UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the transition period from _________ to _________

Commission File Number: 0-24277

CLARUS CORPORATION

(Exact name of registrant as specified in its charter)
 
Delaware
58-1972600
------------------------------
---------------------------
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)

2084 East 3900 South
Salt Lake City, Utah
(Address of principal executive offices)
84124
(Zip code)

(801) 278-5552
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES [ ] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [X]
 
As of November 4, 2010, there were outstanding 21,738,484 shares of common stock, par value $0.0001.

 
1
 

INDEX

CLARUS CORPORATION

PART I
FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
  
 
Condensed Consolidated Balance Sheets - September 30, 2010
(unaudited), December 31, 2009, and June 30, 2009 (Predecessor)
3
 
Condensed Consolidated Statements of Operations (unaudited) -
Three months ended September 30, 2010 and 2009, and three
months ended September 30, 2009 (Predecessor)
4
 
Condensed Consolidated Statements of Operations (unaudited) -
Nine months ended September 30, 2010 and 2009, five months
ended May 28, 2010 (Predecessor) and nine months ended September 30,
2009 (Predecessor)
5
 
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine months ended September 30, 2010 and 2009, five months
ended May 28, 2010 (Predecessor) and nine months ended
September 30, 2009 (Predecessor)
6
 
Notes to Unaudited Condensed Consolidated Financial Statements -
September 30, 2010
8
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
41
Item 4.
Procedures and Controls
41
PART II
OTHER INFORMATION
  
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 6.
Exhibits
43
SIGNATURE PAGE
44
EXHIBIT INDEX
45
 

 
2
 

PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
   
CLARUS CORPORATION
  
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
  
 
               
Predecessor
  
               
Company (Note 1)
  
   
September 30, 2010
    
December 31, 2009
    
June 30, 2009
  
   
(Unaudited)
              
Assets
                  
Current Assets
                  
     Cash and cash equivalents
   $ 1,592     $ 58,363     $ 1,271  
     Marketable securities
     -       24,059       -  
     Accounts receivable, less allowance for doubtful
                        
        accounts of $353, $0, and $474, respectively
     25,304       -       9,727  
     Inventories
     33,338       -       25,580  
     Prepaid and other current assets
     2,649       673       646  
     Income tax receivable
     1,339                  
     Deferred income taxes
     -       -       1,810  
          Total Current Assets
     64,222       83,095       39,034  
                         
Non-Current Assets
                        
     Property and equipment, net
     14,164       696       9,781  
     Definite lived intangible assets, net
     17,772       -       32  
     Indefinite lived intangible assets
     32,650       -       897  
     Goodwill
     34,186       -       1,160  
     Deferred income taxes
     53,246       -       -  
     Other long-term assets
     702       -       -  
          Total Non-Current Assets
     152,720       696       11,870  
TOTAL ASSETS
   $ 216,942     $ 83,791     $ 50,904  
                         
Liabilities and Stockholders' Equity
                        
Current Liabilities
                        
     Accounts payable and accrued liabilities
   $ 17,363     $ 1,713     $ 9,884  
     Deferred income taxes
     1,174       -       -  
     Current portion of debt
     185       -       2,992  
          Total Current Liabilities
     18,722       1,713       12,876  
                         
Non-Current Liabilities
                        
     Long-term debt
     32,741       -       13,398  
     Other long-term liabilities
     1,341       -       797  
     Deferred income taxes
     1,794       -       601  
     Deferred rent
     -       446       -  
               TOTAL LIABILITIES
     54,598       2,159       27,672  
                         
Stockholders' Equity
                        
     Preferred stock, $.0001 par value; 5,000,000
                        
       shares authorized; none issued
     -       -       -  
     Common stock, $.0001 par value; 100,000,000
                        
       shares authorized; 21,813,484 shares issued
                        
       and 21,738,484 outstanding in 2010
     2       2       -  
     Common stock, $0.01 par value; 200,000
                        
       shares issued at June 30, 2009 (including 11,128
                        
       shares held in treasury at June 30, 2009)
     -       -       1  
     Additional paid in capital
     398,790       370,994       2,722  
     (Accumulated deficit) retained earnings
     (237,723 )     (289,368 )     22,499  
     Treasury stock, at cost
     (3 )     (2 )     (2,678 )
     Accumulated other comprehensive income
     1,278       6       688  
   TOTAL STOCKHOLDERS' EQUITY
     162,344       81,632       23,232  
TOTAL LIABILITIES AND EQUITY
   $ 216,942     $ 83,791     $ 50,904  
                         
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
      


 
3
 


CLARUS CORPORATION
  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  
(UNAUDITED)
  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
  
 
   
THREE MONTHS ENDED
    
PREDECESSOR COMPANY (NOTE 1)
  
               
THREE MONTHS
  
               
ENDED
  
   
September 30, 2010
    
September 30, 2009
    
September 30, 2009
  
                   
Sales
              
     Domestic sales
   $ 14,056     $ -     $ 10,956  
     International sales
     19,890       -       14,599  
Total sales
     33,946       -       25,555  
                         
Cost of goods sold
     24,411       -       15,597  
          Gross profit
     9,535       -       9,958  
                         
Operating expenses
                        
     Selling, general and administrative
     10,764       874       6,539  
     Restructuring charge
     772       -       -  
     Merger and integration
     88       -       -  
     Transaction costs
     313       32       -  
                         
          Total operating expenses
     11,937       906       6,539  
                         
Operating loss
     (2,402 )     (906 )     3,419  
                         
Other (expense) income
                        
     Interest expense
     (644 )     -       (187 )
     Interest income
     6       56       -  
     Other, net
     (1,586 )     -       144  
                         
     Total other (expense) income, net
     (2,224 )     56       (43 )
                         
(Loss) income before income tax
     (4,626 )     (850 )     3,376  
(Benefit) income tax provision
     (1,332 )     -       615  
Net (loss) income
   $ (3,294 )   $ (850 )   $ 2,761  
 
(Loss) earnings per share attributable
                        
  to stockholders:
                        
Basic (loss) earnings per share
   $ (0.15 )   $ (0.05 )        
                         
Diluted (loss) earnings per share
   $ (0.15 )   $ (0.05 )        
                         
Weighted average common shares
                        
  outstanding for earnings per share:
                        
     Basic
     21,731       16,867          
                         
     Diluted
     21,731       16,867          
                         
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
          


 
4
 



CLARUS CORPORATION
  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  
(UNAUDITED)
  
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
  
 
   
NINE MONTHS ENDED
    
PREDECESSOR COMPANY (NOTE 1)
  
               
FIVE MONTHS
    
NINE MONTHS
  
               
ENDED
    
ENDED
  
   
September 30, 2010
    
September 30, 2009
    
May 28, 2010
    
September 30, 2009
  
                         
Sales
                        
     Domestic sales
   $ 18,092     $ -     $ 15,751     $ 27,294  
     International sales
     23,598       -       19,192       34,268  
Total sales
     41,690       -       34,943       61,562  
                                 
Cost of goods sold
     30,347       -       21,165       38,728  
          Gross profit
     11,343       -       13,778       22,834  
                                 
Operating expenses
                                
     Selling, general and administrative
     18,963       3,004       12,138       18,989  
     Restructuring charge
     2,149       -       -       -  
     Merger and integration
     868       -       -       -  
     Transaction costs
     5,075       32       -       -  
                                 
          Total operating expenses
     27,055       3,036       12,138       18,989  
                                 
Operating (loss) income
     (15,712 )     (3,036 )     1,640       3,845  
                                 
Other (expense) income
                                
     Interest expense
     (980 )     -       (165 )     (813 )
     Interest income
     45       664       3       -  
     Other, net
     (1,474 )     -       1,803       369  
                                 
     Total other (expense) income, net
     (2,409 )     664       1,641       (444 )
                                 
(Loss) income before income tax
     (18,121 )     (2,372 )     3,281       3,401  
(Benefit) income tax provision
     (69,765 )     -       966       624  
Net income (loss)
   $ 51,644     $ (2,372 )   $ 2,315     $ 2,777  
 
(Loss) earnings per share attributable
                                
  to stockholders:
                                
Basic (loss) earnings per share
   $ 2.71     $ (0.14 )                
                                 
Diluted (loss) earnings per share
   $ 2.67     $ (0.14 )                
                                 
Weighted average common shares
                                
  outstanding for earnings per share:
                                
     Basic
     19,092       16,867                  
                                 
     Diluted
     19,339       16,867                  
                                 
 
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


 
5
 


CLARUS CORPORATION
  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(UNAUDITED)
  
(IN THOUSANDS)
  
 
   
NINE MONTHS ENDED
    
PREDECESSOR COMPANY (NOTE 1)
  
               
FIVE MONTHS
    
NINE MONTHS
  
         
ENDED
    
ENDED
  
   
September 30, 2010
    
September 30, 2009
    
May 28, 2010
    
September 30, 2009
  
                         
CASH FLOWS FROM OPERATING ACTIVITIES:
                        
Net income (loss)
   $ 51,644     $ (2,372 )   $ 2,315     $ 2,777  
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating  activities:
                                
Depreciation on property and equipment
     1,170       260       865       1,684  
Amortization of intangible assets
     444       -       2       -  
Accretion of notes payable
     336       -       17       10  
Loss on disposition of assets
     597       -       1       2  
Amortization of equity and stock based compensation plans
     4,423       371       375       44  
Amortization of discount on securities, net
     -       (452 )     -       -  
Tax benefit related to stock issued as deferred compensation
     -       -       -       53  
Treasury stock issued as director compensation
     -       -       -       13  
Deferred income taxes
     (70,354 )     -       (166 )     85  
Changes in operating assets and liablities, net of acquisitions:
                                
(Increase)/decrease in accounts receivable
     (9,504 )     -       4,063       (6,111 )
Increase in inventory
     (1,498 )     -       (343 )     (1,575 )
(Increase)/decrease in interest receivable, prepaid and other current assets
     71       (53 )     (1,387 )     1,347  
Increase/(decrease) in accounts payable and accrued liabilities
     2,488       (64 )     1,670       (73 )
(Decrease)/increase in deferred rent
     (446 )     24       -       -  
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
     (20,629 )     (2,286 )     7,412       (1,744 )
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                                
Purchase of marketable securities
     (22,065 )     (30,892 )     -       -  
Proceeds from maturity and sales of marketable securities
     46,124       72,698       -       -  
Purchase of businesses, net of cash received
     (82,560 )     -       -       -  
Purchase of intangible assets
     -       -       (10 )     -  
Proceeds from disposition of property and equipment
     -       -       10       12  
Purchase of property and equipment
     (761 )     (6 )     (788 )     (2,597 )
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
     (59,262 )     41,800       (788 )     (2,585 )
                                 



 
6
 
 
CLARUS CORPORATION
  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(UNAUDITED)
  
(IN THOUSANDS)
  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                        
Repayment of long-term debt, revolving lines of credit and capital leases
     (5,064 )     -       (6,261 )     (128 )
Proceeds from long-term debt, revolving lines of credit and capital leases
     24,162       -       -       3,977  
Purchase of treasury stock
     -       -       -       (1,374 )
Proceeds from sales of treasury stock and exercise of stock options
     1,005       -       -       2,162  
Proceeds from the sale of stock
     2,903       -       -       -  
Dividends paid
     -       -       -       (225 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
     23,006       -       (6,261 )     4,412  
                                 
Effect of foreign exchange rates on cash
     114       -       (60 )     (58 )
                                 
CHANGE IN CASH AND CASH EQUIVALENTS
     (56,771 )     39,514       303       25  
CASH AND CASH EQUIVALENTS, beginning of period
     58,363       19,342       1,317       2,126  
CASH AND CASH EQUIVALENTS, end of period
   $ 1,592     $ 58,856     $ 1,620     $ 2,151  
                                 
SUPPLEMENTAL DISCLOSURE:
                                
Cash paid for income taxes
   $ 1,573     $ -     $ 596     $ 936  
Cash paid for interest
   $ 554     $ -     $ 183     $ 784  
Note payable to acquire intangible asset
   $ -     $ -     $ -     $ 897  
Stock issued for acquisition
   $ 19,465     $ -     $ -     $ -  
Notes and deferred compensation issued in acquisition
   $ 13,436     $ -     $ -     $ -  
                                 

 
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


 
7
 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 
NOTE 1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Clarus Corporation and subsidiaries (“Clarus” or the “Company,” which may be referred to as “we,” “us,” or “our”) as of and for the three and nine months ended September 30, 2010 and 2009, have been prepared in accordance with U.S. generally accepted accounting principles and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information in notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. The results of the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be obtained for the year ending December 31, 2010.  These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from these estimates.

Operating History

Since the 2002 sale of our e-commerce solutions business, we have engaged in a strategy of seeking to enhance stockholder value by pursuing opportunities to redeploy our assets through an acquisition of, or merger with, an operating business or businesses that would serve as a platform company.  On May 28, 2010, we acquired Black Diamond Equipment, Ltd. (“BDE”) and Gregory Mountain Products, Inc. (“GMP”).  Because the Company had no operations at the time of our acquisition of BDE, BDE is considered to be our predecessor company (the “Predecessor” or the “Predecessor Company”) for financial reporting purposes.  The Predecessor does not include GMP.  Accordingly, relevant historical information has been presented for BDE (See Note 2 for a more detailed explanation of the acquisition).

Business

Overview

The Company is a leading provider of outdoor recreation equipment and lifestyle products. The Company’s principal brands are Black Diamond™ and Gregory Mountain Products®. The Company develops, manufactures and distributes a broad range of products including carabiners, protection devices, belay and rappel equipment, helmets, ropes, ice-climbing gear, backcountry gear, technical backpacks, high-end day packs, tents, trekking poles, gloves, skis, ski bindings and ski boots. Headquartered in Salt Lake City, Utah, the Company has more than 475 employees worldwide, with ISO 9001 manufacturing facilities in Salt Lake City and southeast China, a distribution center in Germany and a sales and marketing office located outside Basel, Switzerland.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Clarus and all its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.

Foreign Currency Transactions and Translation

The accounts of the Company’s international subsidiaries’ financial statements are translated into U.S. dollars using the exchange rate at the balance sheet dates for assets and liabilities and the weighted average exchange rate for the periods for revenues, expenses, gains and losses. Foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss).  Foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.

Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  At September 30, 2010, the Company did not hold any amounts that were considered to be cash equivalents.
 
 
8
 

 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 
Marketable Securities

The Company accounts for its marketable securities as available-for-sale. Available-for-sale securities have been recorded at fair value and related unrealized gains and losses have been excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized.  At September 30, 2010, the Company did not hold any amounts that were considered to be marketable securities.

At December 31, 2009, marketable securities consisted of government and government agency notes and bonds with a fair market value of $24,059. The amortized cost of marketable securities at December 31, 2009 was $24,059 with an unrealized gain of $6.  The maturities of all securities are less than 12 months at December 31, 2009.

Accounts Receivable and Allowance for Doubtful Accounts

The Company records its trade receivables at sales value and establishes a non-specific reserve for estimated doubtful accounts based on a percentage of sales. In addition, specific reserves are established for customer accounts as known collection problems occur due to insolvency, disputes or other collection issues. The amounts of these specific reserves are estimated by management based on the customer’s financial position, the age of the customer’s receivables and the reasons for any disputes. The allowance for doubtful accounts is reduced by any write-off of uncollectible customer accounts.  Interest is charged on trade receivables that are outstanding beyond the payment terms and is recognized as it is charged.

Inventories

Inventories at September 30, 2010 are stated at the lower of cost (using the first-in, first-out method “FIFO”) or market value. Elements of cost in the Company’s manufactured inventories generally include raw materials, direct labor, manufacturing overhead and freight in.  Inventories at June 30, 2009, Predecessor, other than Black Diamond Equipment AG (“BDAG”) and Black Diamond Sporting Equipment (ZFTZ) Co. Ltd (“BDEA”), are stated at the lower of last-in, first out (“LIFO”) cost or market value.  The excess of current cost using the FIFO cost method over the LIFO value of inventories was approximately $1,062 at June 30, 2009.  Inventories at BDAG and BDEA are stated at the lower of FIFO cost or market value.  Inventories at BDAG and BDEA totaled approximately $13,974 at June 30, 2009.

Goodwill and Other Intangible Assets

Goodwill resulted from the acquisitions of BDE and GMP and represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets. Goodwill and indefinite lived intangible assets are not amortized, but rather tested for impairment on an annual basis or more often if events or circumstances indicate a potential impairment exists.  Definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable.

Property and Equipment

Property and equipment is stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 20 years, or over the life of the lease, if shorter. Major replacements, which extend the useful lives of equipment, are capitalized and depreciated over the remaining useful life. Normal maintenance and repair items are expensed as incurred.

Derivative Financial Instruments

The Company uses derivative instruments to hedge currency rate movements on foreign currency denominated assets, liabilities and cash flows.  The Company enters into forward contracts, option contracts and non-deliverable forwards to manage the impact of foreign currency fluctuations on a portion of its forecasted foreign currency exposure.  These derivatives are carried at fair value on the Company’s condensed consolidated balance sheets in prepaid expenses and accrued liabilities.  Changes in fair value of the derivatives not designated as hedge instruments are included in the determination of net income.  For derivative contracts designated as hedge instruments, the effective portion of gains and losses resulting from changes in fair value of the instruments are included in accumulated other comprehensive income and reclassified to sales in the period the underlying hedged item is recognized in earnings.  The Company uses operating budgets and cash flow forecasts to estimate future economic exposure and to determine the level and timing of derivative transactions intended to mitigate such exposures in accordance with its risk management policies.

Stock-Based Compensation

The Company records compensation expense for all share-based awards granted based on the fair value of the award at the time of the grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions and estimates that the Company believes are reasonable.  The Company recognizes the cost of the share-based awards on a straight-line basis over the requisite service period of the award.

 
9
 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 
Revenue Recognition

The Company sells its products pursuant to customer orders or sales contracts entered into with its customers. Revenue is recognized when title and risk of loss pass to the customer and when collectability is reasonably assured. Charges for shipping and handling fees are included in net sales and the corresponding shipping and handling expenses are included in cost of sales in the accompanying condensed consolidated statements of operations.

Reporting of Taxes Collected

Taxes collected from customers and remitted to government authorities are reported on the net basis and are excluded from sales.

Research and Development

Research and development costs are charged to expense as incurred, and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.   The Company is subject to income taxes in certain foreign jurisdictions based on operations.  Deferred tax assets and liabilities are created in this process.  The Company has netted these deferred tax assets and deferred tax liabilities by jurisdiction.  Deferred income tax assets are reviewed for recoverability and valuation allowances are provided when it is more likely than not that a deferred tax asset is not realizable in the future.

Tax positions are recognized in the financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities.  As of September 30, 2010, the Company had no uncertain tax positions that quality for either recognition or disclosure in the financial statements. The Company conducts its business globally.  As a result, the Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions, and are subject to examination for the open tax years of 2006-2008.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and accounts receivable. Risks associated with cash within the United States are mitigated by banking with federally insured, creditworthy institutions. To date, the Company has not experienced a loss or lack of access to its cash; however, no assurance can be provided that access to the Company’s cash will not be impacted by adverse conditions in the financial markets.  In the normal course of business, the Company provides unsecured credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses as considered necessary by management.

Segment Information

The Company has determined that during 2009, 2008, and 2007, the Company operated in one principal business segment.


 
10
 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 
NOTE 2.  ACQUISITIONS

Black Diamond Equipment, Ltd.

On May 28, 2010, Clarus acquired BDE, a Delaware corporation, pursuant to the Agreement and Plan of Merger dated May 7, 2010 (the “Black Diamond Merger Agreement”), by and among Clarus, BDE, Everest/Sapphire Acquisition, LLC (“Purchaser”), a Delaware limited liability company and wholly-owned direct subsidiary of Clarus, Sapphire Merger Corp. (“Merger Sub”), a Delaware corporation and a wholly-owned direct subsidiary of Purchaser, and Ed McCall, as Stockholders’ Representative.  Under the Black Diamond Merger Agreement, Purchaser acquired BDE and its three subsidiaries through the merger of Merger Sub with and into BDE, with BDE as the surviving corporation of the merger (the “Black Diamond Merger”).

In the Black Diamond Merger Agreement, Clarus acquired all of the outstanding common stock of BDE for an aggregate amount of approximately $85,675 (after closing adjustments of $4,335 relating to working capital), $4,500 of which is being held in escrow for a one year period as security for indemnification claims under the Black Diamond Merger Agreement. Certain BDE shareholders used their cash received from the sale of BDE common stock to purchase 484 shares of Clarus common stock from the Company, for a total value of $2,903.

Gregory Mountain Products, Inc.

On May 28, 2010, Clarus acquired GMP, a Delaware corporation in a merger transaction (the “Gregory Merger”) pursuant to the Agreement and Plan of Merger (the “Gregory Merger Agreement”) by and among GMP, Clarus, Purchaser, Everest Merger I Corp., a Delaware corporation and a wholly-owned direct subsidiary of Purchaser (“Merger Sub One”), Everest Merger II, LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of Purchaser (“Merger Sub Two”), and each of Kanders GMP Holdings, LLC and Schiller Gregory Investment Company, LLC, as the stockholders of Gregory (collectively, the “Gregory Stockholders”).

In the Gregory Merger, the Company acquired all of the outstanding common stock of GMP for an aggregate amount of approximately $44,111 (after closing adjustments of $889 relating to debt repayments, working capital and equity plan allocation), payable to the Gregory Stockholders in proportion to their respective ownership interests of Gregory as follows: (i) the issuance of 2,419 shares to Kanders GMP Holdings, LLC and 1,256 shares to Schiller Gregory Investment Company, LLC of Clarus’ unregistered common stock, and (ii) the issuance by Clarus of the 5% seven year subordinated promissory notes dated May 28, 2010 (the “Merger Consideration Subordinated Notes”) in the aggregate principal amount of $14,517 to Kanders GMP Holdings, LLC and in the aggregate principal amount of $7,539 to Schiller Gregory Investment Company, LLC. The merger consideration payable to the Gregory Stockholders was approved by a special committee comprised of independent directors of Clarus’ Board of Directors.

Clarus’ actual closing stock price was $6.85 on May 28, 2010, the date that each of the Black Diamond Merger and the Gregory Merger (together, the “Mergers”) was completed.   Since a two year lock up is in place on all the shares issued to Kanders GMP LLC and to Schiller Gregory Investment Company, LLC, a discount of $1.58 (23%) was applied against the $6.85 closing stock price to yield a fair value of $5.27 per share.  The 23% discount was calculated using the Finerty model with a two-year term and a volatility of 75.9%.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, requires that the fair value of replacement awards and cash payments made to settle vested awards attributed to precombination service be included in the consideration transferred.  The fair value of GMP share awards, not including stock units, which will immediately vest at the effective date of the Mergers, as applicable, has been attributed to precombination service and included in the consideration transferred in the amounts of $593, consisting of $185 in cash, $316 in notes, and $92 in stock.  The amount attributable to post combination service that will be expensed subsequent to the date of acquisition was $682.

The Company believes the merger of Clarus, BDE and GMP will produce the following significant benefits:

 
·
Create a unique platform to build a large, global and diversified outdoor equipment and lifestyle company, which seeks to be strengthened from both organic and acquisition growth;
 
·
Access to ample liquidity to fuel brand penetration and expansion;
 
·
Utilization of a significant portion of its deferred tax asset;
 
·
Preservation of an organization and culture with a strong foundation with greater resources and opportunities;
 
·
Ability to better utilize existing supply chain and distribution channels;
 
·
Greater combined global revenue balance; and
 
·
Improved efficiencies by combining certain operational functions.


 
11
 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 
The Company’s fair value estimates for the purchase price allocation are preliminary and may change during the allowable allocation period, which is up to one year from the date of acquisition, as we continue to obtain information that existed as of the date of acquisition so that we may finalize the assets acquired and liabilities assumed and determine the associated fair values.  The following table is a reconciliation to the fair value of the purchase consideration and how the purchase consideration is preliminarily allocated to assets acquired and liabilities assumed which have been estimated at their fair values.  The excess of purchase consideration over the assets acquired and liabilities assumed is recorded as goodwill.

   
BDE
    
GMP
         
                         
   
Estimated Fair Value
    
Number of Shares
    
Estimated Fair Value
    
Estimated Fair Value
  
                         
                         
Cash paid to BDE and GMP
   $ 85,675       -     $ 185     $ 85,860  
                                 
Issuance to GMP of shares of Clarus
     -       3,676       19,373       19,373  
                                 
Issuance to GMP of 5% subordinated notes
     -       -       13,120       13,120  
                                 
Issuance of additional shares of Clarus
     -       31       92       92  
                                 
Payment of deferred compensation (5% notes)
     -       -       316       316  
                                         
Total estimated purchase consideration
   $ 85,675       3,707     $ 33,086     $ 118,761  
                                 
                                 
Assets Acquired and Liabilities Assumed
                                
Assets
                                
Cash and cash equivalents
   $ 1,854             $ 1,446     $ 3,300  
Accounts receivable, net
     12,393               3,053       15,445  
Inventories
     26,079               4,390       30,469  
Prepaid and other current assets
     2,161               148       2,309  
Property and equipment
     13,687               693       14,380  
Amortizable definite lived intangible assets
     12,733               5,483       18,216  
Identifiable indefinite lived intangible assets
     19,600               13,050       32,650  
Goodwill
     21,583               12,603       34,186  
Deferred income taxes
     920               65       985  
Other long-term assets
     345               133       478  
  Total Assets
     111,355               41,064       152,419  
                                 
Liabilities
                                
Accounts payable and accrued liabilities
     8,077               3,058       11,135  
Current portion of debt
     200               -       200  
Long-term debt
     245               -       245  
Other long-term liabilities
     1,030               -       1,030  
Deferred income taxes
     16,128               4,920       21,048  
    Total Liabilities
     25,680               7,978       33,658  
                                        
Net book value acquired
   $ 85,675             $ 33,086     $ 118,761  
 
The estimated fair value of inventory was recorded at expected sales price less cost to sell plus a reasonable profit margin for selling efforts.  The fair value of BDE’s and GMP’s property and equipment was estimated using the replacement cost method.  Under the replacement cost method, fair value is estimated to be the amount a market participant would pay to replace the asset.  The fair value of BDE’s and GMP’s assembled workforce and buyer-specific synergies has been included in goodwill.



 
12
 

 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 



PRO FORMA RESULTS

The following pro forma results are based on the individual historical results of Clarus, BDE and GMP, with adjustments to give effect to the combined operations as if the Mergers had been consummated at the beginning of the periods presented.  The pro forma results are intended for information purposes only and do not purport to represent what the combined companies’ results of operations would actually have been had the transaction in fact occurred at the beginning of the earliest periods presented.

   
PRO FORMA
  
   
THREE MONTHS ENDED
    
NINE MONTHS ENDED
  
             
   
September 30, 2009
    
September 30, 2010
    
September 30, 2009
  
                   
Sales
   $ 30,942     $ 90,794     $ 83,385  
Net (loss)/income
   $ 1,594     $ 54,532     $ 1,627  
Net (loss)/income per share - basic
   $ 0.09     $ 2.86     $ 0.10  
Net (loss)/income per share - diluted
   $ 0.09     $ 2.82     $ 0.10  

NOTE 3.   INVENTORIES

Inventories, as of September 30, 2010, December 31, 2009 and for the Predecessor, as of June 30, 2009, were as follows:

               
Predecessor
  
               
Company
  
   
September 30, 2010
    
December 31, 2009
    
June 30, 2009
  
                   
Finished goods
   $ 27,695     $ -     $ 20,404  
Work-in-process
     829       -       465  
Raw materials and supplies
     4,814       -       4,711  
                               
Total Inventory
   $ 33,338     $ -     $ 25,580  

At the time of acquisition, on May 28, 2010, inventories reflected an increase of $3,850 and $1,147 to record BDE and GMP’s inventory, respectively, at its estimated fair value.  The estimated fair value of inventory was recorded at expected sales price less cost to sell plus a reasonable profit margin for selling efforts.  As the Company has sold through a portion of the acquired inventory, the cost of sales reflect the non-cash increased valuation of BDE’s and GMP’s inventory, which has temporarily reduced the Company’s gross margin through September 30, 2010 and will continue to do so until the end of fiscal year 2010.  During the three and nine-month periods ending September 30, 2010, $3,158 and $4,321, respectively, of the fair value adjustment was recognized in cost of goods sold, and $676 of the fair value adjustment remains in inventory at September 30, 2010 to be recognized in cost of goods sold by the end of the fiscal year.


 
13
 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 



NOTE 4.  PROPERTY AND EQUIPMENT

Property and Equipment, net as of September 30, 2010, and December 31, 2009 and for the Predecessor, as of June 30, 2009 was as follows:

               
Predecessor
  
               
Company
  
   
September 30, 2010
    
December 31, 2009
    
June 30, 2009
  
                   
                   
Land
   $ 2,850     $ -     $ 336  
Building and improvements
     2,687       1,894       4,279  
Furniture and fixtures
     1,581       453       2,177  
Computer hardware and software
     1,964       120       3,620  
Machinery and equipment
     5,520       144       8,662  
Construction in progress
     784       -       725  
                               
Total Property & Equipment
   $ 15,386     $ 2,611     $ 19,799  
                         
Less accumulated depreciation
     (1,222 )     (1,915 )     (10,018 )
                         
Property and equipment, net
   $ 14,164     $ 696     $ 9,781  

Property and equipment reflects an increase of approximately $4,262 and $150 to record BDE’s and GMP’s property and equipment, respectively, at their respective estimated fair values.  The Company believes these amounts represent the best estimates of fair value.  The fair value of BDE’s and GMP’s property and equipment was estimated using the replacement cost method.  Under the replacement cost method, fair value is estimated to be the amount a market participant would pay to replace the asset.

NOTE 5.  INTANGIBLES

Indefinite lived intangible assets

In connection with the Mergers, the Company acquired certain tradenames and trademarks which provide BDE and GMP with the exclusive and perpetual rights to manufacture and sell their respective products.  A preliminary fair value estimate pertaining to tradenames and trademarks is noted in the tables below. Tradenames and trademarks will not be amortized, but reviewed annually for impairment or upon the existence of a triggering event.

The fair value of BDE’s and GMP’s assembled workforce and buyer-specific synergies has been included in goodwill.

Definite lived intangible assets, net

Intangible assets such as certain customer relationships, core technologies and product technologies are amortizable over their estimated useful lives.  Preliminary fair value estimates for amortizable intangible assets acquired, primarily consisting of customer relationships, core technologies and product technologies are below.  Intangible assets, net of amortization as of September 30, 2010 and December 31, 2009 and for the Predecessor as of June 30, 2009 were as follows:


 
14
 
 
 
CLARUS CORPORATION
  
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
  
(UNAUDITED)
  
 (in thousands, except share and per share amounts)
  
 



   
September 30, 2010
                         
         
Accumulated
          
Weighted Average
   
Gross
    
Amortization
    
Net
    
Useful Life
                         
Intangibles subject to amortization
                        
  Customer relationships
   $ 16,376     $ (365 )   $ 16,011       15.1
 years
  Core technologies
     1,505       (55 )     1,450       9.3
 years
  Product technologies
     335       (24 )     311       4.6
 years
Intangibles not subject to amortization
                                
  Tradenames and trademarks
     32,650       -