Liberty Safe saw sales of its gun safes plummet 44 percent to $15.3
million in the quarter ended Sept. 30, compared to the corresponding
quarter ended Sept. 30, 2013.

Sales to Non-Dealers, or retailers that are not licensed to sell firearms, were approximately $12.2 million, compared to $21.5 million for the three months ended Sept. 30, 2013 representing a decrease of $9.3 million or 43 percent. Dealer sales totaled approximately $7.7 million in the three months ended Sept. 30, 2014 compared to $13.7 million in the same period in 2013, representing a decrease of $6.0 million or 44 percent.

The decrease in Non-Dealer sales in the three-months ended Sept. 30, 2014 is due to (i) lower sales to one large customer that over ordered in 2013 and as a result continued to have excess stock during the 2014 quarter, (ii) the reduction of sales attributable to a large national account in 2014 compared to 2013 and (iii) a reduction in sales to the majority of Liberty customers as a result of an across-the board reduction in consumer demand for gun safes as gun owners concerns of more restrictive gun control legislation has subsided.

The decrease in sales to Dealer accounts is principally attributable to the aforementioned reduced consumer demand, increased sales rebates and deeply discounted sales prices for the import line of safes. We expect this sales trend to continue through the remainder of the 2014. Liberty Safes sales backlog was approximately $8.5 million at Sept. 30, 2014 compared to approximately $17.3 million at Sept. 30, 2013.

Cost of sales for the three months ended Sept. 30, 2014 decreased approximately $8.7 million when compared to the same period in 2013. Gross profit as a percentage of net sales totaled approximately 10.8 percent and 24.8 percent of net sales for the quarters ended Sept. 30, 2014 and Sept. 30, 2013, respectively.

The steep decrease in gross profit as a percentage of sales during the three-months ended Sept. 30, 2014 compared to the same period in 2013 is attributable to; (i) discounted sales prices for import safes, (ii) negative cost variances as a result of lower manufacturing volume during the third quarter of 2014 compared to 2013, and, (iii) increases in unit production costs resulting from upgrades added to several 2014 safe models that were not able to passed on to customers as a result of the softening market.

Going forward, Liberty Safe has mitigated a portion of its future exposure to excess negative cost variances by writing down the carrying value of its import safes in the second quarter of 2014 and by reducing its workforce, but will still experience a significantly lower gross profit as a percentage of sales through the remainder of fiscal 2014 compared to comparable prior year periods as a result of higher revised standard costs based on the reduced production volume and the expected reduced margins on import safe sales.

Selling, general and administrative expense for the three months ended Sept. 30, 2014 decreased to approximately $2.7 million or 13.8 percent of net sales compared $3.4 million or 9.8 percent of net sales for the same period of 2013. The $0.7 million decrease is primarily attributable to decreases in advertising costs and sales commissions ($0.3 million) and costs associated with a reduction in headcount ($0.2 million) during the three months ended Sept. 30, 2014 compared to the same period of 2013.

Income from operations decreased $5.9 million during the three-months ended Sept. 30, 2014 to a loss from operations of $1.7 million compared to the same period in 2013, principally as a result of the decrease in sales, reduced gross profit as a percentage of sales and other factors, as described above.