Company believes reasonably approximate market participant assumptions, are multiplied by a royalty rate to arrive at the estimated net after tax cost savings. The royalty rate used in the analysis is based on an analysis of empirical, market-derived royalty rates for comparable intangible assets. The net after tax cost savings are discounted using the same weighted-average cost of capital discount rate developed for purposes of the Company's quantitative goodwill impairment test. The key uncertainties in these calculations are the assumptions used in determining the revenue associated with each indefinite-lived intangible asset and the royalty rate. If we do not achieve the results reflected in the assumptions and estimates, our indefinite-lived intangibles impairment evaluations could be adversely affected, and we may impair a portion or all of their carrying values, which would adversely affect our operating results in the period of impairment.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 1 to the notes to consolidated financial statements.

‎

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Results of Operations (In Thousands)

Consolidated Year Ended December 31, 2021 Compared to Consolidated Year Ended December 31, 2020

The following presents a discussion of consolidated operations for the year ended December 31, 2021, compared with the consolidated year ended December 31, 2020:

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[["","Year Ended December 31,"],["","2021","","2020"],["Sales"],["Domestic sales","$","225,878","","$","132,226"],["International sales","","149,916","","","91,781"],["Total sales","","375,794","","","224,007"],["Cost of goods sold","","238,862","","","146,212"],["Gross profit","","136,932","","","77,795"],["Operating expenses"],["Selling, general and administrative","","105,494","","","71,428"],["Transaction costs","","11,843","","","2,433"],["Contingent consideration benefit","","(1,605)","","","-"],["Total operating expenses","","115,732","","","73,861"],["Operating income","","21,200","","","3,934"],["Other income (expense)"],["Interest expense, net","","(2,939)","","","(1,261)"],["Other, net","","(4,382)","","","912"],["Total other expense, net","","(7,321)","","","(349)"],["Income before income tax","","13,879","","","3,585"],["Income tax benefit","","(12,214)","","","(1,960)"],["Net income","$","26,093","","$","5,545"]]
[[/GREPCENT_TABLE]]

Sales

Consolidated sales increased $151,787, or 67.8%, to $375,794 during the year ended December 31, 2021, compared to consolidated sales of $224,007 during the year ended December 31, 2020. The increase in sales was attributable to the increase in the quantity of new and existing outdoor products sold during the period of $46,394. Additionally, there was an increase in the quantity of new and existing precision sport products sold by Sierra of $18,543 and the inclusion of Barnes, which contributed $38,504. The increase was also driven by the inclusion of adventure products sold by Rhino-Rack of $43,411 and MAXTRAX of $1,728. We experienced an increase in sales of $3,207 due to the weakening of the U.S. dollar against foreign currencies during the year ended December 31, 2021, compared to the prior period.

Consolidated domestic sales increased $93,652, or 70.8%, to $225,878 during the year ended December 31, 2021, compared to consolidated domestic sales of $132,226 during the year ended December 31, 2020. The increase in sales was attributable to the increase in the quantity of new and existing outdoor products sold during the period of $26,058. Additionally, there was an increase in the quantity of new and existing precision sport products sold by Sierra of $20,323 and the inclusion of Barnes, which contributed $35,227. The remaining increase was driven by the inclusion of adventure products sold by Rhino-Rack and MAXTRAX of $12,044.

Consolidated international sales increased $58,135, or 63.3%, to $149,916 during the year ended December 31, 2021, compared to consolidated international sales of $91,781 during the year ended December 31, 2020. The increase in sales was primarily attributable to the increase in the quantity of new and existing outdoor products of $20,336 and the inclusion of Barnes, which contributed $3,277. The increase was also driven by the inclusion of adventure products sold by Rhino-Rack of $31,392 and MAXTRAX of $1,703. We experienced an increase in sales of $3,207 due to the weakening of the U.S. dollar against foreign currencies during the year ended December 31, 2021 compared to the prior period. The increase was partially offset by a decrease in the quantity of new and existing precision sport products sold by Sierra of $1,780.

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Cost of Goods Sold

Consolidated cost of goods sold increased $92,650, or 63.4%, to $238,862 during the year ended December 31, 2021, compared to consolidated cost of goods sold of $146,212 during the year ended December 31, 2020. The increase in cost of goods sold was primarily attributable to an increase in the number of units sold.

Gross Profit

Consolidated gross profit increased $59,137 or 76.0%, to $136,932 during the year ended December 31, 2021, compared to consolidated gross profit of $77,795 during the year ended December 31, 2020. Consolidated gross margin was 36.4% during the year ended December 31, 2021, compared to a consolidated gross margin of 34.7% during the year ended December 31, 2020. Consolidated gross margin during the year ended December 31, 2021, increased compared to the prior year due to favorable product mix in higher margin products and the favorable impacts related to foreign currency. Gross margin also benefited from the inclusion of Barnes, Rhino-Rack, and MAXTRAX; however, the benefit was offset by a decrease in gross margin of $4,769, or 1.3%, due to the sale of Barnes, Rhino-Rack and MAXTRAX inventory that was recorded at its fair value in purchase accounting during the year ended December 31, 2021.

Selling, General and Administrative

Consolidated selling, general, and administrative expenses increased $34,066, or 47.7%, to $105,494 during the year ended December 31, 2021, compared to consolidated selling, general and administrative expenses of $71,428 during the year ended December 31, 2020. The increase in selling, general and administrative expenses is due to the inclusion of Barnes, Rhino-Rack, and MAXTRAX which contributed $6,702, $14,885, and $400, respectively. Additionally, there was an increase of stock compensation of $2,686 during the year ended December 31, 2021, compared to the prior year. The remaining increase was attributable to the Company’s investments in the brand related activities of sales, direct-to-consumer, marketing, and warehousing and logistics, focused on supporting its strategic initiatives around expanding distribution, elevating brand awareness and being easier to do business with.

Transaction Costs

Consolidated transaction expense increased to $11,843 during the year ended December 31, 2021, compared to consolidated transaction costs of $2,433 during the year ended December 31, 2020, which consisted of expenses related to the Company’s financing and acquisition efforts in 2021.

Contingent Consideration Benefit

Consolidated contingent consideration increased to $1,605 during the year ended December 31, 2021, compared to $0 consolidated contingent consideration during the year ended December 31, 2020, which consisted of changes in estimated fair value of Contingent Consideration liabilities.

Interest Expense, net

Consolidated interest expense, net increased to $2,939 during the year ended December 31, 2021, compared to consolidated interest expense, net of $1,261 during the year ended December 31, 2020. The increase in interest expense recognized during the year ended December 31, 2021 was primarily associated with the increase in average outstanding debt amounts during the period compared to the prior year and the recording of certain debt issuance costs.

Other, net

Consolidated other, net expense changed $5,294, or 580.5% to $4,382 during the year ended December 31, 2021, compared to consolidated other, net income of $912 during the year ended December 31, 2020. The change in other, net was primarily attributable to changes on mark-to-market adjustments on non-hedged foreign currency contracts, including contracts associated with the purchase price of Rhino-Rack, as well as a decrease in remeasurement losses recognized on the Company’s foreign denominated accounts receivable and accounts payable.

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Income Taxes

Consolidated income tax benefit increased $10,254, or 523.2%, to $12,214 during the year ended December 31, 2021, compared to a consolidated income tax benefit of $1,960 during the same period in 2020. Our effective income tax rate was a benefit of 88% for the year ended December 31, 2021, and differed compared to the statutory tax rates due to the partial release of a valuation allowance offsetting deferred tax assets and discrete charges recorded during the period. This release of the valuation allowance is primarily due to a change in accounting method which increased taxable income and the ability to utilize NOLs. For the year ended December 31, 2020, our effective income tax rate was a benefit of 54.7% and differed compared to the statutory tax rates due to a release of certain valuation allowances and a discrete benefit associated with stock compensation windfall. Factors that could cause our annual effective tax rate to differ materially from our quarterly effective tax rates include changes in the geographic mix of taxable income and discrete events that may occur.

Consolidated Year Ended December 31, 2020 Compared to Consolidated Year Ended December 31, 2019

The following presents a discussion of consolidated operations for the year ended December 31, 2020, compared with the consolidated year ended December 31, 2019:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["Sales"],["Domestic sales","$","132,226","","$","121,751"],["International sales","","91,781","","","107,686"],["Total sales","","224,007","","","229,437"],["Cost of goods sold","","146,212","","","149,146"],["Gross profit","","77,795","","","80,291"],["Operating expenses"],["Selling, general and administrative","","71,428","","","68,680"],["Restructuring charge","","-","","","13"],["Transaction costs","","2,433","","","166"],["Total operating expenses","","73,861","","","68,859"],["Operating income","","3,934","","","11,432"],["Other expense"],["Interest expense, net","","(1,261)","","","(1,358)"],["Other, net","","912","","","(93)"],["Total other expense, net","","(349)","","","(1,451)"],["Income before income tax","","3,585","","","9,981"],["Income tax benefit","","(1,960)","","","(8,991)"],["Net income","$","5,545","","$","18,972"]]
[[/GREPCENT_TABLE]]

Sales

Consolidated sales decreased $5,430, or 2.4%, to $224,007 during the year ended December 31, 2020, compared to consolidated sales of $229,437 during the year ended December 31, 2019. We believe lower consumer demand related to the COVID-19 pandemic drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. These decreases were partially offset by an increase in the quantity of new and existing precision sport products sold by Sierra of $16,729 and the inclusion of Barnes, which contributed $6,556. We also experienced an increase in sales of $606 due to the weakening of the U.S. dollar against foreign currencies during the year ended December 31, 2020 compared to the prior period.

Consolidated domestic sales increased $10,475, or 8.6%, to $132,226 during the year ended December 31, 2020, compared to consolidated domestic sales of $121,751 during the year ended December 31, 2019. The increase in sales was attributable to the increase in the quantity of new and existing precision sport products sold by Sierra of $17,873 and the inclusion of Barnes, which contributed $6,179. We believe this increase was partially offset by a decrease in domestic sales due to lower consumer demand related to the

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COVID-19 pandemic, which drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period.

Consolidated international sales decreased $15,905, or 14.8%, to $91,781 during the year ended December 31, 2020, compared to consolidated international sales of $107,686 during the year ended December 31, 2019. We believe the decrease in international sales was attributable to lower consumer demand related to the COVID-19 pandemic, which drove a decrease in the quantity of new and existing climb, mountain, and ski products sold during the period. We also experienced a decrease in the quantity of new and existing precision sport products sold by Sierra of $1,143. These decreases were partially offset by the inclusion of Barnes, which contributed $376. We also experienced an increase in sales of $606 due to the weakening of the U.S. dollar against foreign currencies during the year ended December 31, 2020 compared to the prior period.

Cost of Goods Sold

Consolidated cost of goods sold decreased $2,934, or 2.0%, to $146,212 during the year ended December 31, 2020, compared to consolidated cost of goods sold of $149,146 during the year ended December 31, 2019. The decrease in cost of goods sold was primarily attributable to a decrease in the number of units sold due to lower consumer demand related to the COVID-19 pandemic.

Gross Profit

Consolidated gross profit decreased $2,496 or 3.1%, to $77,795 during the year ended December 31, 2020, compared to consolidated gross profit of $80,291 during the year ended December 31, 2019. Consolidated gross margin was 34.7% during the year ended December 31, 2020, compared to a consolidated gross margin of 35.0% during the year ended December 31, 2019. Consolidated gross margin during the year ended December 31, 2020, decreased compared to the prior year due to unfavorable impacts on our supply chain and logistic activities due to the COVID-19 pandemic. Gross margin benefited from the inclusion of Barnes; however, this benefit was offset by a decrease in gross margin of 0.2% due to the sale of inventory that was recorded at its preliminary fair value in purchase accounting during the year ended December 31, 2020.

Selling, General and Administrative

Consolidated selling, general, and administrative expenses increased $2,748, or 4.0%, to $71,428 during the year ended December 31, 2020, compared to consolidated selling, general and administrative expenses of $68,680 during the year ended December 31, 2019. The increase in selling, general and administrative expenses is due to the inclusion of Barnes, which contributed $1,698, and an increase of stock compensation of $3,842 during the year ended December 31, 2020 compared to the prior year. The increase was partially offset by the cost-saving initiatives implemented in response to the COVID-19 pandemic, primarily related to reductions within sales, marketing, and logistics.

Restructuring Charges

Consolidated restructuring expense decreased to $0 during the year ended December 31, 2020, compared to consolidated restructuring expense of $13 during the year ended December 31, 2019. Restructuring expenses incurred during the year ended December 31, 2019, related to costs associated with the formal closure and liquidation of the Company’s Black Diamond Equipment manufacturing operations in Zhuhai, China.

Transaction Costs

Consolidated transaction expense increased to $2,433 during the year ended December 31, 2020, compared to consolidated transaction costs of $166 during the year ended December 31, 2019, which consisted of expenses related to the Company’s various acquisition efforts and capital-raising activities, including acquiring Barnes and completing a registered direct offering (the “Offering”).

Interest Expense, net

Consolidated interest expense, net during the year ended December 31, 2020 remained relatively consistent with consolidated interest expense, net, during the year ended December 31, 2019.

Other, net

Consolidated other, net, increased $1,005, or 1,080.6%, to income of $912 during the year ended December 31, 2020, compared to consolidated other, net expense of $93 during the year ended December 31, 2019. The increase in other, net, was primarily attributable to an increase in remeasurement gains recognized on the Company’s foreign denominated accounts receivable and accounts payable. This increase was partially offset by losses on mark-to-market adjustments on non-hedged foreign currency contracts.

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Income Taxes

Consolidated income tax benefit decreased $7,031, or 78.2%, to $1,960 during the year ended December 31, 2020, compared to a consolidated income tax benefit of $8,991 during the same period in 2019. Our effective income tax rate was a benefit of 54.7% for the year ended December 31, 2020, and differed compared to the statutory tax rates due to a release of a partial valuation allowance of the deferred tax assets and discrete charges recorded during the period. For the year ended December 31, 2019, our effective income tax rate was a benefit of 90.1% and differed compared to the statutory tax rates due to a release of certain valuation allowances and a discrete benefit associated with stock compensation windfall. Factors that could cause our annual effective tax rate to differ materially from our quarterly effective tax rates include changes in the geographic mix of taxable income and discrete events that may occur.

Liquidity and Capital Resources (In Thousands)

Consolidated Year ended December 31, 2021 Compared to Consolidated Year ended December 31, 2020

Our primary ongoing funding requirements are for working capital, expansion of our operations (both organically and through acquisitions) and general corporate needs, as well as investing activities associated with the expansion into new product categories. We plan to fund these activities through a combination of our future operating cash flows and revolving credit facility which had approximately $81,499 available to borrow at December 31, 2021. We believe that our liquidity requirements and contractual obligations for at least the next 12 months will be adequately covered by cash provided by operations and our existing revolving credit facility. Additionally, long-term contractual obligations are also currently expected to be funded from cash from operations and availability under our existing credit facilities. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs.

Further, the Company and certain of its direct and indirect subsidiaries (each, a “Loan Party” and, collectively, the “Loan Parties”) entered into Amendment No. 3 (“Amendment No. 3”) to that certain Credit Agreement, dated May 3, 2019, as amended by Amendment No. 1 dated May 28, 2019 and Amendment No. 2 dated November 12, 2020, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (collectively, the “Credit Agreement”). The Credit Agreement increased the aggregate amount of the term loan facility thereunder to $125,000 and increased the maximum amount of the revolving loan facility thereunder to $100,000. The term loan facility was fully borrowed at the closing of Amendment No. 3 on July 1, 2021. The Company is required to repay the term loan through quarterly payments of $1,563 each beginning with September 30, 2021, increasing to $3,125 beginning September 30, 2022, and any remaining obligations will be repaid in full on the maturity date of the Credit Agreement of May 3, 2024. Amendment No. 3 also removed the previously agreed upon ability of the Company to issue debt securities that may be convertible into equity interests of the Company in an aggregate principal amount of up to $125,000 and also increased the maximum consolidated total leverage ratio permitted under the Credit Agreement to 4.25:1.00.

Additionally, the Company entered into an underwriting agreement relating to the public offer and sale of 2,750 shares of the Company’s common stock as well as a 30-day option to purchase up to 413 additional shares of common stock. The closing of the offering of 2,750 shares of common stock as well as the 413 additional shares of common stock occurred on October 29, 2021 and November 2, 2021, respectively. The net proceeds to the Company from the offering were approximately $80,264 before expenses and after deducting the applicable underwriting discounts and commissions. The Company used a portion of the net proceeds of the offering for the repayment of principal under the revolving loan facility available pursuant to the Credit Agreement and the remaining portion of the net proceeds from the offering for general corporate purposes, including capital expenditures and the MAXTRAX acquisition.

At December 31, 2021, we had total cash of $19,465, compared to cash of $17,789 at December 31, 2020, which was substantially controlled by the Company’s U.S. entities. At December 31, 2021, the Company had $8,959 of the $19,465 in cash held by foreign entities, of which $7,188 is considered permanently reinvested.

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The following presents a discussion of cash flows for the consolidated year ended December 31, 2021 compared with the consolidated year ended December 31, 2020.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["Net cash (used in) provided by operating activities","$","(304)","","$","29,392"],["Net cash used in investing activities","","(178,142)","","","(35,582)"],["Net cash provided by financing activities","","180,677","","","22,254"],["Effect of foreign exchange rates on cash","","(555)","","","22"],["Change in cash","","1,676","","","16,086"],["Cash, beginning of year","","17,789","","","1,703"],["Cash, end of period","$","19,465","","$","17,789"]]
[[/GREPCENT_TABLE]]

Net Cash From Operating Activities

Consolidated net cash used in operating activities was $304 during the year ended December 31, 2021 compared to consolidated net cash provided by operating activities of $29,696 during the year ended December 31, 2020. The change in net cash used in operating activities during 2021 is primarily due to an increase in net operating assets, or non-cash working capital, of $48,494, and deferred income taxes, partially offset by an increase in net income, depreciation and amortization and stock compensation during the year ended December 31, 2021, compared to the same period in 2020.

Free cash flow, defined as net cash used in operating activities less capital expenditures, of ($17,687) was used during the year ended December 31, 2021 compared to $23,981 generated during the same period in 2020. The Company believes that the non-GAAP measure, free cash flow, provides an understanding of the capital required by the Company to expand its asset base. A reconciliation of free cash flows to comparable GAAP financial measures is set forth below:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["Net cash (used in) provided by operating activities","$","(304)","","$","29,392"],["Purchase of property and equipment","","(17,383)","","","(5,411)"],["Free cash flow","$","(17,687)","","$","23,981"]]
[[/GREPCENT_TABLE]]

Net Cash From Investing Activities

Consolidated net cash used in investing activities was $178,142 during the year ended December 31, 2021 compared to consolidated net cash used in investing activities of $35,582 during the year ended December 31, 2020. The increase in cash used during the year ended December 31, 2021 is primarily due to the $160,988 used for the purchase of Rhino-Rack and MAXTRAX, net of cash acquired as well as an increase in purchases of property and equipment, primarily due to the purchase of the Barnes facility. During the year ended December 31, 2020, consolidated net cash used in investing activities included $30,498 used for the purchase of the Barnes Purchased Assets, net of cash acquired.

Net Cash From Financing Activities

Consolidated net cash provided by financing activities was $180,677 during the year ended December 31, 2021, compared to consolidated net cash used in financing activities of $22,254 during the year ended December 31, 2020. The increase in cash provided during the year ended December 31, 2021, compared to the same period in 2020 was primarily due to the net proceeds to the revolving line of credit and draws of the term loan under Amendment No. 3 described below and the net proceeds from the sale of the Company’s common stock of $79,232. Cash provided by financing activities during the year ended December 31, 2020, was primarily due to the proceeds of $20,000 borrowed under the term loan and net proceeds from the sale of the Company’s common stock of $11,151, offset by net repayments to the revolving line of credit.

Net Operating Loss

As of December 31, 2021, the Company had net operating loss carryforwards (“NOLs”) and research and experimentation credit for U.S. federal income tax purposes of $60,712 and $2,289, respectively. The Company believes its U.S. Federal NOLs will substantially offset its future U.S. Federal income taxes until expiration. The majority of the Company’s pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F income and will be offset with the NOLs. The Company has $60,712

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of NOLs, of which, $39,507 expire on December 31, 2022. These NOLs are subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended.

As of December 31, 2021, the Company’s gross deferred tax asset was $38,184. The Company has recorded a valuation allowance of $4,378, resulting in a net deferred tax asset of $33,806, before deferred tax liabilities of $46,653. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of December 31, 2021, because the ultimate realization of those assets does not meet the more-likely-than-not criteria. The majority of the Company’s deferred tax assets consist of net operating loss carryforwards for federal tax purposes. If a change in control were to occur, these could be limited under Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended.

Credit Agreement

On May 3, 2019, the Company, Borrowers and the other loan parties party thereto entered into the Credit Agreement for borrowings of up to $60,000 under a revolving credit facility (including up to $5,000 for letters of credit), and borrowings of up to $40,000 under a term loan facility that is available to be drawn until May 3, 2020. The Credit Agreement also permits the Borrowers, subject to certain requirements, to arrange with lenders for an aggregate of up to $50,000 of additional revolving and/or term loan commitments (both of which are currently uncommitted), for potential aggregate revolving and term loan commitments under the Credit Agreement of up to $150,000. The Credit Agreement matures on May 3, 2024.

On November 12, 2020, the Borrowers entered into Amendment No. 2 of the Credit Agreement. Amendment No. 2 increased the maximum consolidated total leverage ratio permitted under the Credit Agreement to 4.00:1.00 from 3.00:1.00. In addition, Amendment No. 2 permits, among other things, the issuance by the Company of debt securities, that may be convertible into equity interests of the Company, in an aggregate principal amount of up to $125,000, and eliminates the requirement that the proceeds therefrom be used to prepay any revolving loans or term loans under the Credit Agreement.

On July 1, 2021, the Borrowers entered into Amendment No. 3 of the Credit Agreement. Amendment No. 3 increased the aggregate amount of the term loan facility thereunder to $125,000 and increased the maximum amount of the revolving loan facility thereunder to $100,000. The term loan facility was fully borrowed at the closing of Amendment No. 3 on July 1, 2021 in connection with the Rhino-Rack Acquisition. The Credit Agreement continues to permit the Borrowers, subject to certain requirements, to arrange with lenders for an aggregate of up to $50,000 of additional revolving and/or term loan commitments (both of which are currently uncommitted), for potential aggregate revolving and term loan commitments under the Credit Agreement of up to $275,000.

Amendment No. 3 provides for additional subsidiaries of the Company to guarantee and provide collateral for the loans under the Credit Agreement, including certain of its newly formed or newly acquired Australian subsidiaries in connection with the Rhino-Rack Acquisition. Amendment No. 3 also removed the previously agreed upon ability of the Company to issue debt securities that may be convertible into equity interests of the Company in an aggregate principal amount of up to $125,000 and also increased the maximum consolidated total leverage ratio permitted under the Credit Agreement to 4.25:1.00. Amendment No. 3 did not change the maturity date which remains May 3, 2024.

On January 3, 2022, the Company entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”). Amendment No. 4, among other things, permits (i) the Company to borrow in Australian Dollars and New Zealand Dollars in order to support the operations of the Company in Australia and New Zealand and (ii) provides for addbacks to EBITDA, for debt covenant purposes, (as defined in the Credit Agreement) under the Credit Agreement for expenses relating to activities in respect of acquisitions, dispositions, investments and financings (whether or not these transactions are actually consummated).

The Borrowers may elect to have the revolving and term loans under the Credit Agreement bear interest at an alternate base rate or a Term Benchmark rate plus an applicable rate. The applicable rate for these borrowings will range from 0.50% to 1.625% per annum, in the case of alternate base rate borrowings, and 1.50% to 2.625% per annum, in the case of Term Benchmark borrowings. The applicable rate was initially 0.875% per annum, in the case of alternate base rate borrowings, and 1.875% per annum, in the case of Term Benchmark borrowings; however, it may be adjusted from time to time based upon the level of the Company’s consolidated total leverage ratio. The Credit Agreement also requires the Borrowers to pay a commitment fee on the unused portion of the revolving and term loan commitments. Such commitment fee will range between 0.15% and 0.30% per annum, and is also based upon the level of the Company’s consolidated total leverage ratio.

All obligations under the Credit Agreement are secured by our subsidiary equity interests, as well as accounts receivable, inventory, intellectual property and certain other assets owned by the Company. The Credit Agreement contains restrictions on the Company’s ability to pay dividends or make distributions or other restricted payments if certain conditions in the Credit Agreement are not fulfilled. The Credit Agreement includes customary affirmative and negative covenants, including financial covenants relating to the Company’s consolidated total leverage ratio and fixed charge coverage ratio. The Company was in compliance with the debt covenants set forth in the Credit Agreement as of December 31, 2021.

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As of December 31, 2021, the Company had drawn approximately $18,501 of the $100,000 revolving loan commitment that was available for borrowing under the Credit Agreement, and $121,874 outstanding under the term loan commitment. As of December 31, 2021, the interest rates for the revolving loan and term loan were 2.3750% and 2.3750% respectively. On April 30, 2020, the Company borrowed $20,000 under the term loan facility and used the proceeds to pay down amounts outstanding under the revolving portion of the Credit Agreement. On July 1, 2021, the term loan facility was fully borrowed at the closing of Amendment No. 3. The Company is required to repay the term loan through quarterly payments of $1,563 each beginning with September 30, 2021, increasing to $3,125 beginning September 30, 2022, and any remaining obligations will be repaid in full on the maturity date of the Credit Agreement of May 3, 2024.

Off-Balance Sheet Arrangements

We do not engage in any transactions or have relationships or other arrangements with unconsolidated entities. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not engage in energy, weather or other commodity-based contracts.