{"url_path":"/sec/aout/10-k/2026/item-7","section_key":"item-7","section_title":"Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-06-25","source_url":"https://www.sec.gov/Archives/edgar/data/1808997/0001808997-26-000031-index.html","accession_number":"0001808997-26-000031","cik":"0001808997","ticker":"AOUT","issuer_name":"American Outdoor Brands, Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1808997/0001808997-26-000031-index.html","primary_entity_key":"0001808997","primary_entity_name":"American Outdoor Brands, Inc."},"word_count":4606,"has_tables":true,"body_markdown":"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations\n\nYou should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report.\n\nSet forth below is a comparison of the results of operations and changes in financial condition for the fiscal years ended April 30, 2026 and 2025. The comparison of, and changes between, the fiscal years ended April 30, 2025 and 2024 can be found within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended April 30, 2025 filed with the SEC on June 26, 2025.\n\nBackground\n\nWe operate as one reporting segment. We analyze revenue streams in various ways, including customer group, brands, categories, and customer channels. However, this information does not include a full set of discrete financial information.\n\nThe following discussion and analysis includes references to net sales of our products in shooting sports and outdoor lifestyle categories. Our shooting sports category includes net sales of shooting accessories and our products used for personal protection. Our outdoor lifestyle category includes net sales of our products used in hunting, fishing, rugged outdoor activities, and outdoor cooking.\n\nU.S. Tariff Developments\n\nThe current political and economic environment is dynamic and uncertain, as the current U.S. Administration has imposed tariffs such as Section 301 and Section 232 of the Trade Act, modified and paused tariffs, and granted exemptions from tariffs, on different countries and products multiple times recently.\n\nIn 2025, the U.S. Administration imposed a series of tariffs on nearly all U.S. trading partners pursuant to the International Emergency Economic Powers Act of 1977 (“IEEPA”). On February 20, 2026, the United States Supreme Court issued a ruling striking down tariffs previously imposed under IEEPA. Immediately following the Supreme Court ruling, the U.S. government initiated new tariffs under Section 122 of the Trade Act (\"Section 122 tariffs\") which have been in effect since February 24, 2026. We continue to monitor and evaluate these developments and assess their potential impact on our business, financial condition, and results of operations.\n\nIn March 2026, the U.S. Court of International Trade (\"CIT\") issued an order directing U.S. Customs and Border Protection (\"CBP\") to process refunds of certain IEEPA tariffs. In April 2026, the CBP released a new system to process IEEPA tariff refunds, allowing importers to submit refund claims. We believe it is probable that we will recover the IEEPA tariffs previously paid and have recognized an IEEPA tariff refund receivable under the loss recovery accounting model of $15.2 million as of April 30, 2026, which was recorded in other current assets. During the year ended April 30, 2026, we recognized a benefit of $4.4 million related to expected recoveries of previously paid IEEPA tariffs, which was recorded as a reduction of cost of goods sold, representing the expense for IEEPA tariffs on inventory sold to customers since the tariffs were enacted in February 2025. Additionally, we reduced the carrying value of inventory on hand as of April 30, 2026 by $10.7 million for tariffs previously capitalized as cost of inventory.\n\nThe ultimate timing and amount of recoveries remain subject to review and processing by governmental authorities and could be affected by future legal, regulatory, or administrative developments. In addition, there continues to be uncertainty regarding existing and proposed tariff regimes, including the potential imposition, modification, suspension, or invalidation of tariffs under various statutory authorities. The Company continues to monitor tariff-related developments and assess their potential impact on its business, financial condition, and results of operations.\n\nBrand Divestiture\n\nOn December 12, 2025, our Board of Directors approved a plan to divest our ust branded product line (the “Disposal Group”). The Disposal Group consists primarily of inventory and long-lived intangible assets associated with the brand. We expect to complete the divestiture within twelve months. The Disposal Group does not represent a strategic shift that will have a major effect on our operations or financial results.\n\n48\n\nWe concluded that the Disposal Group met the criteria for classification as held for sale under ASC 360-10 – Property, Plant, and Equipment during the year ended April 30, 2026 and does not qualify as discontinued operations under ASC 205-20 – Presentation of Financial Statements. The results of the Disposal Group will continue to be reported within continuing operations.\n\nFiscal 2026 Highlights\n\nOur operating results for fiscal 2026 included the following:\n\n•Net sales were $190.5 million, a decrease of $31.8 million, or 14.3%, from the prior fiscal year.\n\n•Gross margin was 44.7%, an increase of 10 basis points over the prior fiscal year.\n\n•Net loss was $9.2 million, or $(0.73) per diluted share, compared with a net loss of $77,000, or $(0.01) per diluted share, for the prior fiscal year.\n\n•Non-GAAP Adjusted EBITDA was $10.2 million, compared with $17.7 million for the prior fiscal year. See non-GAAP financial measure disclosures below for our reconciliation of Non-GAAP Adjusted EBITDA.\n\n•We repurchased a total of 551,283 shares of our common stock, in the open market, for $5.1M during fiscal 2026.\n\nResults of Operations\n\nNet Sales and Gross Profit\n\nThe following table sets forth certain information regarding consolidated net sales for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nNet sales$190,536 $222,322 $(31,786)(14.3)%\n\nCost of sales105,342 123,058 (17,716)(14.4)%\n\nGross profit$85,194 $99,264 $(14,070)(14.2)%\n\n% of net sales (gross margin)44.7 %44.6 %\n\nThe following table sets forth certain information regarding trade channel net sales for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\ne-commerce channels\n$71,216 $84,391 $(13,175)(15.6)%\n\nTraditional channels\n119,320 137,931 (18,612)(13.5)%\n\nTotal net sales$190,536 $222,322 $(31,786)(14.3)%\n\nOur e-commerce channels include net sales from customers that do not traditionally operate physical brick-and-mortar stores, but generate the majority of their revenue from consumer purchases from their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick-and-mortar stores and generate the large majority of revenue from consumer purchases in their brick-and-mortar locations.\n\nWe sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nDomestic\n$179,911 $207,834 $(27,923)(13.4)%\n\nInternational\n10,625 14,488 (3,863)(26.7)%\n\nTotal net sales$190,536 $222,322 $(31,786)(14.3)%\n\n49\n\nThe following table sets forth certain information regarding net sales categories for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nShooting sports\n$80,054 $95,200 $(15,146)(15.9)%\n\nOutdoor lifestyle\n110,482 127,122 (16,640)(13.1)%\n\nTotal net sales$190,536 $222,322 $(31,786)(14.3)%\n\nFiscal 2026 Net Sales Compared with Fiscal 2025\n\nTotal net sales decreased $31.8 million, or 14.3%, from the prior fiscal year because of a decrease in all our channel and category sales primarily from reduced orders from the world's largest online retailer and our belief that a large portion of traditional channel sales were accelerated from our first fiscal quarter of 2026 into the fourth fiscal quarter of 2025, as mentioned below. The decrease in total net sales were partially offset by pricing actions taken on our products to mitigate additional tariff costs associated with tariffs imposed by the U.S. Administration starting in March and April of 2025.\n\nE-commerce channel net sales decreased $13.2 million, or 15.6%, from the prior fiscal year primarily because of lower net sales to the world's largest online retailer in most of our product categories. We believe this decline reflects their inventory management actions, which reduced net sales across most of our products. In addition, we had lower direct-to-consumer net sales for products sold on our websites due to reduced consumer demand.\n\nNet sales in our traditional channels decreased $18.6 million, or 13.5%, from the prior fiscal year. This decrease was driven by the majority of our product categories, partially offset by increased net sales of outdoor cooking equipment. We believe a large portion of the traditional channel decrease was a result of certain customers accelerating orders from our first fiscal quarter of 2026 into the fourth fiscal quarter of 2025. We believe this was due to the anticipated increased costs associated with tariffs imposed by the U.S. Administration in March 2025 and April 2025.\n\nNew products represented 29.1% of net sales for fiscal 2026 compared to 21.5% of net sales for fiscal 2025. We have a history of introducing over 200 new products each year.\n\nOur order backlog as of April 30, 2026 was $1.6 million, or $1.0 million lower than at the end of fiscal 2025. Although we generally fulfill the majority of our order backlog, we allow orders received that have not yet shipped to be cancelled, and therefore, our backlog may not be indicative of future sales.\n\nFiscal 2026 Cost of Sales and Gross Profit Compared with Fiscal 2025\n\nGross margin for fiscal 2026 increased 10 basis points over the prior fiscal year, primarily from our pricing actions mentioned above as well as a higher percentage of new product sales that typically have higher gross margins, offset by sales of slow-moving inventory at lower margins, increased depreciation expense, and higher inbound freight and tariff costs.\n\nOperating Expenses\n\nThe following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nResearch and development$6,087 $7,710 $(1,623)(21.1)%\n\nSelling, marketing, and distribution51,748 55,563 (3,815)(6.9)%\n\nGeneral and administrative32,926 36,145 (3,219)(8.9)%\n\nImpairment of assets held for sale3,433 — 3,433 100.0 %\n\nTotal operating expenses$94,194 $99,418 $(5,224)(5.3)%\n\n% of net sales49.4 %44.7 %\n\n50\n\nFiscal 2026 Operating Expenses Compared with Fiscal 2025\n\nTotal operating expenses of $94.2 million included a $3.4 million non-cash impairment charge during fiscal 2026 related to the write-down of the Disposal Group assets to estimated fair value less costs to sell. Total operating expenses, excluding this non-cash impairment charge, were $90.8 million, or $8.7 million lower than the prior fiscal year. Research and development expenses decreased $1.6 million, primarily from decreased depreciation expense for new product tooling compared to the prior fiscal year. Selling, marketing, and distribution expenses decreased $3.8 million from the prior fiscal year, primarily because of lower sales volume-related expenses, including outbound freight costs and commissions. General and administrative expenses decreased $3.2 million from the prior fiscal year primarily because of lower variable compensation-related expenses, cost-saving initiatives, and acquired intangible amortization expense, partially offset by higher public company costs.\n\nOperating Loss\n\nThe following table sets forth certain information regarding operating loss for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nOperating loss$(9,000)$(154)$(8,846)NM\n\n% of net sales (operating margin)(4.7)%— %\n\nFiscal 2026 Operating Loss Compared with Fiscal 2025\n\nWe recorded an operating loss of $9.0 million for fiscal 2026 compared to an operating loss of $154,000 in fiscal 2025. This decrease was primarily driven by lower net sales volume, partially offset by $5.2 million decrease in operating expenses.\n\nInterest (Expense)/Income, Net\n\nThe following table sets forth certain information regarding interest (expense)/income, net for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nInterest (expense)/income, net$(276)$60 $(336)NM\n\nFiscal 2026 Interest (Expense)/Income Compared with Fiscal 2025\n\nInterest expense was $276,000 compared to interest income of $60,000 in the prior fiscal year as a result of servicing our borrowings on our credit facility during fiscal 2026. We had no borrowings on our revolving line as of April 30, 2026.\n\nIncome Taxes\n\nThe following table sets forth certain information regarding income tax expense for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nIncome tax expense$45 $123 $(78)(63.4)%\n\n% of income from operations (effective tax rate)(0.5)%267.4 %(267.9)%\n\nFiscal 2026 Income Tax Expense Compared with Fiscal 2025\n\nWe recorded an income tax expense of $45,000 for fiscal 2026 as compared to income tax expense of $123,000 for fiscal 2025. The income tax expense recorded for fiscal year 2026 and 2025 was primarily due to a full valuation allowance recorded against our deferred tax assets.\n\n51\n\nNet Loss\n\nThe following table sets forth certain information regarding net loss and the related per share data for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands, except per share data):\n\n20262025$ Change% Change\n\nNet loss$(9,208)$(77)$(9,131)NM\n\nNet loss per share\n\nBasic and diluted$(0.73)$(0.01)$(0.72)NM\n\nFiscal 2026 Net Loss Compared with Fiscal 2025\n\nWe had a net loss of $9.2 million, or $(0.73) per diluted share in fiscal 2026 compared to a net loss of $77,000, or $(0.01) per diluted share in fiscal 2025.\n\nNon-GAAP Financial Measure\n\nWe use GAAP net income as our primary financial measure. We use Adjusted EBITDA, which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an improved understanding of underlying performance trends, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Adjusted EBITDA is defined as GAAP net income/(loss) before interest, taxes, depreciation, amortization, and stock compensation expense. Our Adjusted EBITDA calculation also excludes certain items we consider non-routine. We believe that Adjusted EBITDA is useful to understanding our operating results and the ongoing performance of our underlying business, as Adjusted EBITDA provides information on our ability to meet our capital expenditure and working capital requirements, and is also an indicator of profitability. We believe this reporting provides additional transparency and comparability to our operating results. We believe that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to neutralize our capitalization structure to compare our performance against that of other peer companies using similar measures, especially companies that are private. We also use Adjusted EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe it is useful to investors and analysts to evaluate this non-GAAP measure on the same basis as we use to evaluate our operating results.\n\nAdjusted EBITDA is a non-GAAP measure and may not be comparable to similar measures reported by other companies. In addition, non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of non-GAAP measures through the use of various GAAP measures. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.\n\n52\n\nThe following table sets forth our calculation of non-GAAP Adjusted EBITDA for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\nFor the Years Ended April 30,\n\n20262025\n\n(Unaudited)\n\nGAAP net loss$(9,208)$(77)\n\nInterest expense/(income)276 (60)\n\nIncome tax expense45 123 \n\nDepreciation and amortization12,322 13,179 \n\nStock compensation3,071 3,500 \n\nImpairment of assets held for sale3,433 — \n\nTechnology implementation41 — \n\nNon-recurring inventory reserve adjustment\n— 444 \n\nEmerging growth status transition costs\n— 458 \n\nContract exit costs62 — \n\nOther151 100 \n\nNon-GAAP Adjusted EBITDA\n$10,193 $17,667 \n\nLiquidity and Capital Resources\n\nHistorically, we have generated strong annual cash flow from operating activities. Our ability to fund our operating needs depends on our future ability to continue to generate positive cash flow from operations and obtain financing on acceptable terms. Based upon our history of generating strong cash flows, we believe we will be able to meet our short-term liquidity needs. We also believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through our existing $75.0 million credit facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future.\n\nOur future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, and any acquisitions or strategic investments that we may determine to make. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.\n\nWe had $21.4 million and $23.4 million of cash equivalents on hand as of April 30, 2026 and 2025, respectively.\n\nWe expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; hiring additional employees; funding growth strategies, including any potential acquisitions; and repurchasing our common stock under our existing authorized repurchase programs.\n\nThe following table sets forth certain cash flow information for the fiscal years ended April 30, 2026 and 2025 (dollars in thousands):\n\n20262025$ Change% Change\n\nOperating activities$6,315 $1,359 $4,956 364.7 %\n\nInvesting activities(2,464)(3,896)1,432 36.8 %\n\nFinancing activities(5,838)(3,738)(2,100)(56.2)%\n\nTotal cash flow$(1,987)$(6,275)$4,288 68.3 %\n\n53\n\nOperating Activities\n\nOperating activities represent the principal source of our cash flow.\n\nCash generated in operating activities was $6.3 million for fiscal 2026 compared to cash generation of $1.4 million for the prior fiscal year. Cash generated in operating activities for fiscal 2026 was primarily impacted by a $10.5 million decrease in accounts receivable driven by timing of customer payments and product shipments as certain traditional channel customers were believed to have accelerated orders from our first fiscal quarter of 2026 into the fourth fiscal quarter of 2025. In addition, inventory decreased $9.4 million primarily because of the recognition of an IEEPA tariff refund that reduced the carrying value of our inventory; the reclassification of approximately $3.5 million of inventory to assets held for sale for the planned divestiture of the Disposal Group; and lower inventory purchases as a result of a planned reduction of our overall inventory balance. Cash generated in fiscal 2026 was partially offset by $15.2 million of increased other current assets because of a $15.2 million IEEPA tariff refund receivable recorded for our initial claim of previously paid IEEPA tariffs from tariffs enacted by the U.S. Administration starting in February 2025. Subsequent to April 30, 2026, we received $2.9 million of the $15.2 million IEEPA refund receivable. In addition, we recorded $4.2 million of lower accrued payroll and incentives because of lower variable-related compensation expenses, $2.2 million of lower accrued expenses from lower tariff and duty accruals, and $1.6 million of lower accounts payable due to timing of supplier shipments\n\nDuring fiscal 2026, we recorded a $3.4 million non-cash impairment charge related to the write-down of the Disposal Group assets to estimated fair value less costs to sell. The impairment charge was non-cash and did not impact our liquidity, cash flows from operations, or compliance with debt covenants. We expect the transaction to close within the next twelve months; however, the timing and ultimate proceeds remain subject to market conditions and buyer negotiations. Proceeds from the sale, if completed, are expected to be used for general corporate purposes.\n\nInvesting Activities\n\nCash used in investing activities was $2.5 million for fiscal 2026, compared with cash usage of $3.9 million for the prior fiscal year. This was largely attributable to reduced expenditures on product tooling purchases. We expect to spend approximately $3.5 million to $4.0 million of capital expenditures in fiscal 2027.\n\nFinancing Activities\n\nCash used in financing activities was $5.8 million in fiscal 2026 compared with cash used in financing activities of $3.7 million in the prior fiscal year. Cash used in financing activities in fiscal 2026 was because of $5.1 million of payments to repurchase our common stock under our authorized stock repurchase program. Cash used in financing activities in fiscal 2025 was because of $3.8 million of payments to repurchase our common stock under our authorized stock repurchase program.\n\nOur future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, any acquisitions or strategic investments that we may determine to make, and changes in consumer spending, which is sensitive to economic conditions and other factors. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.\n\nWe had $21.4 million of cash equivalents on hand as of April 30, 2026 and had $23.4 million in cash and cash equivalents on hand as of April 30, 2025.\n\nAs of April 30, 2026, we had approximately $75.0 million available under our revolving credit facility, which matures in March 2031. We were in compliance with all financial covenants under the facility as of April 30, 2026.\n\nWe lease warehouse, manufacturing, distribution and office facilities under long-term operating lease arrangements. Additional information regarding lease obligations is included in Note 5 — Leases to the consolidated financial statements.\n\n54\n\nIn the ordinary course of business, we enter into inventory purchase commitments with suppliers to support forecasted customer demand. These commitments are generally short-term in nature and are not individually material. We also maintain commitments under certain service and information technology arrangements entered into in the normal course of business.\n\nInflation\n\nWe have been impacted by changes in prices of finished product inventory from our suppliers and logistics as well as other inflationary factors, such as increased interest rates, tariffs, and increased labor and overhead costs. We evaluate the need for price changes to offset these inflationary factors while taking into account the competitive landscape. Although we do not believe that inflation had a material impact on us during fiscal 2026, increased inflation in the future may have a negative effect on our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of inflation with increased prices, our future results from operations and cash flows would be materially impacted. Additionally, inflation may cause consumers to reduce discretionary spending, which could cause decreases in demand for our products.\n\nCritical Accounting Estimates\n\nRevenue Recognition\n\nWe recognize revenue for the sale of our products at the point in time when the control of ownership has transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance. The revenue recognized for the sale of our products reflect various sales adjustments for discounts, returns, allowances, and other customer incentives. These sales adjustments can vary based on market conditions, customer preferences, timing of customer payments, volume of products sold, and timing of new product launches. These adjustments require us to make reasonable estimates of the amount we expect to receive from the customer. We estimate sales adjustments by customer or by product category on the basis of our historical experience with similar contracts with customers, adjusted as necessary to reflect current facts and circumstances and our expectations for the future.\n\nValuation of Long-lived Assets\n\nWe evaluate the recoverability of long-lived assets, or asset group, on an annual basis or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine the initial fair value of our long-lived assets, primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.\n\nInventories\n\nWe value inventories at the lower of cost, using the first-in, first-out, or FIFO, method, or net realizable value. We evaluate quantities that make up our current inventory against past and future demand and market conditions to determine excess or slow-moving inventory that may be sold below cost. For each product category, we estimate the market value of the inventory comprising that category based on current and projected selling prices. If the projected market value is less than cost, we will record a provision adjustment to reflect the lower value of the inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold. The projected market value of the inventory may decrease because of consumer preferences or loss of key contracts, among other events.\n\nIncome Tax Valuation Allowance\n\nWe periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. We establish valuation allowances if it is more likely than not that we will be unable to realize our deferred income tax assets.\n\nIn making this determination, we consider available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results, and tax planning strategies. Significant judgment is required in this analysis.\n\n55\n\nWe determined in a prior fiscal period that it was more likely than not that the benefit from our net deferred tax assets will not be realized and accordingly we established a full valuation allowance recorded as an increase to income tax expense. In the current fiscal year, we continued to maintain a full valuation allowance based on the assessment that it is more likely than not that the benefit from our net deferred tax assets will not be realized. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates.\n\nEstimates may change as new events occur, estimates of future taxable income may increase during the expected reversal period of our deferred tax assets, or additional information becomes available. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, a full or partial reversal of the valuation allowance could occur resulting in a decrease to the provision for income taxes in the period such a change in estimate is made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis.\n\nRecent Accounting Pronouncements\n\nThe nature and impact of recent accounting pronouncements is discussed in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements, which is incorporated herein by reference."}